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? $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 adjusted basis in his LLC interest before the sale is: 
$50,000 - $20,000 (liabilities) = $30,000

When he sells his interest to Anna, he received $80,000 cash, which increases his basis, and Anna assumes his share of LLC liabilities, which decreases his basis. Therefore, his new adjusted basis in his LLC interest is:
$30,000 + $80,000 - $15,000 (liabilities assumed by Anna) = $95,000

Nicholas must recognize a $29,000 capital gain on the sale, calculated as follows:
Sales price - Adjusted basis = $80,000 - $51,000 (adjusted basis including share of unrealized receivables) = $29,000

The $6,000 unrealized receivables increase is ordinary income that is recognized by the LLC, not by Nicholas.

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