Cynthia's basis in her LLC interest was $60,000, including her $40,000 share of the LLC's debt. In a proportionate liquidating distribution in which the LLC also liquidates, Cynthia receives cash of $50,000, and inventory with a basis of $3,000 and a fair market value of $5,000. Before the partnership liquidates, it repays all of its liabilities. Cynthia recognizes a gain of $30,000 on the distribution and takes a basis of $0 in the inventory.

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Cynthia's basis in her LLC interest was $60,000, including her $40,000 share of the LLC's debt. When the LLC repays its liabilities, Cynthia's basis is reduced by her share of the debt, or $40,000. This leaves her with a basis of $20,000. When she receives cash of $50,000 and inventory with a basis of $3,000, her total proceeds are $53,000. This is a gain of $33,000 ($53,000 - $20,000).

Cynthia's Basis in Her LLC Interest Was $60,000, Including Her