Question

34. LO.3, 9, 14 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 2012. Sam's uncle purchased the land in 1985 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 partnership. 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 also will contribute $150,000 cash in exchange for his 50% interest in the LLC. The value of his 50% interest is $200,000 36. LO.3, 14 Continue with the facts presented in Problem 34. At the end of the first year, the LLC distributes $100,000 cash to Sam. No distribution is made to Drew. Assume there were no other income or loss transactions for the year that would affect Sam's basis in his LLC interest. Decision Making a. Under general tax rules, how would the payment to Sam be treated? b. Under general tax rules, how much income or gain would Sam recognize as a result of the contribution and distribution? 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? g. How can th e transaction be restructured to minimize risk of IRS recharacterization?

Answer 1

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c. The bassod uotch % to be Hoten ↓LC , bfi, be equal to the ba838 anethe capftal cin on the Land If the loud hax been Sold out at fai taanAacon undes the ntontion to avoid tar -for a lond ooth 2ogco hus t may be dleewed o tha dued Sale of alf of tha Proety to tha LLC.