Reference no: EM133184977

Question 1 - George and Harry each contributed $50,000 in exchange for an LLC interest. The operating agreement provided that, generally, George and Harry would share profits and losses equally. The agreement also provided that capital accounts would be maintained in accordance with the regulations and that liquidating distributions would be made in accordance with capital account balances. While neither member agreed to a deficit restoration obligation, the operating agreement includes a qualified income offset provision. The LLC purchased equipment for $50,000 and was entitled to claim $10,000 of depreciation each year. The members agreed to allocate 60 percent of the depreciation to George and 40 percent to Harry. When the equipment is sold, the gain will be allocated in such a way as to equalize capital accounts. Any remaining gain will be allocated equally between George and Harry.

Assuming the equipment is sold at the beginning of year 2 for $60,000 (ignore any depreciation allocations for year 2), which of the following statements is true:

a. George will be allocated $11,000 of gain and Harry will be allocated $9,000 of gain.

b. Year 1 depreciation will be allocated $5,000 to George and $5,000 to Harry.

c. George's tax basis will limit the amount of depreciation expense he may otherwise claim in Year 1.

d. The LLC will have $20,000 of tax gain but only $10,000 of book gain.

Question 2 - On January 1, 20x1, Karen exchanged equipment with a fair market value of $10,200 and basis of $8,400 for a 20 percent interest in KLM Partnership. The equipment has two years depreciation remaining, the calendar year partnership's 20x1 and 20x2 tax depreciation deductions for this equipment total $8,400. How much of the $8,400 should be allocated to Karen assuming KLM uses the traditional method?

a. $2,040

b. $1,680

c. $240

d. $0