Question: Paul and Anna plan to form the PA LLC by

Paul and Anna plan to form the PA LLC by the end of the current year. The members will each contribute $80,000 cash, and in addition, the LLC will borrow $240,000 from First State Bank. The $400,000 will be used to buy an investment property. The property will serve as collateral, and both members will be required to personally guarantee the debt.
The tentative agreement provides that 65% of operating income, gains, losses, deductions, and credits will be allocated to Paul for the first five years the LLC is in existence. The remaining 35% is allocated to Anna. Thereafter, all LLC items will be allocated equally. Assume the agreement also provides that capital accounts will be properly maintained and that each member must restore any deficit in the capital account upon the LLC's liquidation.
The LLC members would like to know, before the end of the tax year, how the $240,000 liability will be allocated for basis purposes. Using the format (1) facts, (2) issues, (3) conclusion, and (4) law and analysis, draft a memo to the tax planning file for PA LLC that describes how the debt will be shared between Paul and Anna for purposes of computing the adjusted basis of each LLC interest.

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  • CreatedSeptember 09, 2015
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