Dean is a 25% partner in Target Partnership. Dean's tax basis in Target on January 1, 20X1, was $20,000. At the end of 20X1, Dean received a nonliquidating cash distribution of $8,000 from Target. Target's 20X1 accounts recorded the following items:
Municipal bond interest income $ 12,000
Ordinary income 40,000
What was Dean's tax basis in Target on December 31, 20X1?
a.
$25,000
b.
$15,000
c.
$23,000
d.
$30,000
Explanation
Choice “a” is correct. Dean's basis in Target is calculated by starting with his basis at January 1, 20X1 ($20,000) and adding his 25% share of partnership income items for the year. The nontaxable municipal bond income increases his basis as does the ordinary income. Target's income items include the municipal bond income ($12,000) plus the ordinary income ($40,000) for a total of $52,000, of which Dean's 25% share is $13,000. This is added to the beginning basis of $20,000, and the $8,000 cash distribution is deducted leaving a balance at December 31, 20X1, of $25,000.
Choice “b” is incorrect. This answer fails to take into account Dean's distributive share of the ordinary income of Target.
Choice “c” is incorrect. This answer appears to be a distracter.
Choice “d” is incorrect. This answer fails to take into consideration the effect on Dean's basis of both the nonliquidating cash distribution and Dean's distributive share of Target's municipal bond interest income.
I read the question really carefully and caught TAX BASIS. I thought cash distribution and municipal bond interest income should be ignored when computing for tax basis, so I arrived at choosing $30,000 by simply adding Dean's beginning tax basis and share of ordinary income {$20,000 + $10,000}.
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