George received a fully-vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP, LLC (not a publicly-traded partnership interest). The future profits of the partnership are subject to normal operating risks. George will report ordinary income equal to the fair market value of the profits interest, but the capital
interest will not be currently taxed to him.
a. True
b. False
Indicate whether the statement is true or false
False
RATIONALE: George will recognize ordinary income equal to the fair market value of the capital interest (i.e., his share of the liquidation value of the partnership). The fair market value of the profits interest is not reasonably assured and is, therefore, indeterminable. The profits interest will be taxed to George as the partnership's profits are earned.
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