Turnaround LLC was formed several years ago. It incurred losses for several years, reducing many of its members' bases in their interests to zero. However, the business has recently obtained some new and promising contracts, anticipating profits in the coming years if it can obtain some financing. It admitted new members who each made capital contributions for their interests. The owners anticipate it will be necessary to reinvest most of the profits back into the business for some time. As there will no longer be losses to pass through, and the double taxation of profits will be delayed for some time, the owners of Turnaround are considering converting the business to a C corporation. The business has the following assets (assume there is no 754 election in effect):

The original owners of Turnaround, who now have a 50% capital and profits interest, have come to you for advice regarding the potential tax consequences of the conversion for them as well as for the new corporation.

Partial list of research aids:

Rev.Rul. 70-239.

Rev.Rul. 84-111.

Rev.Rul. 2004-59.

Treas. Reg. 301.7701-3(g)(i).