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Unformatted text preview: Copyright 2009 © Deloitte Development LLC All Rights Reserved. 2009 Deloitte Tax Case Study Competition Case Study Solution [Note: This discussion reflects tax law in effect as of October 17, 2009.] Requirement 1. Graduate and undergraduate students. What are the tax consequences of forming CULPRIT-Scope, LLC? What are Clark’s and Erik’s initial bases in their LLC interests? What is the LLC’s basis in the land and equipment it received? Show your calculations and citations. [When considering the assumption of Clark’s debt by the LLC, assume there is no “partnership minimum gain … [under] §704(b),” and that there is no “taxable gain … allocated to the partner.”] Solution 1 An LLC with more than one member is typically taxed as a partnership under the provisions of Subchapter K (§§701 to 777). Formation of a partnership (or LLC) is a tax-deferred transaction under IRC §721. Section 721(a) provides the general rule that “no gain or loss shall be recognized to a partnership or to any of its partners (or LLC members) in the case of a contribution of property to the partnership in exchange for an interest in the partnership.” Section 722 provides, in general, that the partner’s basis in the partnership interest equals the amount of money contributed plus the partner’s adjusted basis in contributed property. Section 723 provides that the partnership’s basis in property is a carryover basis from the partner. Sections 752(a) and (b) provide that the partner’s basis in the partnership is increased and decreased by increases and decreases in that partner’s share of partnership debt. Section 752(c) provides that a transfer of property subject to debt has the same result as a contribution or distribution of a liability: If the partnership assumes a partner’s debt, it is treated as a distribution from the partnership to the partner (and vice versa). Reg. §1.752-3 provides rules for determining the partner’s “share” of partnership nonrecourse debt. This is a three step process, but, in this case, the first two steps do not apply: We are told that there is no “partnership minimum gain … [under] §704(b),” and that there is no “taxable gain … allocated to the partner.” The third step provides that any nonrecourse debt not allocated under the first two steps is allocated to the partners in accordance with their profit-sharing interests. [§Reg. 1.752-3(a)(3)] 2 Copyright 2009 © Deloitte Development LLC All Rights Reserved. CULPRIT-Scope, LLC. With that background, we can calculate the LLC members’ initial bases in their interests in CULPRIT-Scope, LLC: Clark Erik Basis of contributed property: Cash $ 200,000 Land $100,000 Equipment ($200,000 - $114,290) 85,710 Less: debt assumed by the LLC (70,000) Plus: partners’ share of LLC debt 35,000 35,000 Basis in LLC interest at formation $ 250,710 $135,000 Note that both Clark and Erik contributed properties with net fair market values of $250,000....
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This note was uploaded on 11/13/2010 for the course BT 315 taught by Professor Smith during the Spring '10 term at Ohio State.
- Spring '10