Fiona and Gina each contribute $5,000 cash to a partnership on January 1 of Year 1. Fiona and Gina share profits and losses equally. In Year 1, the partnership earned ordinary income of $25,000 and tax-exempt interest income of $2,000. The partnership made no distributions to the partners in Year 1. In Year 2 each partner received a $10,000 distribution from the partnership. There are no partnership liabilities and no other income, loss, contributions or distributions during both years.

a. How much taxable income must Fiona report for Year 1?

b. What is Fiona’s outside basis at the end of Year 1?

c. How much gain must Fiona recognize on the distribution in Year 2?

d. What is Fiona’s outside basis at the end of Year 2?

Question #7. You agree to mow your friend’s lawn. Your friend is low on cash and tells you that he will pay you with $20 worth of postage stamps instead of cash. After you mow your friend’s lawn and he pays you with the stamps, what are the income tax consequences to you?