Posted: December 19th, 2016

Under current law (i.e., without taking into account the effect of any proposed regulations), how much compensation income is N required to report as a result of the vesting of his profits interests?

2. 2. N, an expert in cattle breeding, receives a 10% interest in the profits of the Cow Partnership in

exchange for services he has rendered and will render to the dairy-farming business of the partnership.

N will forfeit his interest if he quits his job at any time during the next three years. N reports no income

in the year of receipt and files no section 83(b) election. The partnership claims no deduction. Over

the next three years, the partnership allocates profits to N in the aggregate amount of $70,000 and

distributes $40,000 to him in cash. On the date of vesting, the value of N’s interest could reasonably

be estimated to be $180,000, including his $30,000 capital account on that date. Under current law

(i.e., without taking into account the effect of any proposed regulations), how much compensation

income is N required to report as a result of the vesting of his profits interests? Show the journal entry

that will be made on the books of Cow for tax purposes.

A – 0

B – $30,000

C – $150,000

D – $180,000