Evaluate Tax Treatment Of LLCs Practice Test

HH LLC is classified as a partnership. In Year 2, member H receives a $40,000 cash distribution and the LLC reduces H’s share of partnership liabilities by $15,000 in the same year; immediately before these changes, H’s outside basis is $45,000. Under Internal Revenue Code sections 731 and 752, what is the correct characterization of the net effect for determining whether H recognizes gain?

UV LLC is a domestic multi-member LLC classified as a partnership. In Year 1, the LLC pays $12,000 of guaranteed payments to member U for services, and the LLC has $50,000 of ordinary business income before the guaranteed payment deduction. Under Internal Revenue Code section 707(c), how is the guaranteed payment generally treated for U and for the LLC?