At the End of Year 1, Tony Had a Tax

question 60

Essay

At the end of Year 1, Tony had a tax basis of $40,000 in Tall Ladders, Limited Partnership.Tony has a 20 percent profits interest in Tall Ladders.For Year 2, Tall Ladders will pay Tony a $10,000 guaranteed payment for extra services he provides to the partnership.Given the following income statement and balance sheet from Tall Ladders, what is Tony's adjusted tax basis at the end of Year 2?
$\begin{array}{lrr}\text { Sales } & \$ 65,000 \\\text { COGS } & \underline{\$ (47,000)} \\\text { Gross Profit } & \$ 18,000 \\\text { Interest Income } & \$ 3,000 \\\text { Dividends } & \$ 5,000 \\\text { Long-Term Capital Gain } & \$ 10,000 \\\text { Other Income } & \underline{\$ 15,000} \\\text { Total Other Income } & \$ 33,000 \\\text { MACRS Depreciation } & \$ (20,000) \\\text { Guaranteed Payments } & \$ (10,000) \\\text { Charitable Contribution } & \$ (10,000) \\\text { Fines and Penalties } & \$ (4,500) \\\text { Other Expenses } &\underline{ \$ (8,500)} \\\text { Total Other Expenses } & \underline{\$ (53,000)} \\\text { Net Income (Loss) } & \$ (2,000)\end{array}$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {TALL, IADDERS, LP}$
$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text {Balarnce Sheet}$
$\begin{array} { l r r r r } & \text { Year 1 } & \text { Year 2 } \\ \text { Assets } & \$ & 120,000 & \$ 70,000 \\\text { Nonrecourse Liabilities }& \$ & 50,000 & \$ 180,000 \\ \text { Partrer's Capital } & \$ & 70,000 & \$ 90,000 \end{array}$

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Definitions:

Mistake Of Fact

An error made regarding a fact that is material to a contract, which can affect the validity of the contract if the mistaken belief was a basis for its formation.

Peerless Case

The Peerless case, formally known as Raffles v Wichelhaus, is a leading English contract law case that established the doctrine of mutual mistake when both parties of a contract are mistaken about an essential term of the contract.

Scienter Misrepresentation

A false representation made knowingly, without belief in its truth, or recklessly without caring whether it is true or false.

Unilateral Mistake

An error made by one party during the formation of a contract that may affect the enforceability or terms of the agreement.