Z is offered a capital interest in a partnership whose sole asset is a commercial real estate property with a fair market value of $300,000 and an adjusted basis of $180,000. The building is depreciated on a straight-line method. X and Y have $90,000 outside bases in their respective partnership interests. Z has performed real estate management services for the partnership over the past year and has agreed to perform additional services in the future.

(a) What are the tax consequences to Z and to the partnership (i.e. X and Y) if Z receives a 1/10th capital interest in the partnership as compensation for his services to the partnership? Ignore the application of Proposed Regulation for the purpose of this answer and explain your answer.

(b) What result in (a) above if instead Z receives his interest as compensation for his services to be rendered in the succeeding three years; provided, however, that if Z ceased to render services before the end of year 3, Z or any of transferee of Z, must relinquish his rights to the interest in the partnership. Assume for the purpose of this problem that the building will have a value of $900,000 and an adjusted basis of $180,000 at the end of year 3.