Choice "D" is correct. Dean's basis in Target is calculated by starting with his basis at January 1, 20X1 ($20,000) and adding his 25% share of partnership income items for the year. The nontaxable municipal bond income increases his basis as does the ordinary income. Target's income items include the municipal bond income ($12,000) plus the ordinary income ($40,000) for a total of $52,000, of which Dean's 25% share is $13,000. This is added to the beginning basis of $20,000, and the $8,000 cash distribution is deducted leaving a balance at December 31, 20X1, of $25,000.Choice "b" is incorrect. This answer fails to take into account Dean's distributive share of the ordinary income of Target.Choice "a" is incorrect. This answer appears to be a distracter.
Choice "c" is incorrect. This answer fails to take into consideration the effect on Dean's basis of both the nonliquidating cash distribution and Dean's distributive share of Target's municipal bond interest income.