RULE: The basis in a partnership is increased by investment, pro-rata
share of income, and liabilities for which the partner is personally liable. The
basis of a partnership is decreased by distributions, pro-rata share of losses,
and liabilities for which the partner is personally relieved of. Choice "d" is correct. Per the above rule, each partner's basis in the
partnership is $110,000 at the end of the current year, calculated as
follows: Contributions | $100,000 |
| Pro-rata income allocation | 20,000 | [$80,000 / 4 partners] | Pro-rata income allocation | (10,000) |
|
| Basis at year-end | $110,000 |
|
Choice "c" is incorrect. The partnership reported income of $80,000,
and this amount must be allocated pro-rata to each partner. The mistake made
here is that the entire $80,000 was included for each partner as an increase in
basis when it should only have been ¼ of that amount (or $20,000). Applying all
other facts correctly, this answer was calculated as $100,000 + $80,000 -
$10,000 = $170,000. Choice "b" is incorrect. The distribution of $10,000 must be deducted from
the basis of each partner. Applying all other facts correctly, this answer was
calculated as $100,000 + $20,000 = $120,000. Choice "a" is incorrect. Each partner received a distribution of $10,000.
Therefore, the total distributions for the partnership were $40,000. The mistake
made here was that the $10,000 distribution was incorrectly assumed to be the
total distribution made by the partnership. $10,000 divided by 4 = $2,500.
Applying all the other facts correctly, this answer was calculated as $100,000 +
$20,000 - $2,500 = $117,500. |
