Question

Skylar is ready to retire and wants your professional opinion on the most advantageous way to dispose of a 40% limited ownership interest in the three-member STU LLC. Communications Option #1. Skylar will immediately sell the LLC interest to Partner Tameeka for $300,000 cash. Skylar will then invest the after-tax proceeds in a tax-exempt (Federal and state) municipal bond paying 4% interest per year, compounded at the end of each year. (Assume that there are no Federal or state income taxes on the interest earned on the bond.) Option #2. STU will distribute a parcel of land (investment property) to Skylar in complete redemption of the 40% interest. STU's land was recently appraised for $260,000. The appraiser estimated that Skylar could sell the land for $400,000 (before taxes) at the end of eight years. For simplicity, determine the tax results of the land distribution under the proportionate liquidating distribution rules. [In this case, this result also arises if the distribution is a § 736(b) distribution.] Other information. In either scenario, at the end of the eighth year, Skylar will convert the asset (bond or land) to cash to help cover living expenses. If needed, use the Present and Future Value Tables in Appendix F. Assumptions: STU owns no hot assets and has no stated or unstated goodwill. Skylar's basis in the LLC interest is $100,000. The LLC's basis in the land is $80,000. Skylar's tax rate is 20% on capital gains.

Draft a memo to Skylar describing how each option would be treated for tax purposes, and the after-tax amount of cash Skylar would have on hand after cashing the bond or selling the land at the end of year 8. Based solely on this analysis, recommend one of these options to Skylar.

Answer 1

 

Answer 2

In the above example skylar has sold the LLC interest. Skylar has two options from which one have to be selected.

Option I

Total Proceeds from LLC Interest $300000

Less: Skylars Basis in LLC Interest $100000

Taxable value $200000

Tax on above 20% (Capital gain) $40000

Net Proceeds ($300000-$40000 $260000

Amount invested in bond after 8 Years($260000*(1.04)8th ) $355828

Option II

Present Value of land $260000

Less: LLC basis in land $80000

Taxable Value $180000

Tax on above @20% $36000

Net Proceeds invested for land $ 224000

Sale value of land at the end of 8th year $400000

Less: Purchase value of land $260000

Taxable value @20% $140000

Tax Value $28000

Net Proceeds from sale of Land after 8 years $372000

Hence Option is recommended as it is having higher amount of $372000.

Answer 3