On January 1, 2006, 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 2011, the two governmental agencies recommended the product. In 2012, Brantos screening device was 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 2012 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 200,000 Meals and entertainment (subject to 50% disallowance) 1,200,000 Travel expenses 800,000 Employee benefit programs 300,000 Insurance (including key employee life insurance of $100,000) 300,000 Legal and professional fees 600,000 Office expenses 2,000,000 Sales and promotion expenses 2,500,000 Utilities 800,000 Warranty expense (increase to reserves; not fixed and determinable) 300,000 Total other costs $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, 2012: Beginning/Ending Cash $ 975,000/ $ 1,825,000 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 /15,000,000 Accumulated depreciation (6,375,000)/ (7,650,000) Total assets $10,820,000/ $16,375,000 Accounts payable $ 420,000/ $ 800,000

Other current liabilities: Operating line of credit (guaranteed by LLC members) 1,000,000 /2,000,000 Warranty reserves (not guaranteed by members) 200,000 /500,000 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 /$16,375,000

The LLC uses the lower of cost or market method for valuing inventory. Branto is subject to 263A; for simplicity, assume that 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 write-downs 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 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 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.

The LLCs activities are eligible for the domestic production activities deduction (DPAD). For simplicity, assume that the LLCs qualified production activities income (QPAI) is $9.5 million. The LLCs production-related W2 wages are $10 million.

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. 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.

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. None of the members contributed cash or other property to the LLC during the year.

Both members are classified as corporations and LLC member-managers on Schedule K1. The capital account analysis on Schedule K1 is prepared on a tax basis. On the Analysis of Income (Loss), the IRSs instructions indicate that the amounts for any LLC members should be reported on the line for limited partners. 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 capital account reconciliation on the partners Schedules K1 is prepared on a GAAP basis, as is the LLCs Schedule L. The LLC is required to file Schedule M3, Form 8916A (Supplemental Attachment to Schedule M3), and Schedule C with its Form 1065.

a. Prepare pages 15 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. You may assume that the answer to each yes/no question on page 3 is no unless discussed above. b. Prepare Schedule M3 and Form 8916A (page 1). Do not prepare 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.