Question

Tax Research Assignment 1

Howard purchased raw (undeveloped) land three years ago for $1,500,000 to develop into lots and sell to individuals planning to build their dream homes. Howard 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 Counterpart Investors LLC when it was worth $2,500,000, in exchange for a 10 percent capital and profits interest. Counterpart's strategy is to hold land for investment purposes only and then sell it later at a gain.

Issue 1. If Counterpart sells the property for $3,000,000 four years after Howard's contribution, how much gain or loss is recognized and what is its character? [Hint: See IRC §724.]

Issue 2. If Counterpart sells the property for $3,000,000 five and one-half years after Howard's contribution, how much gain or loss is recognized and what is its character?

Your memo should be in the format demonstrated in the Tax Research Instruction section. Do not deviate from that format. The memo should be no more than three pages long, and should include an EMBEDDED excel spreadsheet showing the comparison of tax treatment under the two scenarios above. Importantly, be sure to attach the authorities (documents you referred to) to your file and be sure to cite/reference your authorities in the memo.

Explain the facts, Issue, conclusion, discussion, in very detail. Excel Spreadsheet should show the calculations presented in the memo in a clear, easy-to-follow manner.Relevant tax authority should be provided in the following priority: IRC Code and Regs, other primary authority, secondary authority

Answer 1

Howard had purchased the raw land three years ago for $150000 and treated it as inventory. He contributed the property to Counterpart Investors LLC in exchange for 10% profit interests.

But Counterpart Investors LLC will hold it for investment purpose.

a.

After 4 years from Howard's contribution Counterpart Investors LLC sells the land for $3000000. Gain would be 3000000-1500000 = 1500000.

Under Section 724(b), any gain or loss on contributed property that was treated as inventory by the contributing partner and sold by the partnership during the five year period beginning on the date of contribution is treated as ordinary gain or loss. Thus, the entire $1,500,000 gain from the sale of the land will be treated as ordinary gain.

b.

After 5 years 6 months from Howard's purchase, counterpart sells the asset, then the company would gain 150000. Also, the character would be of a long term capital gain, as the property was sold after the expiration of the time period ie. 5 years.