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 monthly 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; $0 ordinary income; $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 just before the sale is calculated by starting with his end-of-last-year basis ($50,000), adding his share of the current year's income up to the sale date (6 months of $120,000 total income, so $60,000 * 25% = $15,000), and subtracting his share of the liabilities assumed by Anna ($20,000 - $15,000 = $5,000). This gives a basis of $60,000. The sale price is $80,000 plus the $15,000 of liabilities assumed by Anna, totaling $95,000. The gain is $95,000 - $60,000 = $35,000. The $6,000 attributable to unrealized receivables is treated as ordinary income, and the remaining $29,000 is capital gain.

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