The Get It Done LLC (GIDL) was originally formed several years ago by Gina, Ignacio, Dani,...

  

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The Get It Done LLC (GIDL) was originally formed several years ago by Gina, Ignacio, Dani, and Larry. At that time, each LLC member contributed $1,000,000 of cash in exchange for a 25% interest in the LLC. GIDL now owns and leases heavy-duty construction equipment in the Tri-State area. At the beginning of the current tax year, Dani sold her 25% interest in GIDL to Denique (an unrelated party) for $3,000,000. At that time the basis and fair market values of the assets recorded on the partnership's books was as follows (the LLC has no debt): Cash Accounts receivable Land Seven-year equipment Total Basis $1,500,000 500,000 2,000,000 -0- $4,000,000 Fair Market Value $ 1,500,000 500,000 1,000,000 9,000,000 $12,000,000 You advised your client, Denique, to get assurance from the LLC that a § 754 election and adjustment would be made. GIDL agreed to make the election and plans to allocate any step up to the equipment and recover the cost using a seven-year depreciation schedule. Denique wants to know if this is the correct treatment and if a more favorable treatment is possible. GIDL told Denique that the equipment was originally purchased several years ago for about $12,000,000 and that GIDL claimed the 100% bonus depreciation deduction that was permitted in that tax year. a. Calculate the amount of Denique's § 754 basis adjustment. b. Prepare a Microsoft Excel spreadsheet to allocate Denique's § 754 basis adjustment among GIDL's assets. Use the rules outlined in Reg. § 1.755-1(b). Refer especially to Example 1 in (b) (2) and as continued in (b)(3). [Note that depreciation recapture is not relevant for this calculation, as the seller (Dani) would recognize any necessary ordinary recapture income on sale of the LLC interest.] c. Can Denique make a case that any step up allocated to the equipment is eligible for an immediate bonus depreciation deduction rather than seven-year cost recovery? See Reg. § 1.168 (k)-2(b)(3)(iv) (D). You can also refer to Examples 13 to 17 in Reg. § 1.168 (k)-2(b)(3) (vii). d. How would your answer to part (c) change if Dani was Denique's mother? e. Denique wants to know if she has any exposure if the IRS questions the step-up allocation. What might you caution her about the equipment valuation? For example, how would Denique's result change if the IRS contended the equipment should only be valued at $4,000,000? The Get It Done LLC (GIDL) was originally formed several years ago by Gina, Ignacio, Dani, and Larry. At that time, each LLC member contributed $1,000,000 of cash in exchange for a 25% interest in the LLC. GIDL now owns and leases heavy-duty construction equipment in the Tri-State area. At the beginning of the current tax year, Dani sold her 25% interest in GIDL to Denique (an unrelated party) for $3,000,000. At that time the basis and fair market values of the assets recorded on the partnership's books was as follows (the LLC has no debt): Cash Accounts receivable Land Seven-year equipment Total Basis $1,500,000 500,000 2,000,000 -0- $4,000,000 Fair Market Value $ 1,500,000 500,000 1,000,000 9,000,000 $12,000,000 You advised your client, Denique, to get assurance from the LLC that a § 754 election and adjustment would be made. GIDL agreed to make the election and plans to allocate any step up to the equipment and recover the cost using a seven-year depreciation schedule. Denique wants to know if this is the correct treatment and if a more favorable treatment is possible. GIDL told Denique that the equipment was originally purchased several years ago for about $12,000,000 and that GIDL claimed the 100% bonus depreciation deduction that was permitted in that tax year. a. Calculate the amount of Denique's § 754 basis adjustment. b. Prepare a Microsoft Excel spreadsheet to allocate Denique's § 754 basis adjustment among GIDL's assets. Use the rules outlined in Reg. § 1.755-1(b). Refer especially to Example 1 in (b) (2) and as continued in (b)(3). [Note that depreciation recapture is not relevant for this calculation, as the seller (Dani) would recognize any necessary ordinary recapture income on sale of the LLC interest.] c. Can Denique make a case that any step up allocated to the equipment is eligible for an immediate bonus depreciation deduction rather than seven-year cost recovery? See Reg. § 1.168 (k)-2(b)(3)(iv) (D). You can also refer to Examples 13 to 17 in Reg. § 1.168 (k)-2(b)(3) (vii). d. How would your answer to part (c) change if Dani was Denique's mother? e. Denique wants to know if she has any exposure if the IRS questions the step-up allocation. What might you caution her about the equipment valuation? For example, how would Denique's result change if the IRS contended the equipment should only be valued at $4,000,000?

Answer rating: 100% (QA)

a Deniques 754 basis adjustment would be 2246000 b The spread... View the full answer