Choice "C" is correct. A partner's basis is increased by the partner's share of partnership ordinary income, separately stated income, and tax exempt income. $5,000 + 50% x ($20,000 + $8,000 + $4,000)=$21,000.

Choice "a" is incorrect. Gray's basis is increased by $16,000, but the question asks what his total basis is at the end of the year.

Choice "d" is incorrect. Gray's basis is increased by 50% of $20,000 + $4,000, or $12,000, but it is also increased by 50% of tax exempt income. This increase is added to the beginning tax basis.

Choice "b" is incorrect. Gray's basis is increased by 50% of ordinary income or $10,000, but it is also increased by tax exempt and portfolio income. This increase is added to the beginning tax basis.