A and B form the AB partnership on January 1, 2015. A contributes real property (10 year straight-line recovery property) she has held for many years with a basis of $500,000 and fair market value of $1,000,000 in exchange for her partnership interest and while B contributes $250,000 in cash in exchange for her partnership interest. A and B have agreed to share profits and losses from the partnership equally but that AB shall allocate 90% of all depreciation deductions from the real property to A. AB partnership elects a December 31 tax year and AB had the following income and expenses during its calendar tax year which ended December 31 of the current year:

Gross Receipts inventory sales	550,000
COGS	(35000)
Salaries to Non partners	(15000)
Depreciation	(50000)
Advertising	(15000)

• 1Create AB partnerships balance sheet as of formation on January 1, 2015 in including partners basis and capital accounts.
• 2Assuming all special allocations have economic effect, how and when will AB, and A and B report the income and who will be liable for the taxes?
• 3What the tax consequences to A and B from the first year of operation?
• 4Summarize the regulatory requirements which AB must satisfy in order for the allocation of depreciation to have economic effect.
• 5How would your answer change, if at all, in (b) and (c) if it was determined that the allocation of depreciation to A lacked substantial economic effect. Explain your answer.
• 6Assumethefactsof(b)and(c),ifin2016ABsnonseparatelystatedincomeequalsitsexpenses(notincludingseparatelystateddepreciation)exceptthatABsellstherealestatefor$1,000,000whatarethetaxconsequencestoAB,AandB?Explainyouanswer.
• partnership taxation based question.