How do I tackle attached assignment on depreciation and amortization deduction on contributed and acquired assets?

Partnership Taxation - Fall Semester, 2017 Homework Assignment #2 Assignment Objectives Allocate depreciation and amortization deductions on contributed and acquired assets Calculate and allocate gain upon the sale of a contributed asset Allocate debt pursuant to Treasury Regs. 1.752-2 and/or -3 Prepare an LLC Balance Sheet and reconcile inside and outside bases Prepare 2016 Forms K-1 for the 4 members Facts On January 1, 2014, K-Tech, LLC is formed with the following contributions from the following 4 members: Member Davis Edwards Franklin Gaffney Gaffney Asset Cash Cash Machinery Patents Cash FMV $200,000 $200,000 $600,000 $150,000 $ 50,000 Adj Basis $200,000 $200,000 $126,000 $ 0 $50,000 Debt N/A N/A $400,000 N/A N/A Concurrent with the formation of the LLC, the lender of Franklin's $400k debt agrees to an assignment of the note from Franklin to the LLC. As part of this agreement, Franklin (who invented the machinery and initially borrowed against it on 7/1/2012) was required to pay-down the debt by $100k prior to assignment. The machinery - both before and after 1/1/14 - serves as the only security on the note. In other words, neither Franklin (before LLC formation) nor any of the LLC members (after LLC formation) have been required to personally guarantee the debt. On January 2, 2014, K-Tech purchases equipment for $140k, financed by $40k of available cash and new debt of $100k. The newly purchased equipment serves as the only collateral on this new debt instrument. On January 3, 2016, K-Tech sells the Machinery contributed by Franklin for $400k, using the proceeds to pay off the \"old\" debt. Concurrently, the LLC acquires new machinery for $700k, using $300k of cash and $400k of new interest-only debt (secured only by the new equipment). Assumptions 1) Not including depreciation and amortization, the LLC generates a loss of ($240k) for 2014, income of $360k for 2015, and income of $440k for 2016. The 2016 income amount does not include the gain or loss, if any, resulting from the sale of the Machinery on 1/3/16. On December 31, 2015, the LLC distributes $20k to each member (total of $80k), and on December 31, 2016 distributes $30k to each (total of $120k). 2) The tax year-end of K-Tech, LLC is properly determined to be December 31. 3) All debt instruments are interest-only, such that the principal amounts do not change. Also assume that interest expense is already included in any income or loss amounts presented (in other words, don't calculate interest expense). 4) The LLC agreement requires that allocations under IRC 704(c) with respect to Franklin's contributed machinery are to be made using the Traditional Method. The agreement further provides that 704(c) allocations with respect to Gaffney's contributed patents are to be made using the Remedial Allocation Method. 5) Except for depreciation, the members share equally in all LLC items. Depreciation (but not amortization) is to be allocated 70% to Edwards, with the remaining 30% shared equally between the other 3 members. The LLC agreement contains the first two requirements of the economic effect safe harbor, but no partner has an obligation to restore a negative capital account. The agreement does contain a qualified income offset provision such that the equal 25% (per partner) allocations meet the alternate test for economic effect to the extent they don't cause or increase a negative capital account. 6) Upon formation, the contributed machinery has 6 years as its remaining life. The patents are amortizable on a straight-line basis over 15 years. Depreciation on new equipment is straight-line over 7 years. For all deprecation and amortization, disregard any mid-month, mid-quarter or halfyear conventions that might otherwise apply. Deliverables 1) Prepare a computation of each member's initial basis in K-Tech as of 1/1/14, including a computation of the extent (if any) to which any partner may be required to recognize gain under IRC 731 incident to the formation; also prepare a schedule of each partner's outside tax basis as of December 31, 2016; 2) Prepare proforma taxable income allocations to all LLC members for 2014, 2015 and 2016, including any special allocations required pursuant to IRC 704(c); 3) Prepare the LLC's book and tax balance sheet as of December 31, 2016; 4) Prepare Forms K-1 for the 4 members for the 2016 tax year only (not 2014 or 2015). Forms K-1 should include Page 1 only, with any supplemental whitepaper disclosures you deem appropriate. Do not populate EINs, SSNs or names and addresses on your K-1s. 5) Limit your deliverable to 3 pages (not including K-1s), using a reasonably sized font. 6) Include an electronic copy of your spreadsheet with your submission. Working With Others You are encouraged to share check figures with your classmates. However, the creation of the spreadsheet -- inasmuch as it involves creating formulas that reflect the rule of law - is viewed as an integral part of the learning process. Accordingly, you are NOT ALLOWED to share spreadsheets. There is no flexibility on this. If you receive a classmate's spreadsheet and use any part of it as your own, your score for the Project will be zero. If you forward your spreadsheet to another classmate and that person uses any part of it as their own then your score for the Project will also be zero. In summary, any students involved in sharing spreadsheets will receive a score of zero for the assignment. Grading Standard Mathematical and computational accuracy will comprise 80% of your grade. Appearance will comprise the other 20%. This does not mean that your submission has to be \"pretty\" with, for example, colored fonts and fancy formatting. What is important is that your product meets a \"client-ready\" standard, meaning it should rise to the level of something that you'd be comfortable delivering to a client while expecting to get paid for it! That means.... Proper labeling of amounts and sections (e.g., if a section of your spreadsheet is calculating 1.752-3 nonrecourse debt allocations then it should be so labeled); Correct spelling; Consistent and easy-to-read formatting of numbers (e.g., $120,000 or $120k but not 120000 or 120,000.00); Good \"flow\" to the computations - ideally a Summary Page followed by the detail backup