Tom and Terry are equal owners in the Tatum LLC,a cash basis service entity.Tatum has unrealized receivables of $400,000 (basis of $0),and no other hot assets.Goodwill is provided for in the LLC's operating agreement.If Tatum distributes cash of $500,000 to Tom in liquidation of his LLC interest,which of the following statements is incorrect?
A)This is a disproportionate distribution with respect to hot assets.
B)Any portion of the payment that relates to LLC goodwill can be deducted by the LLC as a § 736(a)payment.
C)The payment for Tom's share of the LLC's investment real estate is a § 736(b)payment.
D)Any § 736(a)payment will result in ordinary income to Tom.
E)Any § 736(b)payment will be treated as a payment in exchange for Tom's LLC interest.

Question

Quizplus · Accepted Answer

The payment related to LLC goodwill cannot be deducted by the LLC as a § 736(a) payment because goodwill is typically considered a § 736(b) payment, which is treated as a payment in exchange for the partner's interest and not deductible by the LLC.

Tom and Terry Are Equal Owners in the Tatum LLC,a