Carrie D’Lake, Reed A. Green, and Doug A. Divot share a passion for golf and decide to go into the golf club manufacturing business together. On January 2, 2016, D’Lake, Green, and Divot form the Slicenhook Partnership, a general partnership. Slicenhook’s main product will be a perimeter-weighted titanium driver with a patented graphite shaft. All three partners plan to actively participate in the business. The partners contribute the following property to form Slicenhook:

Partner	Contribution
Carrie D’Lake	Land, FMV	$	460,000
	Basis $460,000, Mortgage	$	60,000
Reed A. Green		$	400,000
Doug A. Divot		$	400,000

Carrie had recently acquired the land with the idea that she would contribute it to the newly formed partnership. The partners agree to share in profits and losses equally. Slicenhook elects a calendar-year-end and the accrual method of accounting.

In addition, Slicenhook received a $1,500,000 recourse loan from BigBank at the time the contributions were made. Slicenhook uses the proceeds from the loan and the cash contributions to build a state-of-the-art manufacturing facility ($1,200,000), purchase equipment ($600,000), and produce inventory ($400,000). With the remaining cash, Slicenhook invests $45,000 in the stock of a privately owned graphite research company and retains $55,000 as working cash.

Slicenhook operates on a just-in-time inventory system so it sells all inventory and collects all sales immediately. That means that at the end of the year, Slicenhook does not carry any inventory or accounts receivable balances. During 2016, Slicenhook has the following operating results:

Sales

$

1,126,000

Cost of goods sold

400,000

Interest income from tax-exempt bonds

900

Qualified dividend income from stock

1,500

Operating expenses

126,000

Depreciation (tax)

§179 on equipment

$

39,000

Equipment

81,000

Building

24,000

144,000

Interest expense on debt

120,000

The partnership is very successful in its first year. The success allows Slicenhook to use excess cash from operations to purchase $15,000 of tax-exempt bonds (you can see the interest income already reflected in the operating results). The partnership also makes a principal payment on its loan from Big Bank in the amount of $300,000 and a distribution of $100,000 to each of the partners on December 31, 2016.

The partnership continues its success in 2017 with the following operating results:

Sales			$	1,200,000
Cost of goods sold				420,000
Interest income from tax-exempt bonds				900
Qualified dividend income from stock				1,500
Operating expenses				132,000
Depreciation (tax)
Equipment	147,000
Building	30,000			177,000
Interest expense on debt				96,000

The operating expenses include a $1,800 trucking fine that one of its drivers incurred for reckless driving and speeding and meals and entertainment expense of $6,000.

By the end of 2017, Reed has had a falling out with Carrie and Doug and has decided to leave the partnership. He has located a potential buyer for his partnership interest, Indie Ruff. Indie has agreed to purchase Reed’s interest in Slicenhook for $730,000 in cash and the assumption of Reed’s share of Slicenhook’s debt. Carrie and Doug, however, are not certain that admitting Indie to the partnership is such a good idea. They want at least to consider having Slicenhook liquidate Reed’s interest on January 1, 2018. As of January 1, 2018, Slicenhook has the following assets:

		Tax Basis			FMV
Cash	$	876,800		$	876,800
Investment−tax exempts		15,000			18,000
Investment stock		45,000			45,000
Equipment−net of dep.		333,000			600,000
Building−net of dep.		1,146,000			1,440,000
Land		460,000			510,000
Total	$	2,875,800		$	3,489,800

Carrie and Doug propose that Slicenhook distribute the following to Reed in complete liquidation of his partnership interest:

Tax Basis

FMV

Cash

$

485,000

$

485,000

Investment Stock

45,000

45,000

Equipment—$200,000 cost net of dep.

111,000

200,000

Total

$

641,000

$

730,000

Slicenhook has not purchased or sold any equipment since its original purchase just after formation. (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.)

a. Determine each partner’s recognized gain or loss upon formation of Slicenhook.

	D'Lake	Green	Divot
Recognized gain or loss

b. What is each partner’s initial tax basis in Slicenhook on January 2, 2016?

	D'Lake	Green	Divot
Initial tax basis

c. Prepare Slicenhook’s opening tax basis balance sheet as of January 2, 2016.

Slicenhook Balance Sheet
At Formation (January 2, 2016)
	Tax Basis
Cash
Land
Total
Liabilities
Tax Capital:
Carrie D'Lake
Reed A. Green
Doug A. Divot
Total

d. Using the operating results, what are Slicenhook’s ordinary income and separately stated items for 2016 and 2017? What amount of Slicenhook’s income for each period would each of the partner’s receive?

	Slicenhook Total		Each Partner's share
	2016	2017	2016	2017
Ordinary Income:
Sales
Cost of goods sold
Operating expenses
Depreciation
Interest expense
Total ordinary income
Separately Stated Items:
Qualified dividends
Tax-exempt interest
§179 expense		-		-
Fines and penalties	-		-
Meals and entertainment	-		-
Non-deductible

f. What are Carrie’s, Reed’s, and Doug’s bases in their partnership interest at the end of 2016 and 2017?

	D'Lake	Green	Divot
Basis at 12/31/16
Basis at 12/31/17

g-1. If Reed sells his interest in Slicenhook to Indie Ruff, what is the amount and character of his recognized gain or loss?

$102,100 Ordinary income and $89,000 capital gains

$102,400 Ordinary income and $90,000 capital loss

$162,400 capital loss and $89,000 ordinary income

$89,000 Ordinary income and $102,400 capital gains

Neither gain nor loss recognized

g-2. What is Indie’s basis in the partnership interest?

Basis

h-1. If Reed sells his interest in Slicenhook to Indie Ruff, what is Indie's inside basis in Slicenhook?

Indie’s inside basis

h-2. What effect would a §754 election have on Indie’s inside basis?

Special basis adjustment

i-1. If Slicenhook distributes the assets proposed by Carrie and Doug in complete liquidation of Reed’s partnership interest, what is the amount and character of Reed’s recognized gain or loss?

	$102,100 ordinary income and $89,000 capital gains
	$102,400 ordinary income and $90,000 capital loss
	$162,400 capital loss and $89,000 ordinary income
	$89,000 ordinary income and $102,400 capital gains
	Neither gain nor loss recognized

i-2. If Slicenhook distributes the assets proposed by Carrie and Doug in complete liquidation of Reed’s partnership interest, what is Reed’s basis in the distributed assets?

	Basis
Cash
Investment in stock
Equipment

j-1. If Reed sells his interest, what is his after-tax cash? Assume his ordinary marginal tax rate is 35% and his capital gains tax rate is 15%.

Cash after tax

j-2. If Slicenhook distributes the assets proposed by Carrie and Doug in complete liquidation of Reed's partnership interest and Reed were to immediately sell the distributed assets, what is his after-tax cash? Assume his marginal tax rate is 35% and his capital gains rate is 15%.

Cash after tax

e-1. Using the information provided, prepare Slicenhook’s tax form 1065 for 2016.

Download the Tax Form and enter the required values in the appropriate fields.

Please right click, and select open form in new window. Save your completed Tax Form to your computer and then upload it here by clicking "Browse." Next, click "Save." Use 2016 tax rules regardless of year on form.

e-2. Using the information provided, prepare a Schedule K-1 for Carrie.

Download the Tax Form and enter the required values in the appropriate fields.

Please right click, and select open form in new window. Save your completed Tax Form to your computer and then upload it here by clicking "Browse." Next, click "Save." Use 2016 tax rules regardless of year on form.