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

question 72

Multiple Choice

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.

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Definitions:

Income Tax Expense

The cost incurred by businesses and individuals due to earnings, computed based on tax rates and laws.

Capital Budgeting

The process of evaluating and selecting long-term investments that are in line with the goal of wealth maximization.

Straight-Line Depreciation

Straight-line depreciation is a method of allocating the cost of a tangible asset over its useful life in equal annual amounts.

Capital Budgeting

The strategy of organizing and overseeing a business's extended investments in ventures and assets.