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
A)$19,000.
B)$20,000.
C)$21,000.
D)$22,000.

Question

Quizplus · Accepted Answer

Each partner's initial basis in the partnership is their cash contribution, which for both William and Irene is $20,000. In the first year, there were no distributions or other transactions affecting their basis. In the second year, each partner received a $1,000 cash distribution, reducing their basis to $19,000. However, because the $4,000 of tax-exempt interest income was not distributed, it increases each partner's basis by their share of the income, which is $2,000. Therefore, William's ending basis is $20,000 - $1,000 + $2,000 = $21,000.

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