Peggy and Cindy, parent and child, operate a local apparel shop as a partnership. The PC Partnership earned a profit of $80,000 in the current year. Cindy’s equal partnership interest was acquired by gift from Peggy. Assume that capital is a material income-producing factor and that Peggy manages the day-to-day operations of the shop without any help from Cindy. Reasonable compensation for Peggy’s services is $30,000.
a. How much of the partnership income is allocated to Peggy?
b. What is the maximum amount of partnership income that can be allocated to Cindy?
c. Assuming that Cindy is five years old, has no other income, and is claimed as a dependent by Peggy, how is Cindy’s income from the partnership taxed?
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