Question: Lawrence and Mohammed ( 5 0 % partners ) invited Frizz to join their partnership. Frizz provided services in exchange for a capital interest with

Lawrence and Mohammed (50% partners) invited Frizz to join their partnership. Frizz provided services in exchange for a capital interest with a liquidation value of $10,000. What is the effect of this exchange on the tax basis of each partner?
Multiple choice question.
No effect on basis and no deductions or income.
Lawrence decreased by $5,000, Mohammed decreased by $5,000, Frizz increased by $10,000.
No effect on basis; Lawrence and Mohammed take a deduction for $5,000 each and Frizz recognizes $10,000 income.

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