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) $38,000.
C) $60,000.
D) $70,000.
E) $80,000.

Question

Quizplus · Accepted Answer

Binita's initial basis is $40,000. Her share of the partnership's taxable income is 20% of $30,000, which is $6,000, and her share of tax-exempt income is 20% of $10,000, which is $2,000. Her basis increases by $6,000 + $2,000 = $8,000. The $10,000 distribution reduces her basis. So, $40,000 + $8,000 - $10,000 = $38,000.

Binita Contributed Property with a Basis of $40,000 and a Value