1. [LO2] Kevan, Jerry, and Dave formed Albee LLC. Jerry and Dave each contributed $245,000 in cash. Kevan contributed the following assets:
Kevan: Basis Fair Market Value
Cash $ 15,000 $ 15,000
Land* 120,000 440,000
Totals $ 135,000 $ 455,000
*Nonrecourse debt secured by the land equals $210,000
Each member received a one-third capital and profits interest in the LLC.
a. How much gain or loss will Jerry, Dave and Kevan recognize on the contributions?
b. What is Kevan’s tax basis in his LLC interest?
c. What tax basis do Jerry and Dave have in their LLC interests?
d. What is Albee LLC’s tax basis in its assets?
e. Following the format in Exhibit 20-2, prepare a tax basis balance sheet for the Albee LLC showing the tax capital accounts for the members. What is Kevan’s share of the LLC’s inside basis?
f. If the lender holding the nonrecourse debt secured by Kevan’s land required Kevan to guarantee 33.33 percent of the debt and Jerry to guarantee the remaining 66.67 percent of the debt when Albee LLC was formed, how much gain or loss will Kevan recognize?
g. If the lender holding the nonrecourse debt secured by Kevan’s land required Kevan to guarantee 33.33 percent of the debt and Jerry to guarantee the remaining 66.67 percent of the debt when Albee LLC was formed, what are the members’ tax bases in their LLC interests?
2. [LO2] {Research} Jim has decided to contribute some equipment he previously used in his sole proprietorship in exchange for a 10 percent profits and capital interest in Fast Choppers LLC. Jim originally paid $200,000 cash for the equipment. Since then, the tax basis in the equipment has been reduced to $100,000 because of tax depreciation, and the fair market value of the equipment is now $150,000.
a. Must Jim recognize any of the potential § 1245 recapture when he contributes the machinery to Fast Choppers? {Hint:See § 1245(b)(3).}
b. What cost recovery method will Fast Choppers use to depreciate the machinery? {Hint:See § 168(i)(7).}
c. If Fast Choppers were to immediately sell the equipment Jim contributed for $150,000, how much gain would Jim recognize and what is its character? {Hint:See § 1245 and 704(c).}
3. [LO2] {Research} Ansel purchased raw land three years ago for $200,000 to hold as an investment. After watching the value of the land drop to $150,000, he decided to contribute it to Mountainside Developers LLC in exchange for a 5 percent capital and profits interest. Mountainside plans to develop the property and will treat it as inventory, like all of the other real estate it holds.
a. If Mountainside sells the property for $150,000 after holding it for one year, how much gain or loss does it recognize, and what is the character of its gain or loss? {Hint: See §724.}
b. If Mountainside sells the property for $125,000 after holding it for two years, how much gain or loss does it recognize, and what is the character of the gain or loss?
c. If Mountainside sells the property for $150,000 after holding it six years, how much gain or loss is recognized, and what is the character of the gain or loss?
4. [LO2] {Research} Claude purchased raw land three years ago for $1,500,000 to develop into lots and sell to individuals planning to build their dream homes. Claude intended to treat this property as inventory, like his other development properties. Before completing the development of the property, however, he decided to contribute it to South Peak Investors LLC when it was worth $2,500,000, in exchange for a 10 percent capital and profits interest. South Peak’s strategy is to hold land for investment purposes only and then sell it later at a gain.
a. If South Peak sells the property for $3,000,000 four years after Claude’s contribution, how much gain or loss is recognized and what is its character? {Hint:See § 724.}
b. If South Peak sells the property for $3,000,000 five and one-half years after Claude’s contribution, how much gain or loss is recognized and what is its character?
5. [LO2] {Research} Reggie contributed $10,000 in cash and a capital asset he had held for three years with a fair market value of $20,000 and tax basis of $10,000 for a 5 percent capital and profits interest in Green Valley LLC.
a. If Reggie sells his LLC interest thirteen months later for $30,000 when the tax basis in his partnership interest is still $20,000, how much gain does he report and what is its character?
b. If Reggie sells his LLC interest two months later for $30,000 when the tax basis in his partnership interest is still $20,000, how much gain does he report and what is its character? {Hint:See Reg. §1.1223-3}
6. [LO2] Connie recently provided legal services to the Winterhaven LLC and received a 5 percent interest in the LLC as compensation. Winterhaven currently has $50,000 of accounts payable and no other debt. The current fair market value of Winterhaven’s capital is $200,000.
a. If Connie receives a 5 percent capital interest only, how much income must she report, and what is her tax basis in the LLC interest?
b. If Connie receives a 5 percent profits interest only, how much income must she report, and what is her tax basis in the LLC interest?
c. If Connie receives a 5 percent capital and profits interest, how much income must she report, and what is her tax basis in the LLC interest?
