Page 101 - TaxAdviser_2022

CASE STUDY
CASE STUDY

Outside basis of an LLC

interest acquired by purchase,

gift, or bequest

Editor: When an interest in a limited liability When an LLC interest is purchased
Sheila Owen, CPA company (LLC) classified as a part- from an existing member, the transferee
nership is acquired in exchange for a member’s purchase price is initial outside
direct contribution to the LLC and basis (Secs. 742 and 1012). When an
no liabilities are contributed or as- LLC interest is acquired by gift, the
sumed, the member’s initial outside transferee member’s basis generally
basis (under Sec. 722) equals: equals the donor’s basis (Secs. 742 and
■ The amount of money contrib- 1015). However, if the carryover basis is
uted, plus greater than the FMV of the interest at
■ The adjusted basis of property the time of the gift, then for purposes of
contributed, plus determining loss, the donee’s basis is the
When an LLC interest ■ Any Sec. 721(b) gain recognized FMV. If federal gift tax is paid by the
is transferred, the when the member contributes donor, the donee’s basis is increased by
the amount of tax paid that is attributable
to an LLC that is an investment
transferee’s basis company (generally, more than to the net appreciation on the transferred
depends on the 80% of the LLC’s assets are interest, but the basis may not exceed
the interest’s FMV (Sec. 1015(d); Regs.
securities held for investment).
transferor’s basis Members sometimes acquire an Sec. 1.1015-5(a)). Net appreciation is the
and numerous other LLC interest in exchange for services amount by which the FMV of the trans-
potential factors. rendered to the LLC, or a partner- ferred interest immediately before the
gift exceeds the donor’s basis. The donee
ship or corporation may be converted
into an LLC. Outside basis in these increases the basis of the interest by the
situations is beyond the scope of amount of gift tax paid multiplied by the
this item. fraction obtained by dividing the amount
of net appreciation by the gift’s FMV.
Example 1. Members contribute When property is transferred at the
cash and property: P and L form owner’s death, Sec. 1014 allows the fed-
an LLC classified as a partnership eral income tax basis of inherited capital
to operate a souvenir shop. P con- gain assets to be stepped up to FMV
tributes $10,000 cash to the LLC, on the date of death or alternate valua-
and L contributes a cash register, tion date.
shelving, and other equipment Note: Even if the value of an in-
that has a $10,000 fair market herited interest is zero, an heir can still PHOTO BY COMSTOCK/STOCKBYTE/THINKSTOCK
This case study has been adapted from value (FMV) and an adjusted tax have positive outside basis if the heir is
Checkpoint Tax Planning and Advisory basis of $4,000. P’s basis in her allocated a share of LLC liabilities (Regs.
Guide’s Limited Liability Companies
topic. Published by Thomson Reuters, LLC interest is $10,000 while L’s Sec. 1.742-1).
Carrollton, Texas, 2022 (800-431-9025; is $4,000 — her adjusted basis in When an LLC interest is acquired
tax.thomsonreuters.com). the contributed property. in another type of nonrecognition

54 February 2022 The Tax Adviser