Question

When High Horizon LLC was formed, Maude contributed the following assets in exchange for a 25 percent capital and profits interest in the LLC:

		Basis		Fair Market Value
Maude:
Cash	$	36,250		$	36,250
Land*		103,500			427,000
Totals	$	139,750		$	463,250

*Nonrecourse debt secured by the land equals $195,000

James, Harold, and Jenny each contributed $268,250 in cash for a 25 percent profits and capital interest. (Leave no answer blank. Enter zero if applicable.)

a. How much gain or loss will Maude and the other members recognize?

b. What is Maude’s tax basis in her LLC interest?

c. What tax basis do James, Harold, and Jenny have in their LLC interests?

d. What is High Horizon’s tax basis in its assets?

e. Prepare a tax basis balance sheet for the High Horizon LLC showing the tax capital accounts for the members. (Enter any capital account with a debit balance as a negative amount.)

Answer 1

a) $0

None of the members recognize gain because their debt relief was not in excess of their bases in their LLC interest prior to any debt relief. See table below:

Description	maude	other member	Explanation
1) basis in contributed land	$103500
2) cash contributed	$36250	$268250
3) Nonrecourse mortgage in excess of basis in contributed land	$91500
4) remaining non recourse mortgage	$25875	$25875	25% × [195000-(3)]
Basis immediately prior to debt relief	$257125
5) relief from mortgage debt	($195000)

Each member initial tax basis in the LLC = 1+2+3+4+5

MAUDE = $62125

Other member = $294125

B)$62125

(See table above)

C) $294125

(See table above)

D) $944500

High Horizon takes a $139750 carryover basis in the assets Maude contributes and a $804750 basis in the total cash the other three member contributed.

E)

tax basis balance sheet

Assets:
Cash (36250 + 268250×3)	$841000
Land	$103500
Total	$944500
Liabilities and capital
Mortgae debt	$195000
Capital- maude($139750 - $195000)	-$55250
Capital- james	$268250
Capital- harold	$268250
Capital- jenny	$268250
Total	$944500

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