Skylar is ready to retire and wants your professional opinion on the most advantageous way to dispose of a 40% limited ownership interest in the three-member STU LLC.

Option 1. Skylar will immediately sell the LLC interest to Partner Tameeka for $300,000 cash. Skylar will then invest the after-tax proceeds in a tax-exempt (Federal and state) municipal bond paying 4% interest per year, compounded at the end of each year. (Assume that there are no Federal or state income taxes on the interest earned on the bond.)

Option 2. STU will distribute a parcel of land (investment property) to Skylar in complete redemption of the 40% interest. STUs land was recently appraised for $260,000. The appraiser estimated that Skylar could sell the land for $400,000 (before taxes) at the end of eight years. For simplicity, determine the tax results of the land distribution under the proportionate liquidating distribution rules. [The proportionate liquidating distribution rules yield the correct result because Skylar is a limited partner and the entire distribution is treated as a 736(b) payment.]

Other information. In either scenario, at the end of the eighth year, Skylar will convert the asset (bond or land) to cash to help cover living expenses. If needed, use the Present and Future Value Tables in Appendix E.

Assumptions:

STU owns no hot assets and has no stated or unstated goodwill.

Skylars basis in the LLC interest is $100,000.

The LLCs basis in the land is $80,000.

Skylars tax rate is 20% on capital gains.

Draft a memo to Skylar describing how each option would be treated for tax purposes and the after-tax amount of cash Skylar would have on hand after cashing the bond or selling the land at the end of year 8. Based solely on this analysis, recommend one of these options to Skylar.