Cramer Corporation and Mr. Chips formed a general partnership. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership interest?
A) $500,000
B) $1,200,000
C) $850,000
D) $650,000

Question

Quizplus · Accepted Answer

Cramer's initial tax basis in the partnership interest is calculated as his cash contribution ($500,000) plus his share of the partnership's recourse debt. Assuming the debt is shared equally between the partners (which is a common assumption in the absence of information to the contrary), Cramer's share of the debt would be $350,000 ($700,000 total debt divided by 2). Therefore, Cramer's initial tax basis would be his cash contribution ($500,000) plus his share of the debt ($350,000), totaling $850,000.