[Anonymous]

All right, hopefully this will present itself on these forums as readable. Below is a simulation question, and I understand pretty much all of it, except I can’t figure out where the 15,000 additional capital contribution is from. The first post is the question and the second post is the answer explanation. I am just wondering, did Wiley make a mistake and leave something out?

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During years 1 and 2, Smith and Parker were equal partners in the ABC Partnership, a computer technology business

involving web site design and computer hardware repair. At start-up of the ABC Partnership on January 1, year 1, Smith and

Parker each contributed $50,000 in cash.

ABC Partnership reports the following items during year 1.

Item Year 1

Ordinary income from trade or business activities as reported on Schedule K of the

partnership return for allocation to the partners. 46,000

Interest income 1,400

Life insurance premiums paid on lives of partners (partnership is benefi ciary) 800

Penalties paid for late payment of payroll taxes 200

Guaranteed payment to Parker 10,000

Purchase of land for investment 6,000

Cash distributions to Smith 2,000

Use the table below to determine Smith’s tax basis in the partnership interest at the end of year 1. Not all entries may be

needed for the determination. For any item not needed, enter a zero (0). Decreases in tax basis should be shown as negative values.

(below is where for each category, you have to put the increase/decrease in tax basis for Smith)

2 Smith’s beginning tax basis

3 Ordinary income from trade or business activities

4 Interest income

5 Life insurance premiums paid on lives of partners (partnership is beneficiary)

6 Penalties paid for late payment of payroll taxes

7 Guaranteed payment to Parker

8 Additional capital contributions

9 Distributions

10 Purchase of land for investment

11 Smith’s tax basis at end of year

[Anonymous]

Answer:

2 Smith’s beginning tax basis 50,000

3 Ordinary income from trade or business activities 23,000

4 Interest income 700

5 Life insurance premiums paid on lives of partners (partnership is benefi ciary) (400)

6 Penalties paid for late payment of payroll taxes (100)

7 Guaranteed payment to Parker 0

8 Additional capital contributions 15,000

9 Distributions (2,000)

10 Purchase of land for investment 0

11 Smith’s tax basis at end of year 86,200

A partner’s basis for a partnership interest is increased by the pass-through of all income items (including tax-exempt

income), and re duced by the pass-through of all loss and deduction items (including nondeductible items). Additionally, a

partner’s basis is increased by additional capital contributions and decreased by distributions.

Required: The requirement is to determine the basis for Smith’s 50% partnership interest at the end of year 1. Smith’s beginning basis is increased by Smith’s 50% share of the ordinary income and interest income, and is decreased

by 50% of the nondeductible life insurance premiums and nondeductible penalties.

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>>>>>>>> Also, Smith’s basis is increased by the additional capital contribution, and is decreased by the amount of distribution made to Smith.<<<<<<<<<<<<<

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(what? this is the only sentence on this and it doesn't even say anything about where the 15,000 comes from)

Note that the purchase of land has no effect on Smith’s basis, and that the partnership’s guaranteed payment to Parker would already be deducted in the partnership’s computation of ordinary income and is not separately taken into account in determining Smith’s basis for the partnership interest.

[Anonymous]

Answer:

2 Smith’s beginning tax basis 50,000

3 Ordinary income from trade or business activities 23,000

4 Interest income 700

5 Life insurance premiums paid on lives of partners (partnership is benefi ciary) (400)

6 Penalties paid for late payment of payroll taxes (100)

7 Guaranteed payment to Parker 0

8 Additional capital contributions 15,000

9 Distributions (2,000)

10 Purchase of land for investment 0

11 Smith’s tax basis at end of year 86,200

A partner’s basis for a partnership interest is increased by the pass-through of all income items (including tax-exempt

income), and re duced by the pass-through of all loss and deduction items (including nondeductible items). Additionally, a

partner’s basis is increased by additional capital contributions and decreased by distributions.

Required: The requirement is to determine the basis for Smith’s 50% partnership interest at the end of year 1. Smith’s beginning basis is increased by Smith’s 50% share of the ordinary income and interest income, and is decreased

by 50% of the nondeductible life insurance premiums and nondeductible penalties.

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>>>>>>>> Also, Smith’s basis is increased by the additional capital contribution, and is decreased by the amount of distribution made to Smith.<<<<<<<<<<<<<

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(what? this is the only sentence on this and it doesn't even say anything about where the 15,000 comes from)

Note that the purchase of land has no effect on Smith’s basis, and that the partnership’s guaranteed payment to Parker would already be deducted in the partnership’s computation of ordinary income and is not separately taken into account in determining Smith’s basis for the partnership interest.

[Author]

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