Exhibits for answering the given question:

Arrakis Partnership

Partial Balance Sheet (adjusted basis)

for Year ended December 31, Year 3

Current Assets:
Cash	$ 60,000
Receivables	45,000
Inventory	60,000
Total Current Assets:	$165,000
Noncurrent Assets:
Land	$100,000
Total Assets:	$265,000

Email from Randy Jaegar

To: Tyler Hudson, Partner

From: Randy Jaegar, Partner

Date: January 3, Year 4

RE: Sale of Partnership Interest

Tyler,

Im very sorry to hear about Paul leaving. He was a great asset for this company and he will be sorely missed.

Even stranger though, John Beal just handed me his letter of resignation and informed me that he, too, sold his entire 10% interest in Arrakis on December 31, Year 3. As of the date of the sale, John had an adjusted basis in the partnership of $30,000. According to the records in front of me, John became a partner exactly one year ago today on January 3, Year 3.

John did not seem overly excited like Paul, per your description; however, he did mention that he sold his interest for $50,000 to a party known as Lenina. Similarly, we should expect to hear from Lenina before the end of the week.

Regards,

Randy

Email from Tyler Hudson

To: Randy Jaegar, Partner

From: Tyler Hudson, Partner

Date: January 3, Year 4

RE: Sale of Partnership Interest

Hey Randy,

I just got off of the phone with Paul Ludden who had some surprising news for me. Apparently, on December 31, Year 3, Paul sold his entire 35% interest in Arrakis. According to our records, Pauls interest at that date had an adjusted basis of $115,000, and he has been a partner here since Year 1.

Additionally, Paul must have been overly excited because he let it slip that he sold his interest for $175,000. He told me that we should be expecting a phone call from the new partner, Leto, in a couple of days. Hopefully we can transition smoothly before work gets too crazy later on this year. Ill let you know if I hear anything more from Paul.

Sincerely,

Tyler

Fair value of Assets 12/31/ Year 3

To: Tyler Hudson, Partner

From: Adam Crenshaw, Owner, Adams Appraisals

Date: January 5, Year 4

RE: Appraisal of Assets

Tyler,

Here is the report for the appraisals that my team and I have conducted over the past couple of weeks. If you have any questions or concerns, please let me know.

Fair Value Appraisal

as of December 31, Year 3

Cash	$60,000
Receivables	$52,000
Inventory	$75,000
Land	$150,000

Thank you for using Adams Appraisals. We look forward to serving you again in the near future.

Sincerely,

Adam Crenshaw

Questions to be answered:

Note:

( Type options: Short-term capital gain,Short-term capital loss, long-term capital gain, long-term capital loss, Ordinary income)

Determine the types and amounts of income that Paul and John must report as a result of the sales of partnership interest, based on information included in the exhibits.

Select from the option list provided the type of income that Paul and John must report. Each choice may be used once, more than once, or not at all.

Then, enter the appropriate amount in the associated cell for each item. If the amount is zero, enter a zero (0). Round all amounts to the nearest whole dollar.

	Type	Amount
1.-2. Paul
3.-4. John