Question

Laurel contributed equipment worth $215,000, purchased 8 months ago for $240,000 cash and used in her sole proprietorship, to Sand Creek LLC in exchange for a 20 percent profits and capital interest in the LLC. Laurel agreed to guarantee all $14,400 of Sand Creek’s accounts payable, but she did not guarantee any portion of the $107,500 nonrecourse mortgage securing Sand Creek’s office building. Other than the accounts payable and mortgage, Sand Creek does not owe any debts to other creditors.

a. What is Laurel’s initial tax basis in her LLC interest?

b. Laurel’s holding period begins the day the LLC interest is acquired. True or False

c. What is Sand Creek’s initial basis in the contributed property?

d. What is Sand Creek’s holding period in the contributed property?

Answer 1

Ans-a-Laurel's Basis in her LLC interest is made up of the $240,000 basis in the equipment (no depreciation was taken on the equipment prior to the contribution because it was acquired and contributed within the same calender year) Laurel contributed $14,400 share of accounts payable that she guaranteed, and her $21,500 share of the nonrecourse mortgage security Sand Creek's office building (20%of $107,500). Laurel's profits sharing ratio is used to allocate a portion of the mortagage to her because it is nonrecourse debt.

$240,000+$14,400+$21,500= $275,900

Ans-b-True

Explanation:-

Laurel's holding period begins the day the LLC interest is acquired because the asset she contributed is not a capital or Section 1231 asset. The equipment is not a Section 1231 asset because it was used in a trade or business for one year or less.

Ans-c- The Sand Creek's initial basis in the contributed property is $240,000. The LLC takes a carryover basis in the contributed property.

Ans-d- Sand Creek's holding period in the contributed property is Ten months. Laurel's holding period is included in the LLC's holding period regardless of the nature of the property Laurel contributed.