A. Robert is an illustrator and a partner in Art Prints Partners. Art Prints creates limited edition works and each one is prepared on individual order through the use of a new print technology developed by Robert. It takes Robert about 250 hours to create the “master” copy that produces subsequent copies and then takes about 10 hours to create a copy when one is ordered. Robert’s share of partnership income includes 40% of the profit from each print that he makes.

Robert leaves Art Prints and joins a new partnership, an advertising agency, where Robert does graphics for print ads. At the time Robert joins the new partnership, Art Prints owes him $15,000 in payments for work he had already completed. As a condition to joining the partnership, Robert assigns all payments from Art Prints, past and future, to his new partnership. In the first year at the new partnership, Robert does additional work for Art Prints, which pays his new partnership $55,000, which includes the aforementioned $15,000.

Discuss the tax treatment of the Art Print payments to the new partnership and to Robert.

B. Assume that after Robert has worked for two years, the new partnership decides to open a facility to train new artists in the Arizona desert. The partnership, after interviewing a number of possible teachers including Robert, asks Robert to go to Arizona to teach. He continues to get a share of partnership income, but is also paid an extra $25,000 and is allowed to live in a beautiful home that the partnership built at the facility. (The students live in tents)

Discuss how to treat the $25,000 and the use of the house to the partnership and to Robert.