In the previous chapter, Josh, Kyler, and Maria created Beachside Properties LLC to own and operate the Beachsider Café and to own, manage, and lease the remaining properties in the Shorefront Center. The 10-acre center includes three developed acres (including the Beachsider Café) and seven acres being held for expansion. Josh, Kyler, and Maria own, respectively, 20 percent, 40 percent, and 40 percent shares in the LLC's profits and losses and 5 percent, 47.5 percent, and 47.5 percent interests in its capital. The entity was formed as an LLC to limit the members' liability for claims against the LLC (see text Section 21-1a). In the years since the LLC was formed, it's been business as usual: income each year and regular cash and property distributions to the LLC members. Meanwhile, property values have skyrocketed. The LLC interests and the net underlying assets are currently valued at approximately $10 million (including $1 million of goodwill for the Beachsider Café). Josh wants to develop the remaining seven acres at an estimated cost of $15 million. However, Kyler and Maria are ready to retire. Their interests are valued at $9.5 million, or 95 percent of the current $10 million net LLC value. Josh has found a group of developers who are willing to invest the $24.5 million necessary for improvements and to purchase Kyler's and Maria's interests. There are two ways to accomplish the transition and make everyone happy. First, the LLC could admit the new members for $24.5 million of cash and use $9.5 million to redeem Kyler's and Maria's interests (with the remaining $15 million of cash being used for property improvements). Alternatively, Kyler and Maria could sell their LLC interests directly to the new members for $9.5 million; the new members then would contribute the additional $15 million of cash to the LLC for the expansion. Although the two alternatives have identical economic effects, the tax results could differ substantially. We'll look at several issues related to ongoing operations as well as the buyout. First, on an annual basis, how are the cash and property distributions treated by the LLC? For future planning, what are the tax consequences of admitting the new members to the LLC and redeeming Kyler's and Maria's interests? What are the results if the new members buy Kyler's and Maria's interests directly and contribute additional cash for development? Which alternative is best for Josh, the new owners, and the LLC? Which alternative is best for Kyler and Maria?