Dave LaCroix recently received a 10 percent capital and profits interest in Cirque Capital LLC in exchange for consulting services he provided. If Cirque Capital had paid an outsider to provide the advice, it would have deducted the payment as compensation expense. Cirque Capitals balance sheet on the day Dave received his capital interest appears below:

	Basis			Fair Market Value
Assets:
Cash	$	210,000		$	210,000
Investments		100,000			126,000
Land		290,000			420,000
Totals	$	600,000		$	756,000
Liabilities and capital:
Nonrecourse Debt	$	230,000		$	230,000
Lance*		185,000			263,000
Robert*		185,000			263,000
Totals	$	600,000		$	756,000

*Assume that Lances basis and Roberts basis in their LLC interests equal their tax basis capital accounts plus their respective shares of nonrecourse debt. (Leave no answer blank. Enter zero if applicable.)

a. Compute and characterize any gain or loss Dave may have to recognize as a result of his admission to Cirque Capital.

Answer is complete but not entirely correct.

Gain or loss recognized

$75,600 selected answer incorrect

of

Ordinary income selected answer correct

b. Compute each members tax basis in his LLC interest immediately after Daves receipt of his interest.

	Dave	Lance	Robert
Tax basis

c. Prepare a balance sheet for Cirque Capital immediately after Daves admission showing the members tax capital accounts and their capital accounts stated at fair market value.

Cirque, LLC
Balance Sheet
	Tax Basis	704(b)/FMV
Assets:
Cash
Investments
Land
Totals	$	$
Capital:
Nonrecourse Debt
Capital-Lance
Capital-Robert
Capital-Dave
Totals	$	$

d. Compute and characterize any gain or loss Dave may have to recognize as a result of his admission to Cirque Capital if he receives only a profits interest.

Gain or loss recognized

of

e. Compute each members tax basis in his LLC interest immediately after Daves receipt of his interest if Dave receives only a profits interest.

	Dave	Lance	Robert
Tax basis