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 daily 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.
b
RATIONALE: Nicholas's beginning $50,000 basis in the LLC interest is decreased by the $5,000 decrease in his share of LLC liabilities and increased by his $15,000 share of LLC income for the year ($120,000 × 25% × 1/2 year), for a basis of $60,000 at the date the interest is sold. As the selling price of the interest was $95,000 ($80,000 cash plus $15,000 assumption of liabilities), Nicholas's total gain is $35,000 . Because his share of the LLC's hot asset is $6,000, he has $6,000 of ordinary income and the remaining $29,000 is capital gain.
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