Mike and Melissa want to form the equal MM Partnership. Melissa will contribute cash of $140,000. Mike has cash of $40,000 and land (fair market value of $100,000, adjusted basis of $136,000). Mike purchased the land several years ago as an investment (capital) asset. Mike and MM LLC are trying to decide between two alternatives.

• In Alternative 1, Mike will contribute the land to the LLC. MM will use the property as a 1231 asset (a parking lot) and then sell it in six years at an estimated $100,000 price. (Disregard any potential improvements to the land.)
• In Alternative 2, Mike will sell the land immediately to a third party and contribute to MM the $100,000 cash proceeds from the sale. MM will use that cash to purchase similar land for $100,000 (also to be used as a parking lot).

Use the following additional assumptions:

1. Neither Mike nor MM will realize other capital or 1231 gains or losses now or in the future.
2. Mike's marginal tax rate is 35%.
3. A reasonable annual discount rate is 3%.
4. The tax treatment of capital and 1231 gains and losses does not change in the foreseeable future.

b. In these two alternatives, calculate the present value of Mike's tax savings each year from deducting his share of any loss allocated to him that year. The present value factor at 3%, six years is 0.8375 and the present value factor of an annuity at 3% for six years is 5.417 and for 12 years is 9.954.

Alternative 1	$
Alternative 2	$

In considering only the tax savings, Alternative 1 is preferred because the present value of the tax savings is higher .