Question

Peter, Matt, Priscilla, and Mary began the year in the PMPM General Partnership sharing profits, losses, and capital equally. They each had a tax basis at the beginning of the year of $3,000, $10,000, $8,000, and $11,000 respectively. Early in the year, Mary provided general consulting services to the partnership and received an additional 15% profits, losses, and capital interest in the partnership. The liquidation value of her additional interest was $45,000. Later the same year, the partnership received cash contributions of $25,000 for Peter and Matt that it used to repay the partnership's $35,000 recourse debt. According to state laws, the partners shared responsibility for this debt in accordance with their loss sharing ratios. What is each partner's tax basis after adjustments for these transactions?

Answer 1

Peter: Tax basis at the beginning of the year + Contribution of cash - Debt relief when Peter handed over an interest to Mary - Debt relief when debt was repaid - Deduction allocated to Peter when handed over Mary a interest.
= $3,000 + $25,000 - ($35,000 * 0.05) - ($35,000 * 0.20) - ($45,000/3)
= $3,000 + $25,000 - $1,750 - $7,000 - $15,000
= $4,250
Matt: Tax basis at the beginning of the year + Cash contribution - Debt relief when Matt handed over a 5% interest to Mary - Debt relief when debt was repaid - Deduction allocated to Matt when handed over a 5% interest to Mary.
$10,000 + $25,000 - ($35,000 * 0.05) - ($35,000 * 20) - ($45,000/3)

= $10,000 + $25,000 - $1,750 - $7,000 - $15,000

= $11,250

Priscilla: Tax basis at the beginning of the year - Relief of debt when Priscilla gave handed over a 5% interest to Mary - Debt relief when debt was repaid - Deduction allocated to Priscilla when handed over a 5% interest to Mary .
= $8,000 - ($35,000 * 0.05) - ($35,000 * 20)
= $8,000 - $1,750 - $7,000
= ($750) + $750 (Capital gain recognized by Priscilla) = $0.
Priscilla's deduction for the amount $15,000 from the transfer of 5% interest to Mary will decraese her basis in the future after it has been increased by other partnership items

Mary: Tax basis at the beginning of the year + Basis in 15% interest received for services + Increase in partnership debt share on receiving 15% interest for services - Relief on debt when debt was repaid.
= $11,000 + $45,000 + ($35,000 * 0.15) - ($35,000 * 0.40)
= $11,000 + $45,000 + $5,250 - $14,000
= $47,250