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 and allocated using the daily proration method). 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

First, we need to calculate Nicholas's basis in his LLC interest at the sale date. Nicholas's original basis was $50,000, and he received $80,000 cash from the sale. He also had to transfer $15,000 in liabilities to Anna, so his adjusted basis is $50,000 + $80,000 - $15,000 = $115,000.

Next, we need to determine how much gain or loss Nicholas must recognize. The amount realized is $80,000 (cash received) plus $15,000 (liabilities assumed by Anna), for a total of $95,000. Nicholas's adjusted basis is $115,000, so he has a capital loss of $20,000.

However, Nicholas's share of the LLC's unrealized receivables is valued at $6,000 with a basis of $0. This means he must recognize $6,000 of ordinary income under the unrealized receivables rule. This brings Nicholas's total recognized gain to $6,000 - $20,000 = $14,000.

The $14,000 gain is a capital gain because the sale of an LLC interest results in a capital asset. Therefore, the best choice is B.

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