Jane and Kennedy started the JK partnership in June $2018.$ Each member contributed $$1$ Million $($cash$)$

and the partnership used the funds to purchase $$2$ Million of land. The partners have been receiving

offers to purchase the land. They have never signed a purchase agreement but the offers range between

$$4\mathrm{.}8$ Million and $$5\mathrm{.}3$ Million.

One offer came from Martha, a local commercial real estate developer. Recognizing Jane and Kennedy$$s

reluctance to sell, Martha instead offers to perform development services in exchange for a $20\%$ interest

in any development profits. The cost of development will be funded with a bank loan.

Kennedy and Jane are willing to admit Martha as a $20\%$ profits$-$only partner. The three parties have

reached an agreement that the land is currently worth $$5\mathrm{.}2$ Million. Martha$$s development profit will be

for gains realized above this $$5\mathrm{.}2$ Million figure.

 

 

QUESTIONS:

$1.$ Will the receipt of a $20\%$ interest in development profits be taxable to Martha? You must

explain why or why not, using primary tax authorities.

$2.$ How do you suggest the partners memorialize the understanding that the development profit

share is based on gains above $$5\mathrm{.}2$ Million. If you can locate any primary tax authorities to

support your answer you should cite them.