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 2005. Sam’s uncle purchased the land in 1980 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 partnership. 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 will also 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?
d. What basis will Drew take in his LLC interest?
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