Question

Problem 21-33 (LO. 3, 17) During the current tax year, Dave and Stu formed the DS LLC with Dave contributing land with a basis of $360,000 and a fair market value of $600,000 at the contribution date. At the end of the year, the LLC distributes $300,000 of cash to Dave. The LLC made no distributions to Stu. Assume there were no other income or loss transactions for the year that would affect Dave's basis in his LLC interest. If an amount is zero, enter "O". a. Under general tax rules, the $300,000 would be treated as a distribution b. Under general tax rules, the income or gain that Dave recognizes as a result of the payment is $ C. Under general tax rules, what basis would the LLC take in the land Dave contributed? $ 360,000 d. The IRS might assert that the contribution and distribution transactions were, in effect: A disguised sale , and the basis the LLC would take in the land contributed e. and f. Under this treatment, Dave would recognize a gain of $ by Dave would be $

I do not know if the answers entered are correct.

Answer 1

Sec. 721 provides that a member’s transfer of property to an LLC taxed as a partnership does not result in income or loss to the member or the LLC.

Under Sec. 723, the LLC’s basis in the contributed assets is the same as each contributing member’s basis in the assets prior to the contribution.

The distribution from LLC is not taxable since LLC is disregarded entity and any profit made during the year is incorporated into member's account in agreed ratio.

In view of the provision of law the answer are :

a. Distribution

b. zero

C. 360,000

The transaction can be characterized as "disguised sale" under Anticipated Reduction rule :

For purposes of the rules under section 707, a partner’s share of a liability assumed or taken subject to by a partnership is determined by taking into account certain subsequent reductions in the partner’s share of the liability.

Basis : 360,000

FMV : 600,000

Distribution : 300,000

Basis for Distribution : 180,000 (360,000/600,000*300,000)

Gain : 120,000 (300,000 - 180,000)

Hence the remaining Basis LLC would have would be 180,000 (360,00-180,000)