C is corrent. The requirement is to determine the net effect of the two transactions on Fred’s basis for his Reingold partnership interest. A partner’s basis for a partnership interest consists of the partner’s capital account plus the partner’s share of partnership liabilities. A decrease in the partner’s share of partnership liabilities is considered to be a deemed distribution of money and reduces a partner’s basis for the partnership interest. Here, Fred’s partnership interest was reduced from 25% to 20% on January 2, resulting in a reduction in Fred’s share of partnership liabilities of 5% x $500,000 = $25,000. Subsequently, on May 9, when there was a $150,000 repayment of partnership loans, there was a further reduction in Fred’s share of partnership liabilities of 20% x $150,000 = $30,000. Thus, the net effect of the reduction of Fred’s partnership interest from 25% to 20%, and the repayment of $150,000 of partnership liabilities would be to reduce Fred’s basis for the partnership interest by $25,000 + $30,000 = $55,000.
A is incorrect. The reduction in liabilities affects Fred’s basis.
B is incorrect. The reduction in liabilities reduces a partner’s basis.
D is incorrect. Fred’s basis is reduced by 20% of the loan repayment.
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