Question

T/F Partners adjust their outside basis by adding non-deductible expenses and subtracting any tax-exempt income to avoid being double taxed.

Answer 1

The statement about partners adjusting their outside basis by adding non-deductible expenses is true, but subtracting tax-exempt income is not for avoiding double taxation, but to prevent a double benefit, hence the statement is false.

Step-by-step explanation:

The statement is false. Partners adjust their outside basis by adding non-deductible expenses to prevent those expenses from effectively being taxed twice; however, they must subtract any tax-exempt income. This is because tax-exempt income should not increase the basis since it is not subject to tax; thus, the partner should not receive a basis increase for income that won't be taxed upon distribution. The aim is to ensure proper taxation without double taxation of income or allowing a double benefit for deductions.