Sam and Drew are equal partners in SD LLC formed on June 1 o

Sam and Drew are equal partners in SD LLC formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2007. Sam\'s uncle purchased the land in 1982 for $30,000. The land was worth $100,000 when Sam\'s uncle died. The fair market value of the land was $200,000 at the date it was contributed to the partnership. Drew has significant experience developing real estate. After the LLC is formed, he will prepare a plan for developing the property and secure zoning approvals for the LLC. Drew would normally bill a third party $50,000 for these efforts. Drew will also contribute $150,000 cash in exchange for his 50% interest in the LLC. The value of his 50% interest is $200,000

Solution

ANSWER:

a) No gain or loss is recognized, thus no character of recognized gain/loss

b) Sam will take a basis of $100,000. Sam’s basis in the property will be inherited from his uncle is fair value on the date of death; and Uncle\'s estate will be taxed for the 70,000 gain computed as $100,000-$30,000. Therefore, Sam should take the $100k adjusted basis.

c) Drew will recognize $50,000 of ordinary income which is the fair value of services. For the purposes of Section 721 non-recognition treatment, services do not constitute \"property\"

d) Drew takes a basis of $200,000 (computed as 150,000 (cash contribution) + $50,000 (ordinary income))