In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2,...

In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a one-third capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his one-third capital interest, which of the following tax consequences does not occur in X2?

Multiple Choice

Cory reports $60,000 of ordinary income in X2.
Adam, Jason, and Cory receive an ordinary deduction of $20,000 in X2.
Adam and Jason receive an ordinary deduction of $30,000 in X2.
Cory reports $60,000 of ordinary income in X2, and Adam and Jason receive an ordinary deduction of $30,000 in X2.

Solutions

Expert Solution

The answer is Adam, Jason, and Cory receive an ordinary deduction of $20,000 in X2.

This is because only non service partners are allowed to allocate a deduction for capital interest. However in this case they have given their capital interest to new partner.

ekkarill92 answered 2 years ago

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