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 2013. Sam's uncle purchased the land in 1986 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 LLC.

The question is incomplete. Complete question is given below.          

Explanation:

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 2005.Sam’s Uncle purchasedthe land in 1980 for $30,000.The land was worth $100,000 when Sam’s uncle died.Thefair market value of the land was $200,000at the date it was contributed to the partnership.Drew has significant experience developing real estate.After the LLC is formed, he willprepare 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 will also contribute$150,000 of cash in exchange for his 50%interest in the LLC.The value of 50% interest is$200,000

a.How much gain or income will Sam recognize on his contribution of the land to the LLC?What is the character of any gain or income recognized?

b.What basis will Sam take in his LLC interest?

c.How much gain or income will Drew recognize on the formation of the LLC? Whatis the character of any gain or income recognized?

d.What basis will Drew take in his LLC interest ?

Answers

a. No gain or income will be recognized as per 721 by the LLC nor their members on contribution of the Land to the LLC.

b. the Sam will take $ 100,000. The land worth $ 100,000 at the time of his uncle death when the property inherited to him.

c. $ 50,000 can be recognized by Drew as income. According to the question, value  for 50 % interest is $ 200,000. thus Drew can contribute only $ 150000 in sake of property.

d. Drew basis in LLC interest will be $ 200,000.

Break up of $ 200,000 is = Ordinary income recognized + Contribution

                                           = $ 50,000 + 150,000

                                           = $ 200,000    

a) the gain or income to be recognized by Sam is zero

b) Since the worth of the property is $100,000, Sam's basis is 100,000

Explanation:

c) The incometo be recognized by Drew on the formation of the LLC is $50,000

d) Drew's basis of interest in the LLC is $200,000

First, the question is completed below:

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 normall bill a third party $50,000 for these efforts. Drew will also contributed $150,000 cash in exchange for his 50% interest in the LLC. The value of his 50% interest is $200,000.

a)How much gain or income will Sam recognize on his contribution of the land to the LLC? What is the character of any gain or income recognized?

b) What basis will Sam take in his LLC interest

c) How much gain or income will Drew recognize on the formation of the LLC? What is the character of any gain or income recognized?

d) What basis will Drew take in his LLC interest?

Solution

a) the gain or income to be recognized by Sam is zero. This is because no gain is allowed to be recognized by any member of a LLC where property is contributed to the LLC as a means of exchange for interest in the company

b) Sam's basis in his LLC interest will be equal to the value of the property he inherited from his uncle. Since the worth of the property is $100,000, Sam's basis is 100,000

c) The incometo be recognized by Drew on the formation of the LLC is $50,000 (the amount he normally bills for the effort) as the fair market value of his interest in the LLC is $200,000

It should be noted that this income recognized will be deducted from the fair value of his interest, so Drew will only contribute property worht $200,000 -$50,000 to the LLC

d) Drew's basis of interest in the LLC is $200,000

calculaed as Cash contributed (150,000) + orodinary income recognized ($50,000) = $200,000

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