Problem NO: 8

Malak has decided to contribute some equipment she previously used in her sole proprietorship in exchange for a 10 percent profits and capital interes

Malak has decided to contribute some equipment she previously used in her sole proprietorship in exchange for a 10 percent profits and capital interest in Fast Choppers LLC. Malak originally paid $200,000 cash for the equipment. Since then, the tax basis in the equipment has been reduced to $100,000 because of tax depreciation, and the fair market value of the equipment is now $150,000.

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a. Must Malak recognize any of the potential §1245 recapture when she contributes the machinery to Fast Choppers? [Hint: See §1245(b)(3).]

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b. What cost recovery method will Fast Choppers use to depreciate the machinery? [Hint: See §168(i)(7).]

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c. If Fast Choppers were to immediately sell the equipment Malak contributed for $150,000, how much gain would Malak recognize, and what is its character? [Hint: See §§1245 and 704(c).]

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