Question

Scott and Amber form the equal Toucan, LLC, with a cash contribution of $100,000 from Scott...

Scott and Amber form the equal Toucan, LLC, with a cash contribution of $100,000 from Scott and a property contribution (adjusted basis of $110,000, fair market value of $100,000) from Amber.

a. How much gain or loss, if any, does Amber realize on the transfer? Does Amber recognize any gain or loss?

b. What is Scott’s basis in his LLC interest?

c. What is Amber’s basis in her LLC interest?

d. What basis does the LLC take in the property transferred by Amber?

e. Are there more effective ways to structure the formation? Explain.

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Answer #1

Answer to a.

Amber has a realized loss of $ 10000. However, § 721 contains the general rule that no gain or loss is recognized to a partnership (LLC) or any of its partners (members) upon the contribution of money or other property in exchange for a capital interest. Since Amber is subject to this rule, she does not recognize the loss.

Answer to b.

Scott will take a cash basis of $ 100000 in his partnership (LLC) interest.

Answer to c

Amber will take a a substituted basis of $110,000 in her partnership interest ($110,000 basis in the property contributed to the entity).

Answer to d

The partnership firm (LLC) will take a carryover basis in the assets it receives ($ 100000 basis in cash and $ 110000 basis in property).

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