The BLM LLC's balance sheet on August 31 of the current year is as follows. The nonrecourse debt is shared equally among the LLC members. On that date, Lillie sells her one-third interest to Robyn for $170,000, including cash and relief of Lillie's share of the nonrecourse debt. Lillie's outside basis for her interest in the LLC is $50,000, including her share of the LLC's debt. How much capital gain and/or ordinary income will Lillie recognize on the sale?
A) $100,000 capital gain; $50,000 ordinary income.
B) $120,000 capital gain; $0 ordinary income.
C) $150,000 capital gain; $0 ordinary income.
D) $70,000 capital gain; $50,000 ordinary income.
E) None of the above.

Question

The BLM LLC's balance sheet on August 31 of the current year is as follows.  The nonrecourse debt is shared equally among the LLC members. On that date, Lillie sells her one-third interest to Robyn for $170,000, including cash and relief of Lillie's share of the nonrecourse debt. Lillie's outside basis for her interest in the LLC is $50,000, including her share of the LLC's debt. How much capital gain and/or ordinary income will Lillie recognize on the sale?
A) $100,000 capital gain; $50,000 ordinary income. 
B) $120,000 capital gain; $0 ordinary income. 
C) $150,000 capital gain; $0 ordinary income. 
D) $70,000 capital gain; $50,000 ordinary income. 
E) None of the above.

Quizplus · Accepted Answer

When Lillie sells her one-third interest to Robyn, the nonrecourse debt is relieved by $300,000/3 = $100,000. Therefore, Lillie's share of the nonrecourse debt relief is $33,333.33 ($100,000/3). Lillie's selling price is $170,000, which is $120,000 ($170,000 - $50,000) more than her outside basis. This excess is treated as a capital gain. Therefore, Lillie will recognize a capital gain of $120,000 and ordinary income of $33,333.33, which is her share of the nonrecourse debt relief. This gives a total of $153,333.33 ($120,000 + $33,333.33) in taxable income. The correct answer is D.

The BLM LLC's Balance Sheet on August 31 of the Current