Apply partnership formation, basis, distribution, and flow-through rules, including the Section 721 nonrecognition rule and a partner's outside basis adjustments.

Lorcan Bryce holds a 30 per cent interest in Saltford Provisions LLC, a calendar-year partnership, and begins 2024 with an outside basis of 50,000 dollars. During 2024 his Schedule K-1 reports a 22,000 dollar distributive share of ordinary business income and a 4,000 dollar share of a separately stated long-term capital loss. The partnership took out a new bank loan during the year, raising Lorcan's allocated share of partnership liabilities by 9,000 dollars, and it made a 15,000 dollar cash distribution to him. No other events affect his interest. What is Lorcan's outside basis at the end of 2024?

• A53,000 dollars, by adding the 22,000 dollar income share and subtracting the 4,000 dollar capital loss and the 15,000 dollar distribution, while ignoring the change in his share of partnership liabilities for the year.
• B62,000 dollars, by adding the 22,000 dollar income share and the 9,000 dollar liability increase and subtracting the 15,000 dollar distribution, while treating the separately stated capital loss as already absorbed at the partnership level.
• C71,000 dollars, by adding the 22,000 dollar income share, the 9,000 dollar liability increase and treating the 15,000 dollar cash distribution as a further basis addition, then subtracting only the 4,000 dollar capital loss.
• D62,000 dollars, by adding the 22,000 dollar income share and the 9,000 dollar liability increase, then subtracting the 4,000 dollar capital loss and the 15,000 dollar distribution from the 50,000 dollar starting basis.check_circle Correct

Why A is wrong: Leaving out the liability increase is a common omission, but under Section 752 an increase in a partner's share of partnership debt is treated as a deemed cash contribution that raises outside basis, so the 9,000 dollars must be added.

Why B is wrong: It is tempting to think the partnership absorbs the loss, but a separately stated loss passes through on the K-1 and reduces outside basis under Section 705, so the 4,000 dollar capital loss must still be subtracted.

Why C is wrong: Treating the distribution as an increase reverses its effect; a cash distribution is a return of capital that decreases outside basis under Section 733, so it must be subtracted rather than added.

Why D is correct: Outside basis rises for distributive income and for a Section 752 increase in liability share and falls for distributive losses and distributions, giving 50,000 plus 22,000 plus 9,000 minus 4,000 minus 15,000, which equals 62,000 dollars.