Ever receive a partnership interest in exchange for “sweat equity” (services)?

Value of Services Does Not Create Basis until Taxed: The taxpayer, along with four other individuals, formed an LLC treated as a partnership for tax purposes. The taxpayer did not contribute any capital to the business and agreed to forego a salary until the LLC had sufficient cash flow. The business failed the following year, and the taxpayer was never paid for his services. On his 2008 tax return, the taxpayer deducted his share of the LLC’s losses (approximately $39,000). Upon audit, the IRS disallowed the loss, arguing that the taxpayer lacked sufficient tax basis. The Tax Court agreed, holding that tax basis does not include the value of services unless such services have been subject to tax. Michael D. Hastings , TC Memo 2016-61 (Tax Ct.).