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was the prospect of appreciation resulting in profit on
the eventual sale of each property.
P wife (PW) acquired a 2-percent membership
interest in a medical LLC (the LLC) upon formation of
the LLC in April 1995. In July 2000, incident to the
July 28, 2000, sale of all membership interests in the
LLC to a third party, the three LLC members executed a
written agreement describing transfers by Dr. J, who
held an 88-percent membership interest in the LLC as of
Dec. 31, 1995, of 10-percent membership interests to
each of the other two LLC members, PW and Dr. M (who
previously held a 10-percent LLC membership interest).
The agreement stated that it was “effective as of” Jan.
1, 1997. In 1998, 1999, and 2000, the LLC made
distributions to the three members consistent with a
68-20-12-percent apportionment of the LLC profits among
Dr. J, Dr. M, and PW, respectively. Ps argue that Dr.
J’s transfers of 10-percent membership interests to Dr.
M and PW did not occur until July 2000. R argues that
the July 2000 written agreement formalized a prior
oral agreement and that the effective date of those
transfers was Jan. 1, 1997.
PW received both a lump-sum cash payment and a
promissory note in consideration of the July 28, 2000,
sale of her 12-percent LLC membership interest. On
their 2000 return, Ps reported, as long-term capital
gain under the installment method of accounting, the
lump-sum cash payment and the sum of the first five
monthly payments due under the terms of the promissory
note. R argues that Ps elected out of the installment
method with respect to the gain on the sale and that Ps
are required to report the full amount of that gain in
2000.
1. Held: Neither vacation home 1 nor vacation
home 2 was held for investment. Therefore, Ps are not
entitled to treat the disposal of the former and
acquisition of the latter in 2000 as a tax-free like-
kind exchange under sec. 1031, I.R.C.
2. Held, further, PW owned a 12-percent
membership interest in the LLC during the years in
issue, 1999 and 2000.
3. Held, further, Ps did not elect out of the
installment method of accounting in connection with
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