Question

Three individuals, C, D, and E, form CDE LLC. CDE LLC does not “check the box” to become a corporation and therefore is treated as a partnership for tax purposes.

(a) C contributes land, adjusted basis $70 fair market value $100 and cash of $20. D contributes inventory (in the hands of both D and CDE), adjusted basis $50 fair market value $120. E contributes services. In exchange, each partner receives a 1/3 interest in the LLC. What are the consequences to all of the parties?

(b) Same as (a) except that C’s land is subject to an assumable mortgage of 30 and has a fair market value of 130.

Answer 1

C contributes land, FMV $100 and Cash $20 & D contributes inventory, FMV $120, Capital Contribution is as follows

Account	Debit($)	Credit($)
Cash	20
Land	100
C’s Capital		120
(Capital being contributed by C)

Account	Debit($)	Credit($)
Inventory	120
D’s Capital		120
(Capital being contributed by D)

Firstly any contribution received as to be taken at its market value as shown above.

In the given case E contributes services, about which nothing is mentioned in terms of its realisation. Contributions of services shall be recognized if the services received (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills.

Assuming services provided are equivalent to the contributions provided by D & C, receiving equal interest by all parties is right and there will be no consequences.

(b)

When C’s land is subject to mortgage of $30 and has FMV $130, other things remaining same

C’s contribution will be as follows

Account	Debit($)	Credit($)
Land	130
Cash	20
Mortgage		30
C’s Capital		120
(Being Capital contributed)

Since capital of C remaining the same, there will be no change.