C is corrent. The requirement is to determine the effect on a partner’s basis in the partnership when a partner’s share of partnership liabilities increases. Since partners are individually liable for their share of partnership liabilities, a change in the amount of partnership liabilities affects a partner’s basis for a partnership interest. An increase in partnership liabilities increases each partner’s basis in the partnership by each partner’s share of the increase. Thus, when partnership liabilities increase, it effectively is treated as if each partner individually borrowed money and then made a capital contribution of the borrowed funds.
A is incorrect. The liability increase is a deemed cash contribution.
B is incorrect. Changes in the amount of liabilities affect a partner’s basis.
D is incorrect. The increase in liabilities increased basis.
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