Sam and Drew are equal members of the SD LLC, formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2006. Sam's uncle purchased the land in 1981 for $30,000. The land was worth $100,000 when Sam's uncle died. The fair market value of the land was $200,000 at the date it was contributed to SD.
Drew has significant experience developing real estate. After SD is formed, he will prepare a plan for developing the property and secure zoning approvals for the LLC.
Drew normally would bill a third party $50,000 for these efforts. Drew will also contribute $150,000 of cash in exchange for his 50% interest in SD. The value of Drew's 50% interest is $200,000.
a. How much gain or income does Sam recognize on his contribution of the land to SD? What is the character of any gain or income recognized?
b. What basis does Sam take in his LLC interest?
c. How much gain or income will Drew recognize on the formation of SD? What is the character of any gain or income recognized?
d. What basis will Drew take in his LLC interest?