[Oneday]

Anderson and Decker are equal members in Andek, an LLC, which has not elected to be treated as a corporation. Anderson contributes $7,000 cash, and Decker contributes a machine with an adjusted basis of $5,000 and fair market value of $10,000, subject to a liability of $3,000. What is Decker’s basis in Andek?

A.$2,000

B.$3,500 (ANSWER)

C.$5,000

D.$10,000

Solution:

When a partner contributes property to an LLC, the company’s basis in the property is the lesser of the partner’s adjusted basis or the FMV of the property. In this case the adjusted basis of $5,000 would be the basis of the property, since it is less than the FMV. Decker’s basis in the LLC is further adjusted by the liabilities that were assumed by the LLC, and adjusted by the % share of income/loss. Decker would reduce their basis by 50% of the liabilities assumed by the LLC. So Decker’s $5,000 less the $1,500 in liability would make their basis in the LLC $3,500.

Hi, My question on how do we know whether the liability was assumed in this question? Do we assume liability is assumed whether or not the problem states “liability is assumed by corp”?

Thanks.

[Anonymous]

In a partnership, if one partner contributes property with liability, the company usually always assumes some portion of the liability even if the question doesn't say it because there is a percentage split. It's 50/50 in this question. But it could be any combination of percentage. Hope this helps.

The portion of the liability that the company assumes is the “% interest owned by the other partners/members” x amt of liability. In this case, company assumes 50% x 3,000=$1,500 since they are equal members.

So Decker's Basis= $5000 adj basis- $1500 liability assumed by “other partners/members”= $3,500

If the problem said that 70% Anderson and 30% Decker. Then the portion of the liability assumed by company is 70% since Decker only owes 30%. I hope this helps.

Then Decker's Basis would be $5,000 adj basis-2,100 (3000 liability x 70% assumed by Anderson)= $2900.

[Author]

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