Lilli has essentially received a 5% partnership interest from Jada and Kelsey in exchange for her continued managerial services to the LLC., and in consideration for services, Lilli also received interest in the capital and future earnings of the LLC. Lilli would pay tax on the $200,000 liquidation value of the capital interest since she has full ownership of it. Since it is impossible to identify the value of the future profits interest, it is not yet taxable; Lilli will pay tax on the annual allocations each year. JKL LLC can deduct $200,000 for Lilli's managerial services because they are likely to be considered an ordinary and necessary business expense, therefore the deduction will likely go to Jada and Kelsey