Facts:

A, B, and c are calendar-year taxpayers who are the original members of the ABC Partnership (ABC), a cash-method, general partnership with a fiscal year ending January 31. Each partner has a one-third interest in the capital, profits, and losses of ABC. Each contributed $10 in cash to the partnership. The partnership has the following balance sheet:

Tax and BookFair Market Value

Assets

1$20$20

2 1025

33045

Total$60$90

Capital

A1020

B10.20

C1020

Total$60$90

Questions:

1.On February 1, Year 1, D purchases A's interest in ABC for $20 cash. Assume that ABC has no Section 751(c) or Section 751(d) assets and ignore the accrual of interest on the partnership's mortgage liability. What is the amount and character of A's gain or loss?

2.Assume that Asset 2 on the balance sheet consists of five separate items which are not inventory items within the meaning of 751(d), each with a fair market value of $5 and an adjusted basis of $2. ABC's only transactions during its fiscal year ending on January 31, Year 2 are the sales of these items. These sales take place on February 1, April 1, June 1, September 1, and October 1, Year 1 and result in aggregate income of $15.

a.On August 1, Year 1, A sells his interest in ABC to D for $20 cash. Assume that A's sale is the only variation in the interests of ABC during the year. What is A's share of the income of ABC for its fiscal year ending on January 31, Year 2? When must A report this income? What is the amount and character of A's gain or loss from the sale of his partnership interest?

b.What is the answer in a. above if some of the records of ABC have been destroyed in a fire and it is impossible to determine the dates on which the items were sold other than that they were sold sometime during the year? What if it is merely inconvenient to close the books at the time of A's sale?

c.What is the answer in a. above if A sells one-half of his interest in ABC to D on August 1, Year 1, for $10 cash?

d.Suppose in a. above that A and D agreed that A would be responsible for 80 percent of the taxable income attributable to the purchased interest for the fiscal year ending on January 31, Year 2 and that D would be responsible for the other 20 percent. Can the partnership achieve this result?

e.Suppose in 2. a. above that D demanded an allocation of an amount of income equal to 80 percent of the income attributable to the purchased interest for the fiscal year ending on January 31, Year 2. Can the partnership accommodate this demand? If not, is there an alternative way that D's request may be satisfied?