Oscar, Felix, and Marv are all one-third partners in the capital and profits of

Question

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:

Sales revenue                                    $ 405,000

Dividend income                                     5,700

Short-term capital gains                          2,800

Cost of goods sold                               (210,000)

Employee wages                                 (115,000)

Depreciation expense                           (28,000)

Guaranteed payments                           (14,000)

Miscellaneous expenses                         (9,500)

Overall net income                              $ 37,000

In addition, Eastside owed creditors $120,000 at the beginning of the year but managed to pay down its debts to $30,000 by the end of the year. All partnership debt is 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. What tax basis does Oscar have in his partnership interests at the end of the year?

Explanation / Answer

Tax basis does Oscar have in his partnership interests at the end of the year

Openinhg Tax basis = 80000

Oscar Share = 17000 (Overall profit of the firm excluding guaranteed payment is 37000+ 14000 = 51000. Share of Oscar = 17000*1/3rd = 17000)

Guaranteed payment = 7000

Deemed distribution = (10000) (120000-90000 = 30000/3 = 10000) [creditor repayment]

Tax Base at the end = 94000

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