Question

Partner A contributes cash of $10,000 to a partnership in exchange for a 10% interest. In the partnership’s first taxable year, Partner A is allocated $15,000 in losses. In the partnership’s second taxable year, Partner A is allocated $10,000 of income. In the partnership’s third taxable year, Partner A is allocated both a $3,000 capital loss and a $3,000 ordinary loss. What is Partner A’s outside basis in the partnership after the first and second taxable years?

	A.	Partner A has a basis of -$5,000 at the end of the first year and a basis of $5,000 at the end of the second year.
	B.	Partner A has a basis of $0 at the end of the first year and a basis of $10,000 at the end of the second year.
	C.	Partner A has a basis of $10,000 at the end of the first taxable year assuming the losses are passive and A cannot deduct them as a result. Partner A has a basis of $10,000 at the end of the second year as well because A’s passive losses from the first year carry forward and make it so A does not have to recognize $10,000 in income during the second taxable year. Partner A then carries $5,000 of passive losses forward to the third taxable year.
	D.	Partner A has a basis of $0 at the end of the first taxable year. This is regardless of whether or not the losses are considered passive losses to A. At the end of the second taxable year, Partner A’s basis is $5,000. If the first-year losses were passive, Partner A would carry forward to the second year $5,000 of losses due the basis limitation and $10,000 of losses due the passive limitation. In the second year, Partner A would report a prior year adjustment for the $5,000 of losses formerly disallowed by the basis limitation. Partner A would therefore report a total of $15,000 in passive losses during the second year, but only $10,000 could be used to offset income with the remaining $5,000 in passive losses carried forward to the third taxable year.

Answer 1

answer is option C

Partner A has a basis of $10,000 at the end of the first taxable year assuming the losses are passive and A cannot deduct them as a result. Partner A has a basis of $10,000 at the end of the second year as well because A’s passive losses from the first year carry forward and make it so A does not have to recognize $10,000 in income during the second taxable year. Partner A then carries $5,000 of passive losses forward to the third taxable year.

Cash contributed by a partner is A will be considered its outside basis. It is a partner's basis in the partnership. it is referred to as a partner's interest in the partnership. Built-in gain or loss stays with partner A and does form the part of outside basis in the partnership. The loss of first year will be adjusted to the second year income and remaining loss in the second year will be carryforward to the third year.