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South-Western Federal Taxation Comprehensive Volume 2014 need solution. please thanks.


On January 1, 2004, the Branson Company (EIN 22-2222222) and Porto Engineering, Inc. (EIN 33-3333333), formed Branto, LLC (an equally owned joint

venture). During its first four years, the LLC worked with the U.S. Department

of Homeland Security and the National Transportation Safety Board to design

and develop a specific device for airport passenger screening. Porto provides

engineering expertise, and Branson provides high-tech manufacturing, selling,

and distribution expertise. Early in 2008, the two governmental agencies recommended the product. In 2009, Branto's screening device is being succesfully

marketed, sold, delivered, and installed in airports around the United States.

The LLC uses the accrual method of accounting and the calendar year for

reporting purposes. Its current address is 3750 Airport Boulevard, Seattle, WA,

98124. The following information was taken from the trial balance supporting the

LLC's GAAP-basis (audited) financial statements for the 2009 calendar year:


Sales revenues

Interest income

Total revenues




Amounts related to cost of goods sold:

Beginning inventory

Materials purchases


Additional § 263A costs

Other costs: Various items

Book depreciation

Less: Ending inventory

Total amounts re: work-in-progress:

$ 2,000,000








Other costs not related to production:

Salaries and wages

Taxes and licenses

Charitable contributions

Interest expense

Meals and entertainment (subject to 50% disallowance)

Travel expenses

Employee benefit programs

Insurance (including key employee life insurance of $100,000)

Legal and professional fees

Office expenses

Sales and promotion expenses


Warranty expense (increase to reserves; not fixed and determinable)

Total other costs disbursements

$ 1,000,000














Net income per books and GAAP-basis audited financial statements

$ 9,675,000

The beginning and ending GAAP-basis balance sheets for the LLC were as

follows at December 31, 2009:





Accounts receivable


U.S. government obligations


Buildings and equipment

Accumulated depreciation

Total assets









$ 1,825,000








Accounts payable

Other current liabilities:

Operating line of credit (guaranteed by LLC members)

Warranty reserves (not guaranteed by members)

Mortgage notes on building

Capital, Branson Company

Capital, Porto Engineering, Inc.

Total liabilities and capital

















The LLC uses the lower of cost or market method for valuing inventory. Branto is

subject to § 263A; for simplicity, assume § 263A costs are reflected in the same

manner for book and tax purposes. Branto did not change its inventory accounting

method during the year. There were no writedowns of inventory items, and Branto

does not use the LIFO method.

The LLC claimed $2,499,270 of depreciation expense for tax purposes (book

depreciation is $1,275,000). All tax depreciation expense should be reported on

Schedule A. The LLC placed $3 million of assets in service during the current year;

this exceeds the threshold for eligibility for a § 179 deduction. Tax depreciation

amounts reflect bonus depreciation deductions (and these assets are not subject to

AMT adjustments). Depreciation for assets placed in service in prior years creates an

adjustment of ($276,900) for AMT purposes. (This is a negative amount—book

depreciation for these assets is greater than tax depreciation.)

All borrowings were used exclusively for business operations; consequently, none

of the interest expense is considered investment interest expense. The LLC

members were required to guarantee the debt related to the operating line of

credit. The accounts payable, accrued warranty claim liabilities, and the mortgage

were not guaranteed by the members. The mortgage relates to the real property and

is considered qualified nonrecourse financing. The partners share equally in all

LLC liabilities, because all initial contributions and all ongoing allocations and

distributions are pro rata.

No guaranteed payments were paid to either of the LLC members. Instead, the

members each withdrew $3.4 million of cash during the year. The LLC has never

made a distribution to the partners of noncash property. Cash distributions were not

subject to the disclosure requirements of Reg. § 1.707-8. The LLC has not made a

§ 754 election and had no transactions during the current year that would warrant

such an election. None of the members sold any portion of their interests in the

LLC during the year.

During the current tax year, the LLC did not sell or acquire intangible assets,

restructure debt, or distribute any property received in a like-kind exchange. It did

not change any accounting method for tax or financial reporting purposes. Both

LLC members are U.S. Subchapter C corporations. The LLC's operations are

entirely restricted to the United States, and all sales were to U.S. businesses. The

LLC had no foreign operations, no foreign bank accounts, and no interest in any

foreign trusts or other LLCs. The LLC is not publicly traded and is not a statutory

tax shelter. The LLC is not required to file Form 8918; there were no ''reportable


The LLC's activities are eligible for the domestic production activities deduction

(DPAD). For simplicity, assume the LLC's qualified production activities income is

$9.5 million. Employer's production-related W-2 wages are $10 million.

The IRS's business code for ''Other specialty trade contractors'' is 238900. The

LLC files its tax return in Ogden, Utah. Branson Company is located at 3750 Airport

Boulevard, Seattle, WA 98124 (the same as the LLC's address). Porto Engineering,

Inc., is located at 42100 Highway 980 West, Tacoma, WA 98401. The LLC member

corporations are each owned by several unrelated individual taxpayers. Branson

Company is the tax matters partner. The LLC has not been audited by the IRS and

has not filed Form 8893 for any tax years.

The capital account reconciliation on the partners' Schedules K-1 is prepared on

a GAAP basis. The LLC is required to file Schedule M-3, Form 8916-A

(Supplemental Attachment to Schedule M-3), and Schedule C with its Form 1065.

Schedule L must be prepared on a financial reporting basis.

a. Prepare pages 1-5 of Form 1065 for Branto, LLC. Do not prepare Form 4562.

Leave any items blank where insufficient information has been provided. Prepare supporting schedules as necessary if adequate information is provided.

b. Prepare Schedule M-1, Form 8916-A (page 1), and Schedule C. Hint: You will

find four book-tax differences (two temporary differences and two permanent


c. Prepare Schedule K-1 for 50% LLC member Branson Company.

Subject: Accounting, Business

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