Nicholas is a 25% owner in the DDBN LLC (a calendar year entity).At the end of the last tax year, Nicholas's basis in his interest was $50,000, including his $20,000 share of LLC liabilities.On July 1 of the current tax year, Nicholas sells his LLC interest to Anna for $80,000 cash.In addition, Anna assumes Nicholas's share of LLC liabilities, which, at that date, was $15,000.During the current tax year, DDBN's taxable income is $120,000 (earned evenly during the year).Nicholas's share of the LLC's unrealized receivables is valued at $6,000 ($0 basis).At the sale date, what is Nicholas's basis in his LLC interest, how much gain or loss must he recognize, and what is the character of the gain or loss?
A)$45,000 basis; $6,000 ordinary income; $44,000 capital gain.
B)$60,000 basis; $6,000 ordinary income; $29,000 capital gain.
C)$60,000 basis; $35,000 capital gain.
D)$75,000 basis; $0 ordinary income; $20,000 capital gain.
E)$75,000 basis; $6,000 ordinary income; $14,000 capital gain.

Question

Quizplus · Accepted Answer

Nicholas's basis in his LLC interest at the time of sale is calculated as follows:

Initial basis: $50,000 
Add: Share of LLC liabilities assumed by Anna: $15,000 
Add: Nicholas's share of DDBN's taxable income for the year ($120,000 x 25%): $30,000 
Add: Share of unrealized receivables ($6,000): $6,000 
Total basis: $101,000

Nicholas's gain on the sale is calculated as follows:

Sale price: $80,000 
Less: Nicholas's adjusted basis: $101,000 
Recognized loss: ($21,000)

Since the recognized loss on the sale is attributable to the sale of a capital asset, it is a capital loss. However, since Nicholas's share of the LLC's unrealized receivables has a zero basis, the $6,000 gain on those assets is ordinary income. Therefore, the correct answer is B: $60,000 basis; $6,000 ordinary income; $29,000 capital gain.

Nicholas Is a 25% Owner in the DDBN LLC (A