Question

Ssam and Drew are equal members of the SD LLC, formed on June 1 of the current year. Sam contributed land that he inherited from his uncle Garza in 2009. Garza had purchased the land in1984 for $30,000. Tha land was worth $100,000 when Garza died. The fair market value of the land was $200,000 at the date it was contributed.

Drew has significant experience developing real estate. After SD is formed, he will prepare a plan for developing the property and secure zoning approvals for the LLC. Drew usually would bill a third party $50,000 for thses efforts. Drew will also contribute $150,000 of cash in exchange for his 50% interest in SD. The value of Drew's 50% interest is $200,000.

A.) How much gain or income does Sam recognize on his contribution of the land to SD? What is the character of any gain or income recognized?

B.) What basis does Sam take in his LLC interest?

C.) How much gain or income will Drew recognize on the formation of SD? What is the character of any gain or income recognized?

D.) What basis will Drew take in his LLC interest?  

Answer 1

Answer:

Part (a) Under § 721, neither the LLC nor any of the members recognize gain on contribution of property to a LLC in exchange for an interest in the LLC.

Part (b)
$100,000. Sam’s basis in his LLC interest will equal the basis he held in the property he inherited from his uncle. The basis a beneficiary takes in property received from an estate generally equals the fair market value of the asset at the date of death or at the alternate valuation date

Part ( c)
Drew will recognize $50,000 of ordinary income. The fair market value of Drew’s 50% LLC interest is $200,000. Because Drew will contribute only $150,000 of property, the difference between the amount contributed and the value of the interest will be treated as being for services rendered to the LLC. Services do not constitute ‘‘property’’ for purposes of § 721 non recognition treatment.

Part (d)
Drew’s basis in his LLC interest will be $200,000 [$150,000 (cash contributed) + $50,000 (the amount of ordinary income recognized for services rendered to the partnership)].