Skylar is ready to retire and wants your professional opinion on
the most advantageous way to dispose of a 40% limited ownership
interest in the three-member STU LLC.
Option #1. Skylar will immediately sell the LLC interest to Partner Tameeka for $300,000 cash. Skylar will then invest the after-tax proceeds in a tax-exempt (Federal and state) municipal bond paying 4% interest per year, compounded at the end of each year. (Assume that there are no Federal or state income taxes on the interest earned on the bond.)
Option #2. STU will distribute a parcel of land (investment property) to Skylar in complete redemption of the 40% interest. STU's land was recently appraised for $260,000. The appraiser estimated that Skylar could sell the land for $400,000 (before taxes) at the end of eight years. For simplicity, determine the tax results of the land distribution under the proportionate liquidating distribution rules. [In this case, this result also arises if the distribution is a § 736(b) distribution.]
Other information. In either scenario, at the end of the eighth year, Skylar will convert the asset (bond or land) to cash to help cover living expenses. The future value factor at 4% at the end of eight years is 1.3686.
Assumptions:
Option #1. Skylar will immediately sell the LLC interest to Partner Tameeka for $300,000 cash. Skylar will then invest the after-tax proceeds in a tax-exempt (Federal and state) municipal bond paying 4% interest per year, compounded at the end of each year. (Assume that there are no Federal or state income taxes on the interest earned on the bond.)
Option #2. STU will distribute a parcel of land (investment property) to Skylar in complete redemption of the 40% interest. STU's land was recently appraised for $260,000. The appraiser estimated that Skylar could sell the land for $400,000 (before taxes) at the end of eight years. For simplicity, determine the tax results of the land distribution under the proportionate liquidating distribution rules. [In this case, this result also arises if the distribution is a § 736(b) distribution.]
Other information. In either scenario, at the end of the eighth year, Skylar will convert the asset (bond or land) to cash to help cover living expenses. The future value factor at 4% at the end of eight years is 1.3686.
Assumptions:
- STU owns no hot assets and has no stated or unstated goodwill.
- Skylar's basis in the LLC interest is $100,000.
- The LLC's basis in the land is $80,000.
- Skylar's tax rate is 20% on capital gains.
