An examination of the MO Partnership's tax books provides the
following information for the current year:

Operation(ordinary) income before guaranteed payments        $120,000
Guaranteed payment to Megan                                  $ 20,000
Cash distributions to each partner                           $ 16,000
Tax Exempt Interest                                          $  2,000
Interest paid to purchase the tax exempt bonds               $  1,000
Charitable contributions made by partnership                 $  3,000
Decrease in partnership liabilities during the year          $ 20,000

Meagan is a 25% partner in partnership capital, profits, and losses.
Assume the adjusted basis of her partnership interest is $60,000 at
the beginning of the year, and she shares in 25% of the partnership
liabilities for basis purposes.

A.  What is Meagan's adjusted basis for the partnership interest at
the end of the year?

B.  How much income must Meagan report on her tax return for the
current year?

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Request for Question Clarification by angy-ga on 23 Apr 2003 01:23 PDT

In what country is Meagan living ?

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Clarification of Question by alpa_sanjay-ga on 23 Apr 2003 08:09 PDT

we are taking about USA

Hello and thank you for submitting your question.

So the partnership had gross income of
120,000  from operations
  2,000  tax exempt interest

It had deductions of
  20,000 guaranteed payment (sort of like salary)

And it distributed (apart from the guaranteed payment already
mentioned)
   16,000 partnership distribution
    3,000 to charity

Take a look at Rev. Rul. 96-11
http://www.taxlinks.com/rulings/1996/revrul96-11.htm

A.    i. Meagan's basis starts out at 60,000
     ii. The guaranteed payment does not affect Meagan's basis in the
partnership; it is simply taxable income to her, deductible by the
partnership.
    iii. The charitable contribution reduces Meagan's basis by 750 
     iv. The taxable and non-taxable income increases Meagan's basis
by 3,500
      v. The cash distributions decease Meagan's basis by 4,000
       vi. The decrease in partnership liabilities decreases Meagan's
basis by 5,000.

So the answer to A is that Meagan's new basis is 53,500 because
60,000 - 750  + 3,500 - 4,000 - 5000 = 60,000  - 6,500  = 53,750

[although a non-deductible expense in the partnership would decrease
Meagan's basis, I do not see the purchase of the bonds as an expense
since in liquidating the partnership she will receive her share of the
bonds so their value will be taken into account in computing her gain
on liquidation]

B.  Meagan reports her guaranteed payment on her personal return, and
her 25% share of the partnership income items.

So her taxable income is 20,000 + a 25,000 share of the partnership's
taxable income =  45,000.

She also has a 750 charitable deduction and 500 of tax exempt
interest.

Search terms used to find Rev. Rul. 96-11
partnership charitable deduction

Thank you again for your question.  If you find any of it unclear,
please request clarification.  I would appreciate it if you would hold
off on rating my answer until I have an opportunity to reply.

Sincerely,
Richard-ga

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Request for Answer Clarification by alpa_sanjay-ga on 24 Apr 2003 20:53 PDT

the answer to A is that Meagan's new basis is 53,500 because 
60,000 - 750  + 3,500 - 4,000 - 5000 = 60,000  - 6,500  = 53,750 


53,500 should be 53,750 ...right?

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Clarification of Answer by richard-ga on 25 Apr 2003 05:12 PDT

Right, 53,750.
Thank you for your generous rating.
-R

Interesting questions, alpa_sanjay-ga.  
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