Phillip and Quentin form an LLC, taxable as a partnership, on January 1, 20×1. Phillip contributed a building with a fair market value of $900,000, an adjusted basis of $300,000 and subject to a nonrecourse liability of $400,000. Quentin contributed $250,000 cash. Phillip and Quentin agree to split all items based on book capital accounts. The LLC agreement provides for the maintenance of capital accounts, liquidation in accordance with such capital accounts, and while neither member agrees to an unconditional deficit restoration obligation, the operating agreement provides for a qualified income offset. The building has 20 years remaining for depreciation/cost recovery and is depreciated using the straight line method. The operating agreement also provides that the LLC will use the traditional method for allocation with respect to property with a built-in gain or loss.
Assuming that cash flow from operations is break even such that the loss is equal to the depreciation/cost recovery deductions:
A. What are Phillip and Quentin’s book capital accounts at December 31, 20×1?
B. What are Phillip and Quentin’s tax basis in their membership interests at December 31, 20×1?
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