For 20 years, Anne has owned and operated a riverside restaurant called The Riverside. Anne rents the property from Landlord Bob. Business was booming and Anne is on her way to becoming a billionaire. Anne decides to expand her business and asks Bob if he would help her with her business, and Bob agrees. They approach John who is a real estate developer and he proposed an expansion to The Riverside and upgrades to the building. Anne, Bob and John agree to form a partnership to own and operate The Riverside. Anne and Bob will each contribute one-half of the capital. Bob will contribute the real estate at a value of $3 million. Anne will contribute the equipment and the restaurant furnishings at a value of $1 million and the cost of improvement, which amounts to $2 million. John will oversee the construction and when complete, he will vest in a 5 percent interest in the partnerships capital. On an ongoing basis, John will oversee the partnerships operations in exchange for a fixed salary and 20 percent of the partnerships ongoing profits. The construction is estimated to be completed in June of 2016, and his capital interest is estimated to be valued at $400,000 at that time. What are the tax consequences if the trio forms The Riverside as a partnership to own and operate the restaurant.

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