William and Irene each contributed $20,000 cash to the WI Partnership on January 1 of last year. William and Irene share profits and losses equally. Last year, the partnership reported tax- exempt interest income of $4,000. This year, each partner receives $1,000 of the tax- exempt interest income in a cash distribution. There are no partnership liabilities and no other income, loss, contributions, or distributions during both years. William's basis in the partnership interest following these transactions is

Question

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William's basis in the partnership interest is increased by his share of the tax-exempt interest income, which is $2,000 ($4,000 x 50%). His basis is also decreased by the cash distribution he received, which is $1,000. Therefore, his basis in the partnership interest following these transactions is $21,000 ($20,000 + $2,000 - $1,000).

William and Irene Each Contributed $20,000 Cash to the WI