LO.3, 9, 17 Sam and Drew are equal partners in SD LLC formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2006. Sam’s uncle purchased the land in 1981 for $30,000. The land was worth $100,000 when Sam’s uncle died. The fair market value of the land was $200,000 at the date it was contributed to the
Drew has significant experience developing real estate. After the LLC is formed, he will prepare a plan for developing the property and secure zoning approvals for the
LLC. Drew would normally bill a third party $50,000 for these efforts. Drew will also contribute $150,000 of cash in exchange for his 50% interest in the LLC. The value of his
50% interest is $200,000.
a. How much gain or income will Sam recognize on his contribution of the land to the
LLC? What is the character of any gain or income recognized?
b. What basis will Sam take in his LLC interest?
c. How much gain or income will Drew recognize on the formation of the LLC? What is the character of any gain or income recognized?
d. What basis will Drew take in his LLC interest?
36. LO.3, 17 Continue with the facts presented in Problem 35.
a. Construct a balance sheet for SD LLC assuming that Drew’s services are completed immediately after forming SD. The balance sheet should reflect the LLC’s basis in the assets and the fair market value of these assets.
b. Outline any planning opportunities that may minimize current taxation to any of the parties.
37. LO.3, 17 Continue with the facts presented in Problem 35. At the end of the first year, the LLC distributes $100,000 of cash to Sam. No distribution is made to Drew.
a. Under general tax rules, how would the payment to Sam be treated?
b. How much income or gain would Sam recognize as a result of the payment?
c. Under general tax rules, what basis would the LLC take in the land Sam contributed?
d. What alternative treatment might the IRS try to impose?
e. Under the alternative treatment, how much income or gain would Sam recognize?
f. Under the alternative treatment, what basis would the LLC take in the land contributed by Sam?
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