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Dan is one of two general partners in XNX Partnership. They share equally in income and losses. When XNX started 3 years ago, Dan contributed $5,000 cash. XNX had $3,000 of ordinary business income in the first tax year and $10,000 in the second. Dan made no withdrawals in the first year but withdrew $4,000 in the second. Also, in the second tax year, XNX borrowed $2,500 from the bank, and both partners signed the note. Dan made no capital contributions in the second year. What is Dan's adjusted basis in XNX at the end of the second tax year?

1) $8,750
2) $5,000
3) $6,500
4) $7,500

Answer :

Dan's adjusted basis in the XNX Partnership at the end of the second tax year is $8,750, calculated by adding his initial contribution, his share of income, and share of borrowed amount, then subtracting his withdrawals. Option 1

The question asks about the adjustment of Dan's basis in the XNX Partnership at the end of the second tax year. To calculate this, we need to take into account Dan's initial capital contribution, his share of income, his withdrawals, and any additional debt liability. Dan's initial contribution was $5,000. His share of the partnership's income for the two years was $6,500 (half of $3,000 in the first year and half of $10,000 in the second year). Dan then withdrew $4,000 in the second year. Additionally, XNX borrowed $2,500, and since the partners are general partners, this increases Dan's basis as both are equally liable for the debt. The adjusted basis is calculated as follows:

  • Initial Contribution: $5,000
  • + Share of Income (Year 1 and 2): $6,500
  • - Withdrawals (Year 2): $4,000
  • + Share of Borrowed Amount: $1,250 (since they share equally)

The result is Dan's adjusted basis:

$5,000 + $6,500 - $4,000 + $1,250 = $8,750

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