Questions -
Q1. Emma and Laine form the equal EL Partnership. Emma contributes cash of $100,000. Laine contributes property with an adjusted basis of $40,000 and a fair market value of $100,000.
a. How much gain, if any, must Emma recognize on the transfer? Must Laine recognize any gain? If so, how much?
b. What is Emma's basis in her partnership interest?
c. What is Laine's basis in her partnership interest?
d. What basis does the partnership take in the property transferred by Laine?
Q2. Kenisha and Shawna form the equal KS LLC with a cash contribution of $360,000 from Kenisha and a property contribution (adjusted basis of $380,000, fair market value of $360,000) from Shawna.
a. How much gain or loss, if any, does Shawna realize on the transfer? Does Shawna recognize any gain or loss? If so, how much?
b. What is Kenisha's basis in her LLC interest?
c. What is Shawna's basis in her LLC interest?
d. What basis does the LLC take in the property transferred by Shawna?
e. Are there more effective ways to structure the formation? Explain.
Q3. 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 2006. Sam's uncle purchased the land in 1981 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.
a. How much gain or income will Sam recognize on his contribution of the land to the LLC? What is the character of any gain or income recognized?
b. What basis will Sam take in his LLC interest?
c. How much gain or income will Drew recognize on the formation of the LLC? What is the character of any gain or income recognized?
d. What basis will Drew take in his LLC interest?
Q4. The JM Partnership was formed to acquire land and subdivide it as residential housing lots. On March 1, 2013, Jessica contributed land valued at $600,000 to the partnership in exchange for a 50% interest. She had purchased the land in 2005 for $420,000 and held it for investment purposes (capital asset). The partnership holds the land as inventory.
On the same date, Matt contributed land valued at $600,000 that he had purchased in 2003 for $720,000. He became a 50% owner. Matt is a real estate developer, but he held this land personally for investment purposes. The partnership holds this land as inventory.
In 2014, the partnership sells the land contributed by Jessica for $620,000. In 2015, the partnership sells the real estate contributed by Matt for $580,000.
a. What is each partner's initial basis in his or her partnership interest?
b. What is the amount of gain or loss recognized on the sale of the land contributed by Jessica? What is the character of this gain or loss?
c. What is the amount of gain or loss recognized on the sale of the land contributed by Matt? What is the character of this gain or loss?
d. How would your answer in (c) change if the property was sold in 2020?