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On January 1, 2008, the Branson Company (EIN 222222222) and Porto Engineering, Inc. (EIN 333333333), 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 2013, the two governmental agencies recommended the product. In 2014, Brantos screening device is being successfully 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 LLCs GAAP-basis (audited) financial statements for the 2014 calendar year:

Revenues:

Sales revenues - $40,000,000

Interest income - 50,000

Total revenues - $40,050,000

Amounts related to cost of goods sold:

Beginning inventory - $ 2,000,000

Materials purchases - 8,000,000

Labor - 9,000,000

Additional 263A costs - 0

Other costs: Various items - 2,700,000

Book depreciation - 1,275,000

Less: Ending inventory - (3,000,000)

Total Amount of work in progress: $19,975,000

Other costs not related to production:

Salaries and wages - $ 1,000,000

Taxes and licenses - 300,000

Charitable contributions - 100,000

Interest expense - 1,200,000

Meals and entertainment (subject to 50% disallowance) - 1,200,000

Travel expenses - 800,000

Insurance (including key employee life insurance of $100,000) - 300,000

Legal and professional fees - 900,000

Office expenses - 2,000,000

Sales and promotion expenses - 1,500,000

Utilities - 800,000

Warranty expense (increase to reserves; not fixed and determinable) - 300,000

Total other costs disbursements - $10,400,000

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:

Beginning Ending

Cash 975,000 $ 825,000

Accounts receivable 620,000 2,600,000

Inventories 2,000,000 3,000,000

U.S. government obligations 1,000,000 1,000,000

Land 600,000 600,000

Buildings and equipment 12,000,000 19,500,000

Accumulated depreciation (6,375,000) (7,650,000)

Total assets $10,820,000 $19,875,000

Accounts payable 420,000 800,000

Operating line of credit 1,000,000 5,500,000

(guaranteed by LLC members)

Warranty reserves 200,000 500,000

(not guaranteed by members)

Mortgage notes on building 5,000,000 6,000,000

Capital, Branson Company 2,100,000 3,537,500

Capital, Porto Engineering, Inc. 2,100,000 3,537,500

Total liabilities and capital $10,820,000 $19,875,000

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 $7.5 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 amountbook 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. 1.7078. 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 LLCs 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 transactions.

The LLCs activities are eligible for the domestic production activities deduction (DPAD). For simplicity, assume the LLCs qualified production activities income is $9.5 million. Employers production-related W2 wages are $10 million. The IRSs 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 LLCs 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 K1 is prepared on a GAAP basis. The LLC is required to file Schedule M3, Form 8916A (Supplemental Attachment to Schedule M3), and Schedule C with its Form 1065. Schedule L must be prepared on a financial reporting basis.

a. Prepare pages 1,4, and 5 of Form 1065 and Form 1125-A 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 M1, Form 8916A (page 1), and Schedule C. Hint: You will find four book-tax differences (two temporary differences and two permanent differences).

c. Prepare Schedule K1 for 50% LLC member Branson Company.

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