S convinces a bank to lend her $20 million on a fully nonrecourse basis to start a real estate development business. Her business plan anticipated acquiring land for $10 million and developing an apartment building on that land by spending another $15 million, for a total cost of $25 million. The bank loan accounted for 80 percent of the projected outlay and was to be secured by the land and all improvements on it. S takes $2.5 million out of the proceeds of the bank loan and spends that money on a yacht, which she owns personally, and which is not encumbered by the bank loan. She uses the balance of the proceeds to pay for the land and begin construction of the apartment building. While the apartment building is only partially completed, S runs out money. The land has meanwhile appreciated in value, and the land and partially developed apartment building on it now have an aggregate gross fair market value of $27.5 million.

To obtain the remaining necessary money to complete the apartment building, S convinces X to contribute $7.5 million to a new limited liability company, S&X LLC, which will be owned 50 percent by S and 50 percent by X.

Alice transfers the land and improvements that together cost her $17.5 million, financed entirely by the bank loan and encumbered by it, to S&X LLC in exchange for her 50 percent interest in S&X LLC.

X contributes $7.5 million in cash to S&X LLC in exchange for her 50 percent interest in S&X LLC.

(a) What are the tax consequences of these transactions to: S; X; and S&X LLC?

(b) What will be the partnership's balance sheet (including the partners' respective capital accounts) immediately after the transfer by S and cash contribution byX?

ontributed the land the partnership was deemed to assume the mortgage.