Problem 1. Outside Basis and Capital Accounts. Al, Bob and Cam form an equal partnership as a limited liability company, ABC, LLC, a cash basis taxpayer, where they are all entitled to one-third of all income and loss from the operations of the business. The capital accounts and outside basis of each of the partners were as follows immediately after the partnership formation:

Outside Basis Tax Capital Account Book Tax Capital Account

Al $60,000 $60,000 $100,000

Bob $75,000 $75,000 $100,000

Cam $200,000 $200,000 $100,000

Please determine how each of the following transactions affect each partners outside basis and capital account (tax and book tax).

Immediately after the LLC was formed, the partnership borrowed $90,000 from a bank secured by the assets of the business.

ABC, LLC, earned $390,000 of ordinary business income, earned $9,000 of municipal bond interest, paid $6,000 in interest expense and had a $90,000 short term capital loss in its first year of operations.

At year end, ABC, LLC paid down its bank loan from $90,000 to $60,000 and made a cash distribution of $555,000 ($185,000 each) to the partners.

Problem 2. Sales of Partnership Interests. Assuming after all the transactions occurred in Problem 1, the assets on the books of ABC, LLC were as follows:

Unrealized Accounts Receivable $12,000

Inventory (FMV of $40,000) $30,000

1231 Assets $50,000

Cash $10,000

What if, after all of the transactions in Problem 1 occurred, Bob sold his interest in ABC partnership for $50,000 cash to David?