On January 1, 2002, John, Mary and Susan decided to organize

On January 1, 2002, John, Mary and Susan decided to organizean LLC (taxed, for federal tax purposes, as a partnership). John contributed $100,000 in cash in exchange for a 25% interest in the LLC. Mary contributed $50,000 in cash and accounts receivables with a basis of 0$ and a fair marketvalue of $ 50,000 in exchange for a 25% interest in the LLC. Susan contributed$100,000 in cash and a capital asset having a basis of $60,000 and a fairmarket value of $100,000 in exchange for a 50% interest in the LLC.The LLC had income from operations of $80,000 during the 2002tax year. However, no distributions were made to John, Mary or Susan during2012. The LLC had a loss from operations of $40,000 during the 2003 tax year.Again, no distributions were made during 2003. During 2003, the LLC acquired abuilding for $ 100,000 paying $40,000 in cash and obtaining a non-recourse loanto finance the remaining purchase price ($60,000) (the “Building Loan”). Thelender for the Building Loan secured its loan with a mortgage on the building.On January, 1, 2004, the LLC paid off the Building Loan andthe mortgage on the building was released. On January 2, 2004, John sold hisinterest in the LLC to Therese for $110,000. At the time of the purchase andsale of John’s interests, the LLC had a valid IRC Code Section 754 election inPlace with the IRS. The LLC has income from operations of $160,000 during the2004 tax year. Again, no distributions were made to Mary, Susan or Thereseduring the 2004 tax year.On January 1, 2005, the LLC sold the accounts receivablesfor $50,000 in cash and the building for $120,000 to separate third parties anddissolved. Upon the dissolution, the LLC distributed the capital asset to Mary.All other liquidation distributions are made in cash payments to the LLCmembers in accordance with the LLC’s operating agreement, which contains thefollowing provisions:1. Capital accounts. The LLC will maintain capitalaccounts pursuant to the provisions of Treas. Reg. § 1.704-1 (b) (2) (iv), as required byTreas. Reg.  §1.704-1(b)(2)(ii)(b)(1).2. Liquidation. Upon liquidation of the LLC,liquidating distributions will be made according to the positive capitalaccount balances of the members, as determined after taking into account allcapital account adjustments for the LLC taxable year during which suchliquidation occurs, by (i) the end of such taxable year, or (ii) within 90 daysafter the date of such liquidation.3. Additional Capital Contributions Required. Eachmember shall be obligated to make up any deficit account balance existing atthe end of any year or upon liquidation of the LLC.Assume that (i) no cash distributions were made to anymember, except as provided herein, (ii) all income and loss generated duringthe years of operation resulted from cash transactions, (iii) no depreciationoccurred on the capital asset for any year and the fair market value of theasset remained the same at all times, and (iv) the agreement among the membersof the LLC also include language that all allocation of income and loss were tobe in accordance with the respective interests of the LLC members.Discuss, in detail, the implications to all parties(inclusive of the LLC) of each transaction identified above, including theimpact on each member’s basis in his LLC interest and his capital account atthe end of each year. N/B: Give at least 10 page analysis.

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Cathy, CS.