Question

Phoebe and Parker are equal members in Phoenix Investors, LLC. They are real estate investors who formed the LLC several years ago with equal cash contributions. Phoenix then purchased a parcel of land.

On January 1 of the current year, to acquire a one-third interest in the entity, Reece contributed to the LLC some land she had held for investment. Reece purchased the land five years ago for $120,000; its fair market value at the contribution date was $90,000. No special allocation agreements were in effect before or after Reece was admitted to the LLC. Phoenix holds all land for investment.

Immediately before Reece’s property contribution, the balance sheet of Phoenix Investors LLC was as follows:

        Basis FMV

Land $30,000 $180,000

Phoebe, capital 15,000    90,000

Parker, capital 15,000    90,000

A few years later, Pheonix sold the land contributed by Reece for 84,000

A. How much is the recognized gain or loss? how is it allocated among the LLC members

B. Prepare a balance sheet reflecting basis and fair market value for the LLC immediately after the land sale. Also prepare schedules that support the basis and fair market value of each LLC members capital account.

Answer 1

Answer

A.

The recognized gain or loss:=$36000 Loss

Under § 704(c), all unrealized gain or loss at the contribution date on propertycontributed for an LLC interest belongs to the contributing LLC member.

Gain or loss in excess of that amount on the subsequent sale or exchange of the property isdivided among the LLC members according to their profit and loss sharing ratios.

On the land sale, the LLC has a loss of $36,000 ($120,000 adjusted basis - $84,000 selling price),

$30,000 of which is allocated to Reece under § 704(c) (Reece’s basis of $120,000in the land at the contribution date minus the land’s FMV of $90,000 at that date).

The remaining loss of $6,000 is allocated equally among the LLC members.

B.

Balance sheet reflecting basis and fair market value for the LLC immediately after the land sale:

Balance sheet

	FMV	Basis		FMV	Basis
Cash	84000	84000	Interest, Phoebe	13000	88000
Land	30000	180000	Interest, Parker	13000	88000
			Interest, Reece	88000	88000
	114000	264000		114000	264000

Capital accounts:

	Phoebe	Parker	Reece	Total
Balance Before sale	15000	15000	120000	150000
Built-in loss			(30000)	(30000)
Loss after Contribution	(2000)	(2000)	(2000)	(6000)
Balance After sale	13000	13000	88000	114000