Question

LeBron, Dennis, and Susan formed the Bar T LLC at the beginning of the current year. LeBron and Dennis each contributed $200,000 and Susan transferred several acres of agricultural land she had purchased two years earlier to the LLC. The land had a tax basis of $50,000 and was appraised at $300,000. The land was also encumbered with a $100,000 nonrecourse mortgage (i.e., qualified nonrecourse financing) for which no one was personally liable. The members plan to use the land and cash to begin a cattle-feeding operation. Susan will work full time operating the business, but LeBron and Dennis will devote less than two days per year to the operation. All three members agree to split profits and losses equally. At the end of the first year, Bar Thad accumulated $40,000 of accounts payable jointly guaranteed by LeBron and Dennis and had made a $9,000 principal payment on the mortgage. None of the members have passive income from other sources or business income from other sources. LeBron and Dennis are married, while Susan is single. For the first year of operations, the partnership records disclosed the following information: Sales Revenue COGS Operating Expenses Dividends Municipal Bond Int Salary pd as a guarentee to Susan Cash Dist split equally at year-end $620,000 $380,000 $670,000 $1,200 $300 $10,000 not inlcuded in expenses $3,000 1. Compute the adjusted basis of each member's interest immediately after the formation of the LLC.

Answer 1

ANSWER:

The adjusted basis of each member's interest immediately after the formation of the LLC is calculated with the use of following table:

	Lebron	Dennis	Susan
Basis in Land			50,000
Cash Contribution	200,000	200,000
Debt Allocated to Susan			50,000
Debt Allocated to Partners [(100,000 – 50,000)*1/3]	16,667	16,667	16,667
Relief to Susan from Non-Recourse Mortgage			-100,000
Gain Recognized (if any)	0	0	0
Adjusted Tax Basis	$216,667	$216,667	$16,667

Notes:

1) The value of debt allocated ($50,000) to Susan is basically the difference between the nonrecourse mortgage (100,000) and tax basis in land ($50,000).

2) The balance value of debt ($50,000) is allocated between the partners in the equal ratio (1/3).

3) Gain will be recognized only if the value of relief to Susan from non-recourse mortgage row is greater than the sum of values reported in basis in land, cash contribution, debt allocated to Susan and debt allocated to partners (in the above table). If the resulting value is negative, the gain will be taken as 0.

4) Partner's adjusted basis is the sum of basis in land, cash contribution, debt allocated to Susan, debt allocated to partners and relief to Susan from non-recourse mortgage rows for all partners.

_____________________________________________

If you have any query or any Explanation please ask me in the comment box, i am here to helps you.please give me positive rating.

*****************THANK YOU**************