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I don't think you have a mess, based on the additional information as to the gift tax being done for the transaction.

Your son's basis is the lower of:
*your wife's basis
*the value at the time of the gift.

So for 2013, as long as your son is the sole member of the LLC, it is still a disregarded entity, and it's his responsibility to report the income/expenses (if any) on his Schedule E. (And yes, that is the right form.)

And I don't see why he'd want to, or need to, dissolve the LLC now. If he chooses to sell the property, let the LLC be the seller. Dissolving it now would just require an additional deed to be filed, and maybe transfer tax, depending on state/local laws. And then dissolve it later. He might also have some protection for environmental issues, but that's a question for his lawyer.

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