Get It Done Case Study

  1. Research Problem 2. The Get It Done LLC (GIDL) was originally formed several years ago by Gina, Ignacio, Dani, and Larry. At that time, each LLC member contributed $1,000,000 of cash in exchange for a 25% interest in the LLC. GIDL now owns and leases heavy-duty construction equipment in the Tri-State area.

At the beginning of the current tax year, Dani sold her 25% interest in GIDL to Denique (an unrelated party) for $3,000,000. At that time the basis and fair market values of the assets recorded on the partnership’s books was as follows (the LLC has no debt): 

You advised your client, Denique, to get assurance from the LLC that a § 754 election and adjustment would be made. GIDL agreed to make the election and plans to allocate any step up to the equipment and recover the cost using a seven-year depreciation schedule. Denique wants to know if this is the correct treatment and if a more favorable treatment is possible. GIDL told Denique that the equipment was originally purchased several years ago for about $12,000,000 and that GIDL claimed the 100% bonus depreciation deduction that was permitted in that tax year. 

  • Calculate the amount of Denique’s § 754 basis adjustment.
    • Prepare a Microsoft Excel spreadsheet to allocate Denique’s § 754 basis adjustment among GIDL’s assets. Use the rules outlined in Reg. § 1.755–1(b). Refer especially to Example 1 in (b)(2) and as continued in (b)(3). [Note that depreciation recapture is not relevant for this calculation, as the seller (Dani) would recognize any necessary ordinary recapture income on sale of the LLC interest.]
    • Can Denique make a case that any step up allocated to the equipment is eligible for an immediate bonus depreciation deduction rather than seven-year cost recovery? See Reg. § 1.168(k)–2(b)(3)(iv)(D). You can also refer to Examples 13 to 17 in Reg. § 1.168(k)–2(b)(3)(vii).
    • How would your answer to part (c) change if Dani was Denique’s mother?
    • Denique wants to know if she has any exposure if the IRS questions the step-up allocation. What might you caution her about the equipment valuation? For example, how would Denique’s result change if the IRS contended the equipment should only be valued at $4,000,000?

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