An examination of the RB Partnership’s tax books provides the following informat

ID: 2598125 • Letter: A

Question

An examination of the RB Partnership’s tax books provides the following information for the current year.

Rachel is a 30% general 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 30% of the partnership’s liabilities for basis purposes.

a. What is Rachel’s adjusted basis for the partnership interest at the end of the year?

b. How much income must Rachel report on her tax return for the current year? What is the
character of the income and what types of tax might apply to it?

Operating (ordinary) income before guaranteed payments $300,000 Long-term capital gain 6,000 Guaranteed payment to Rachel for services 30,000 Cash distributions to Rachel 20,000 Interest on Colorado state bonds (exempt interest income) 2,000 Charitable contributions made by partnership 10,000 Decrease in partnership liabilities from 1/1-12/31 (20,000)

Explanation / Answer

Particulars

Adjusted basis for Partnership interest

$60,000

Add:

Share of income after guaranteed payment (270,000*30%)

$81,000

Long term gain (6000*30%)

$1,800

Share of interest on Colorado state bonds (2000*30%)

$600

$83,400

Less:

Decrease in share of partnership liabilities (20000*30%)

($6,000)

cash distributions

($20,000)

Share of charitable contributions made by partnership (10000*30%)

($3,000)

($29,000)

Adjusted basis for Partnership interest at the end of the year

$1,14,400

Rachel will report $82,800 (income from partnership $81,000 plus long term gain $1800).

Charitable contribution of $30000 can be deductible as itemized deduction

Interest income on bond is non taxable and interest expense is not deductible.