Does Adjusting a Partner's Basis for Tax-Exempt Income Prevent Double

question 20

Multiple Choice

Does adjusting a partner's basis for tax-exempt income prevent double taxation?

• A) Yes, if this basis adjustment is not made the partner will be taxed once when the income is allocated to him and a second time when he sells his partnership interest
• B) Yes, if this basis adjustment is not made the partner will be taxed on the tax-exempt income twice when he sells his partnership interest because he was not taxed on this income when it was earned
• C) No, making this adjustment to the partner's basis prevents the tax-exempt income from being converted to taxable income
• D)No, the partner should not adjust his tax basis by his share of tax-exempt income

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Definitions:

Reserve Requirement

The reserve requirement is a central bank regulation that sets the minimum fraction of customer deposits and notes that each commercial bank must hold as reserves rather than lending out.

Discount Rate

The interest rate charged to commercial banks and other financial institutions for loans received from the central bank's discount window.

Uninsured Savings

Savings not protected by government insurance, exposing depositors to potential loss if the financial institution fails.

Reserve Requirement

The minimum amount of reserves a bank must hold against deposits, as mandated by central banking authorities.