On September 1, 2012, James Elton received a 25% capital
interest in Bredbo Associates, a partnership, in return for services
rendered plus a contribution of assets with a basis to Elton of
$25,000 and a fair market value of $40,000. The fair market value
of Elton’s 25% interest was $50,000. How much is Elton’s basis
for his interest in Bredbo?

(b) The requirement is to determine Elton’s basis for his
25% interest in the Bredbo partnership. Since Elton received a
capital interest with a FMV of $50,000 in exchange for property
worth $40,000 and services, Elton must recognize compensation
income of $10,000 ($50,000 – $40,000) on the transfer of services
for a capital interest. Thus, Elton’s basis for his partnership
interest consists of the $25,000 basis of assets transferred plus the
$10,000 of income recognized on the transfer of services, a total
of $35,000.