Outside basis of an LLC interest acquired by purchase, gift, or bequest.

• Author: Owen, Sheila
• Position: Limited liability companies

When an interest in a limited liability company (LLC) classified as a partnership is acquired in exchange for a direct contribution to the LLC and no liabilities are contributed or assumed, the member's initial outside basis (under Sec. 722) equals:

* The amount of money contributed, plus

* The adjusted basis of property contributed, plus

* Any Sec. 721(b) gain recognized when the member contributes to an LLC that is an investment company (generally, more than 80% of the LLC's assets are securities held for investment).

Members sometimes acquire an LLC interest in exchange for services rendered to the LLC, or a partnership or corporation may be converted into an LLC. Outside basis in these situations is beyond the scope of this item.

Example 1. Members contribute cash and property: P and L form an LLC classified as a partnership to operate a souvenir shop. P contributes $10,000 cash to the LLC, and L contributes a cash register, shelving, and other equipment that has a $10,000 fair market value (FMV) and an adjusted tax basis of $4,000. P's basis in her LLC interest is $10,000 while L's is $4,000--her adjusted basis in the contributed property.

When an LLC interest is purchased from an existing member, the transferee member's purchase price is initial outside basis (Secs. 742 and 1012). When an LLC interest is acquired by gift, the transferee member's basis generally equals the donor's basis (Secs. 742 and 1015). However, if the carryover basis is greater than the FMV of the interest at the time of the gift, then for purposes of determining loss, the donee's basis is the FMV. If federal gift tax is paid by the donor, the donee's basis is increased by the amount of tax paid that is attributable to the net appreciation on the transferred interest, but the basis may not exceed the interest's FMV (Sec. 1015(d); Regs. Sec. 1.1015-5(a)). Net appreciation is the amount by which the FMV of the transferred interest immediately before the gift exceeds the donor's basis. The donee increases the basis of the interest by the amount of gift tax paid multiplied by the fraction obtained by dividing the amount of net appreciation by the gift's FMV.

When property is transferred at the owner's death, Sec. 1014 allows the federal income tax basis of inherited capital gain assets to be stepped up to FMV on the date of death or alternate valuation date.

Note: Even if the value of an inherited interest is zero, an heir can still have positive outside basis if the...