During the current tax year, Jordan and Whitney each contributed $50,000 cash to form the J&W LLC. Each member has a 50% interest in LLC capital, profits, and losses (including deemed losses in the "constructive liquidation scenario"), except that depreciation expense is allocated 40% to Jordan and 60% to Whitney. During the first year, the LLC reported income (before depreciation expense) of $20,000 and had depreciation expense of $10,000. The LLC incurred recourse debt (that was personally guaranteed by both of the LLC members) of $60,000. Partnership assets are $170,000 at the end of the year. Under the constructive liquidation scenario, how is the recourse debt allocated to Jordan and Whitney?
A)The recourse debt is shared equally ($30,000 each) by Jordan and Whitney.
B)The recourse debt is allocated $36,000 to Whitney and $24,000 to Jordan.
C)The recourse debt is allocated $31,000 to Whitney and $29,000 to Jordan.
D)The recourse debt is allocated $29,000 to Whitney and $31,000 to Jordan.
E)The recourse debt is allocated $24,000 to Whitney and $36,000 to Jordan.

Question

Quizplus · Accepted Answer

Under the constructive liquidation scenario, the recourse debt is allocated based on the members' capital accounts. Jordan's capital account is $50,000 - (40% x $10,000) = $46,000. Whitney's capital account is $50,000 - (60% x $10,000) = $44,000. Therefore, the recourse debt is allocated $31,000 to Whitney and $29,000 to Jordan.

During the Current Tax Year, Jordan and Whitney Each Contributed