Problem 10-28 (LO. 3) 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. If required, round your answer to the nearest dollar. a. For each alternative, when would the $36,000 loss be recognized, to whom would the loss be allocated, what is the character of the loss, and over what time period can the loss be deducted? In Alternative 1, the LLC would recognize the $36,000 loss in year 6 when the property is sold Because the LLC will have held the property for more than five years, the LLC's use of the property determines the character of the loss. The loss is treated as a 1231 loss and it is allocated and deducted by Mike. Assuming no In Alternative 2, the $36,000 loss would be recognized immediately by Mike as a long-term capital loss capital gains, Mike would be able to deduct $ a year for the next X years. 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 Regarding what other issues should Mike consider, classify each of the following as "Yes" should be considered "No" should not be considered. Uncertainty regarding the actual future selling price of the property. Yes Potential future changes in the tax laws regarding this transaction. Yes Whether Mike has had a interest in a LLC in the last five years. No