Determine Partnership Basis And Capital Accounts
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CPA Regulation (REG) › Determine Partnership Basis And Capital Accounts
EF LLC (taxed as a partnership) has two equal partners, E and F. On January 1, E contributes $30,000 cash and F contributes services with an agreed value of $30,000 in exchange for a 50% capital and profits interest. Capital accounts are maintained under Treasury Regulations §1.704-1(b)(2)(iv), and the LLC has no liabilities. Which item affects F's capital account but not F's outside basis at formation under Internal Revenue Code §722?
The partnership's inside basis in contributed property under Internal Revenue Code §723
E's $30,000 cash contribution
The $30,000 value of services credited to F's capital account
F's share of partnership liabilities under Internal Revenue Code §752
Explanation
Internal Revenue Code §722 establishes a partner's basis from contributions, excluding services which are not 'property' under §721. F contributes services valued at $30,000, credited to capital but not increasing outside basis, as services trigger income recognition under §83 but basis remains zero per §722. The $30,000 affects capital but not basis, aligning with the distinction between book capital and tax basis. Choices B, C, and D are incorrect as they involve property basis or liabilities, which do not apply to services. Specifically, choice C relates to E's cash, not F's basis. Professionals must differentiate capital account credits from tax basis adjustments, especially for non-property contributions. A key rule is that basis from services is zero unless cash or property is also contributed, with value taxed as income.