Question
J&J, LLC, was in its third year of operations when J&J decided to expand the number of members from two, A and B, with equal
J&J, LLC, was in its third year of operations when J&J decided to expand the number of members from two, A and B, with equal profits and capital interests, to three members, A, B, and C. The third member, C, will contribute her financial expertise to the LLC in exchange for a one-third capital interest in J&J. Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J, when C receives her capital interest? If, instead, member C receives a one-third profits interest, what would be the tax consequences to members A, B, and C, and to J&J?
| J&J Limited Liability Company | |||||
| Balance Sheet | |||||
|
| Basis | FMV |
| Basis | FMV |
| Cash | $ 20,000 | $ 20,000 | Account Payable | $ 7,000 | $ 7,000 |
| Inventory | 5,000 | 5,000 | Mortgage Payable | 20,000 | 20,000 |
| Equipment | 10,000 | 17,000 | ACapital | 22,000 | 30,000 |
| Building | 30,000 | 45,000 | BCapital | 16,000 | 30,000 |
| Total Assets | $ 65,000 | $ 87,000 | Total liability and OE | $ 65,000 | $ 87,000 |
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Advanced Accounting
Authors: Joe Hoyle, Thomas Schaefer, Timothy Doupnik
10th edition
0-07-794127-6, 978-0-07-79412, 978-0077431808
