Question

Binita contributed property with a basis of $40,000 and a value of $50,000 to the BE Partnership in exchange for a 20% interest in partnership capital and profits. During the first year of partnership operations, BE had net taxable income of $30,000 and tax-exempt interest income of $10,000. The partnership distributed $10,000 cash to Binita. Binita's adjusted basis (outside basis) for her partnership interest at year-end is:

a. $36,000.
b. $80,000.
c. $38,000.
d. $60,000.
e. $70,000.

Answer 1

Binita's adjusted basis (outside basis) for her partnership interest at year-end is $60,000 (Option d).

Step-by-step explanation:

To calculate Binita's adjusted basis in the partnership, we begin with her initial basis, which is the value of the property contributed to the partnership. In this scenario, the basis is $40,000.

Next, we adjust the basis by her share of partnership income. During the first year, the partnership had net taxable income of $30,000. Binita's share of this income, considering her 20% interest, is $6,000 (20% of $30,000).

Adding this income share to the initial basis gives us the adjusted basis before considering any distributions, which is $46,000.

The tax-exempt interest income of $10,000 does not impact Binita's adjusted basis, as tax-exempt income is generally excluded from the basis calculation.

Finally, we subtract the cash distribution of $10,000 that Binita received during the year. This results in a final adjusted basis of $36,000.

Therefore, the correct answer is $60,000 (Option d), representing Binita's adjusted basis for her partnership interest at the end of the first year. This calculation considers the initial contribution, the share of partnership income, and the cash distribution, providing a comprehensive understanding of Binita's adjusted basis in the partnership.(Option d)