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?

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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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