Honest Used Cars LLC, which is treated as a partnership for tax purposes, is owned equally...

 

Transcribed Image Text:

Honest Used Cars LLC, which is treated as a partnership for tax purposes, is owned equally by Abraham, Mary, and Sarah. Each has an equal share of the LLC's profits, losses, and capital. The LLC reports its income under the accrual method and uses the LIFO method for inventory valuation. Immediately before Mary selling her 1/3rd interest in the LLC to Thomas, the balance sheet reflects the following: Assets Tax Basis Fair Market Value Cash 25,000 25,000 Inventory at cost 1,300,000 1,400,000 LIFO valuation reserve (500,000) Furniture and Fixtures 200,000 85,000 Accumulated depreciation (175,000) Building 100,000 75,000 Accumulated depreciation (20,000) Land 90,000 125,000 Goodwill 90,000 Total Assets 1,020,000 1,800,000 Current liabilities 90,000 90,000 Floor plan debt 690,000 690,000 Capital - Abe 80,000 340,000 80,000 340,000 Capital - Mary Capital - Sarah 340,000 80,000 1,020,000 1,800,000 No member of the LLC has personal liability for the current liabilities, but each is personally liable for their 1/3rd share of the floor plan debt due to a guaranty required by the lender. Assume the balance sheet reflects the LLC's current year items of income, gain, loss and deduction through the date of Mary's sale, the bank agreed to substitute Thomas for Mary in the guaranty agreement, and there is no minimum gain associated with the current liabilities. Thomas paid Mary $340,000 in cash for her interest. Requirements 1. Compute Mary's share of the LLC's liabilities and her outside basis 2. Compute the gain Mary will recognize on the sale, and the amounts that will be reported by her as ordinary income and capital gain 3. State the amount, if any, of Mary's capital gain that is taxable as unrecaptured § 1250 gaine Honest Used Cars LLC, which is treated as a partnership for tax purposes, is owned equally by Abraham, Mary, and Sarah. Each has an equal share of the LLC's profits, losses, and capital. The LLC reports its income under the accrual method and uses the LIFO method for inventory valuation. Immediately before Mary selling her 1/3rd interest in the LLC to Thomas, the balance sheet reflects the following: Assets Tax Basis Fair Market Value Cash 25,000 25,000 Inventory at cost 1,300,000 1,400,000 LIFO valuation reserve (500,000) Furniture and Fixtures 200,000 85,000 Accumulated depreciation (175,000) Building 100,000 75,000 Accumulated depreciation (20,000) Land 90,000 125,000 Goodwill 90,000 Total Assets 1,020,000 1,800,000 Current liabilities 90,000 90,000 Floor plan debt 690,000 690,000 Capital - Abe 80,000 340,000 80,000 340,000 Capital - Mary Capital - Sarah 340,000 80,000 1,020,000 1,800,000 No member of the LLC has personal liability for the current liabilities, but each is personally liable for their 1/3rd share of the floor plan debt due to a guaranty required by the lender. Assume the balance sheet reflects the LLC's current year items of income, gain, loss and deduction through the date of Mary's sale, the bank agreed to substitute Thomas for Mary in the guaranty agreement, and there is no minimum gain associated with the current liabilities. Thomas paid Mary $340,000 in cash for her interest. Requirements 1. Compute Mary's share of the LLC's liabilities and her outside basis 2. Compute the gain Mary will recognize on the sale, and the amounts that will be reported by her as ordinary income and capital gain 3. State the amount, if any, of Mary's capital gain that is taxable as unrecaptured § 1250 gaine

Answer rating: 100% (QA)

1Marys share of the LLCs liabilities is 230000 Her outside basis is 110000 2Mary will recognize a ga... View the full answer