Questions 17

Jeremy and Shae form an LLC. Jeremy and Shae are equal partners. Jeremy contributes inventory with a tax basis of $500 and a value of $500, and Shae contributes land with a tax basis of $500 and a fair market value of $500. Four years later, when the inventory is worth $600 and the land is worth $700, Shae sells her LLC interest to Mia for $650. Shaes outside basis is $500 at the time of the sale. The LLC has no liabilities.

1) What is Shaes amount realized on the sale of her LLC interest?

2) What is Shaes gain recognized on the sale of her LLC interest?

3) What is the character of Shaes gain recognized (i.e., how much ordinary income, how much capital gain)?

4) Suppose that after Mia purchases the LLC interest from Shae, the LLC sells the inventory for $600.

a. What are the income tax consequences to Mia and Jeremy as a result of the sale of inventory if the LLC does not have a Section 754 election in place?

b. What are the income tax consequences to Mia and Jeremy as a result of the sale of inventory if the LLC has a Section 754 election in place?

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