Paul is a 25% owner in the DDBP LLC (a calendar year entity).At the end of the last tax year,Paul's basis in his interest was $40,000,including his $10,000 share of LLC liabilities.On July 1 of the current tax year,Paul sells his LLC interest to Lee Anna for $50,000 cash.In addition,Lee Anna assumes Paul's share of LLC liabilities,which,at that date,was $15,000.During the current tax year,DDBP's taxable income is $100,000 (earned evenly during the year).Paul's share of the LLC's unrealized receivables is valued at $5,000 ($0 basis).At the sale date,what is Paul'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)$65,000 basis;no gain or loss.
B)$65,000 basis;$15,000 capital gain.
C)$57,500 basis;$2,500 ordinary income and $5,000 capital loss.
D)$57,500 basis;$5,000 ordinary income and $2,500 capital gain.
E)$55,000 basis;$5,000 capital loss.

Question

Quizplus · Accepted Answer

Paul's initial basis is $40,000. His share of income for the year is $12,500 (25% of $100,000), increasing his basis to $52,500. His share of liabilities increased by $5,000, making his basis $57,500. The sale price is $65,000 ($50,000 cash + $15,000 liabilities assumed). The gain is $7,500 ($65,000 - $57,500). The $5,000 unrealized receivables are ordinary income, leaving a $2,500 capital gain.

Paul Is a 25% Owner in the DDBP LLC (A