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

question 114

Multiple Choice

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.

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Definitions:

Tax Shield

The reduction in income taxes that results from taking allowable deductions from taxable income, such as interest on debt.

Fully Taxable Recapture

The process whereby the IRS fully taxes the depreciation or deductions previously taken on an asset, typically when the asset is sold for a gain.

Bargain Price

A price that is significantly lower than the perceived value of an item or investment.

Balance Sheet

A financial statement that showcases the assets, liabilities, and shareholders' equity of a company at a specific point in time.