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 $ 420,000 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 $ 52,000 In addition, Eastside owed creditors $120,000 at the beginning of the year but managed to pay down its debts to $90,000 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. (Round your intermediate calculations and final answers to the nearest whole dollar amounts. Leave no answer blank. Enter zero if applicable.)

Answer 1

Part a)

The tax basis the partners have in their partnership interests at the end of the year is calculated as below:

	Oscar	Felix	Marv
Beginning Tax Basis (Given)	80,000	80,000	80,000
Add Dividend Income (5,700*1/3)	1,900	1,900	1,900
Short-Term Capital Gains (2,800*1/3)	933	933	933
Partner's Share of Ordinary Business Income [(52,000 - (5,700 + 2,800))*1/3]	14,500	14,500	14,500
Less Deemed Distribution from Repayment of Debt [(120,000 - 90,000)*1/3)]	-10,000	-10,000	-10,000
Add Guaranteed Payments Received	0	0	0
Ending Tax Basis	$87,333	$87,333	$87,333

_____

Notes:

Partner's basis is not increased with the amount of guaranteed payments received.

_____

Part b)

The total amount of gain recognized by each partner when the debt is paid off and the tax basis the partners have in their partnership interests at the end of the year is arrived as follows:

	Oscar	Felix	Marv
Beginning Tax Basis (Given)	10,000	10,000	10,000
Add Dividend Income (5,700*1/3)	1,900	1,900	1,900
Short-Term Capital Gains (2,800*1/3)	933	933	933
Partner's Share of Ordinary Business Income [(52,000 - (5,700 + 2,800))*1/3]	14,500	14,500	14,500
Less Deemed Distribution from Repayment of Debt [(120,000 -0)*1/3)]	-40,000	-40,000	-40,000
Add Guaranteed Payments Received	0	0	0
Gains Recognized by Partners [-(-40,000 + 14,500 + 933 + 1,900 + 10,000)]	$12,667	$12,667	$12,667
Ending Tax Basis	$0	$0	$0