1. 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."]. CULPRIT-Scope, LLC sold the land contributed by Erik late in the initial year of operations. How is the gain or loss on the sale

allocated between the LLC members? Why is it allocated that way? Under the "traditional method," how would your answer differ if the land had been sold for $240,000 instead of

$280,000? What are the holding periods of the properties transferred and the holding periods of Clark's and Eric's interest in CULPRIT-Scope LLC?

Re: Formation and Initial Operations of CULPRIT-Scope, LLC

Dear David:

As we discussed, the following information summarizes the financial activities of CULPRIT-Scope, LLC since its inception on January 1 of this year.

This has been an amazing and trying year! Erik and I have both worked long hours at our regular jobs. It has been difficult to find time to work on the Scope, so we hired people to do lot of the work for us. Still, we each managed to spend just a bit less than 500 hours working with the LLC. Overall, it took an incredible amount of dedication, and it looks as if our efforts are really paying off.

Ownership and Formation

Erik Crawford and I each own 50% interest in CULPRIT-Scope, LLC. We each contributed property with a total net value of $250,000.

Last year, I started working on preliminary research on my own (through a single- member LLC), and I bought equipment for $200,000. I claimed depreciation and related amounts of $114,290 (this includes a $100,000 "off-the-top" deduction and MACRS calculated using a 7-year life). I contributed that equipment to the LLC. We valued it at

$120,000. I still owed $70,000 on it, and the bank agreed to allow the LLC to assume that debt. The net value of the equipment at the contribution date was $50,000. I also contributed $200,000 cash. [Note to participants: Assume the equipment debt is nonrecourse to the LLC.]

Erik contributed land that he had inherited several years ago. The real estate market was a bit depressed at the beginning of the year, so the land was appraised at only at $250,000 in January. Erik's basis in the land was $100,000.