Gray is a 50% partner in Fabco Partnership. Gray's tax basis in Fabco on January 1, year 4, was $5,000. Fabco made no distributions to the partners during the year 4 and recorded the following:

1. Ordinary Income $20,000

2. Tax-exempt income $8,000

3. Portfolio income $ 4,000

What is Gray's tax basis in Fabco on December 31, year 4?

a. $21,000 b. $16,000 c. $12,000

d. $10,000

Option (a) is correct.

Explanation:

Total income:

= Ordinary Income + Tax-exempt income + Portfolio income

= $20,000 + $8,000 + $4,000

= $32,000

Gray is a 50% partner,

Share of Gray in income = 50% of Total income

= 50% * $32,000

= $16,000

Therefore, the Gray's tax basis in Fabco on December 31, year 4 is as follows:

= Gray's tax basis in Fabco on January 1, year 4 + Share of Gray in income

= $5,000 + $16,000

= $21,000