Question

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Pam and Joe each own 50% of Tucson LLC a limited liability company located in Tucson, AZ which was created in April of 2019. Tucson LLC provides veterinary services and uses the cash method of accounting. Pam and Joe have come to you on December 30, 2019 to ask your advice on some transactions they are considering.

Tucson's financial information is provided below:

Profit and Loss Statement January 1, 2019-December 30, 2019:

Gross Receipts:
Veterinary Services	$675,000
Expenses:
Salaries	$400,000
Utilities	$17,000
Depreciation	$15,000
Supplies	$75,000
Interest	$20,000
Total Expenses	$557,000
Net Income	$148,000

Balance Sheet – 12/30/2019

Assets:
Cash	$ 8,500
Equipment	$50,000
A/D – Equipment	(21,500)
Building	$250,000
A/D – Building	(100,000)
Total Assets	$187,000
Liabilities & Equity:
Mortgage – Building	$25,000
Member Capital – Avery	$81,000
Member Capital – Henry	$81,000
Total Liabilities & Equity	$187,000

Please provide Tucson LLC advice on the following transaction:

1. They would like to purchase additional equipment for their business, they have not purchased any other fixed assets in 2019.

	Asset	Cost
	Examination Table	$15,000
	X-Ray Machine	$250,000

2. In order to accommodate the inventory required from #2 above, they believe they would need to relocate to a new space. The fair market value of Tucson LLC’s building is $425,000, the cost, A/D and mortgage on the building are on the balance sheet above. They recently met with two potential buyers for the building:

• Fred Rouleau, who owns a building which would suit their needs. Fred would like to enter into a like kind exchange with Tucson LLC. Fred has agreed to assume Tucson's mortgage on the building as part of the like kind exchange. The relevant information on Fred’s building is as follows:

FMV $400,000

Cost                             $200,000

A/D-Tax                       ($125,000)

• Chris Burke also has a building that would suit Tucson LLC’s needs with a FMV of $430,000. Separately, Tucson LLC’s real estate agent has a buyer interested in purchasing Tucson LLC’s building for its FMV of $425,000.

Determine whether it is better from a tax perspective for Tucson LLC to enter into a like kind exchange with Fred or if they should buy the building from Chris and sell their building to the buyer their real estate agent identified.

When making your determination consider both the gain on sale of the Tucson LLC's building (if any) as well as the tax depreciation expense allowable on the new building acquired by Tucson LLC. You must show your calculations for each scenario as support for your conclusion.

NOTE: Scenario 3: In this scenario, we have the potential for a like-kind exchange. We should consider both gain/loss implications as well as depreciation consequences. A portion of the gain will be recognized immediately, while the other portion may be deferred.

Answer 1