Sam and Drew are equal partners in SD LLC formed on June 1 of the current year. Sam contributed land that he inherited from his uncle in 2013. Sam’s uncle purchased the land in 1986 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 the LLC.

Drew has significant experience developing real estate. After the LLC is formed, he will prepare a plan for developing the property and secure zoning approvals for the LLC. Drew would normally bill a third party $50,000 for these efforts. Drew also will contribute $150,000 of cash in exchange for his 50% interest in the LLC. The value of his 50% interest is $200,000.

a. How much gain or income will Sam recognize on his contribution of the land to the LLC? What is the character of any gain or income recognized?

b. What basis will Sam take in his LLC interest?

c. How much gain or income will Drew recognize on the formation of the LLC? What is the character of any gain or income recognized? Does Drew have a “carried interest”?

d. What basis will Drew take in his LLC interest?

e. Use Microsoft Excel to construct a balance sheet for SD LLC assuming that Drew’s services are completed immediately after forming SD. The balance sheet should show two numeric columns, including the LLC’s basis in the assets and the fair market value of these assets.

f. Outline any planning opportunities that may minimize current taxation to any of the parties.