Rule: The partnership basis formula follows:

Choice "d" is correct. Dale's basis at the end of the first year of operations is calculated as follows:

Choice "a" is incorrect. There are a few ways to have miscalculated the basis by $2,000. The proper calculation of the basis at year end is shown above.

Choice "b" is incorrect. The most likely error made if this answer option were chosen is that the tax exempt income of $1,000 was omitted from being an increase in the partner's basis in the partnership. All income (including tax free income) increases a partner's basis.

Choice "c" is incorrect. The most likely error made if this answer option were chosen is that the distributions of $3,000 were omitted from being a decrease in the partner's basis in the partnership; although, several other miscalculations could have been made. The proper calculation of the basis at year end is shown above.