We study a small Anderson-impurity cluster using lattice density functional methods, and try to determine the exact exchange-correlation (XC) potential via reverse engineering. In doing so we find singlettriplet degenerate interacting ground states which cannot be v0-represented in an ensemble-DFT sense. We also find that it is possible to represent a triplet ground state as a pure state, but not the singlet. We further investigate this behavior within time-dependent density-functional theory. Starting from a v0-representable ground state and entering the degeneracy region via a time-dependent perturbation, we determine via reverse-engineering the time-dependent XC potential for progressively slower perturbations. This analysis shows that, even in a constant external field, the XC potential must retain a time-oscillating pattern to ensure a density constant in time, a hint of the underlying representability issue in the ground state.