A and B, both calendar year noncorporate taxpayers, are equal partners in the AB partnership, which had the following income and expenses during its (business purpose) taxable year that ended on July 31 of the current year: Gross receipts from inventory sales $100,000 Cost of goods sold $30,000 Salaries paid to nonpartners $10,000 Depreciation $12,000 Advertising expenses $8,000 Interest expense paid on investment margin account maintained by AB (see 163(d)) $6,000 Gain from the sale of machine held for 2 years: 1245 gain $8,000 1231 gain $2,000 Dividends $7,000 Charitable contributions $800 Tax Exempt Interest $500 STCG on a sale of stock $6,000 LTCG on a sale of stock held for 2 years $4,000 LTCL on a sale of stock held for 2 years $2,000 1231 gain on a casualty to a machine held for 2 years $1,000

(a) How and when will AB, A and B report the income and who will liable for the taxes? (b) Assume this is the first year of partnership operations, As basis in his partnership interest is $70,000 and Bs basis in her partnership interest is $40,000. What will be the tax consequences of ABs first year of operations to A and B? (c) What would be the result in (b), above, if the partnership distributed $20,000 in cash to each partner at the end of the year? (d) Would it matter if the 1231 gain on the sale of the machine would have been ordinary income if A had sold it individually?