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 2005.Sam’s Uncle purchasedthe land in 1980 for $30,000.The land was worth $100,000 when Sam’s uncle died.Thefair market value of the land was $200,000at the date it was contributed to the partnership.Drew has significant experience developing real estate.After the LLC is formed, he willprepare 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 50% interest is$200,000
a.How much gain or income will Sam recognize on his contribution of the land to the
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? Whatis the character of any gain or income recognized?
d.What basis will Drew take in his LLC interest?
a.
How much gain or income will Sam recognize on his contribution of the land to theLLC?What is the character of any gain or income recognized?
Answer:
None. Under § 721, neither LLC nor any of the members can recognize the gain on the contribution for the property to the LLC in exchange of interest in LLC.
b.
What basis will Sam take in his LLC interest?
Answer:
$100,000.
Basis of Sam in his LLCinterest will equal to basis he held in property which he inherited from his uncle.Basis that beneficiary can takes in the property received from the estate generally are equals to fair market value of an asset at date on death or at alternate date of valuation
c.How much gain or income will Drew recognize on the formation of the LLC? Whatis the character of any gain or income recognized?
Answer:
Drew can recognize $50,000 of an ordinary income. Fair market value of Drew’s 50% LLC interest is $200,000. Because Drew could contribute only $150,000 for property, difference between amount contributed & the value for interest will be treated as the being for the services rendered to LLC.
Here Services do not constitute as ‘‘property’’ for the purposes of § 721 non recognition of treatment.
d.
What basis will Drew take in his LLC interest?
Answer:
Basis of Drew in his LLC interest can be $200,000
=[$150,000 (the cash contributed) add: + $50,000 ( amount of ordinary income which recognized for the services rendered to partnership)]
