Oscar, Felix, and Marv are all one-third partners in the capital and profits of Eastside General Partnership. In addition to their normal share of the
Oscar, Felix, and Marv are all one-third partners in the capital and profits of Eastside General Partnership. In addition to their normal share of the partnership’s annual income, Oscar and Felix receive annual guaranteed payments of $7,000 to compensate them for additional services they provide. Eastside’s income statement for the current year reflects the following revenues and expenses:
\r\nSales revenue $ 420,000
\r\nDividend income 5,700
\r\nShort-term capital gains 2,800
\r\nCost of goods sold (210,000)
\r\nEmployee wages (115,000)
\r\nDepreciation expense (28,000)
\r\nGuaranteed payments (14,000)
\r\nMiscellaneous expenses (9,500)
\r\nOverall net income $ 52,000
\r\nIn addition, Eastside owed creditors $120,000 at the beginning of the year but managed to pay down its liabilities to $90,000 by the end of the year. All partnership liabilities are allocated equally among the partners. Finally, Oscar, Felix and Marv had a tax basis of $80,000 in their interests at the beginning of the year.
\r\na. What tax basis do the partners have in their partnership interests at the end of the year?
\r\nb. Assume the partners began the year with a tax basis of $10,000 and all the liabilities were paid off on the last day of the year. How much gain will the partners recognize when the liabilities are paid off? What tax basis do the partners have in their partnership interests at the end of the year?
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