Question

Wozniacki and Wilcox form Jewel LLC, with Wozniacki receiving a one-half interest in the capital and Wilcox receiving a one-half interest in the capital of the LLC. (Ignore any profits interest for this problem.) Wozniacki receives his one-half interest as compensation for tax planning services he rendered prior to the formation of the LLC. Wilcox contributes $50,000 cash. The value of a one-half capital interest in the LLC (for each member) is $50,000.

a. How much income does Wozniacki recognize as a result of this transaction, and what is the character of the income?
b. How much is Wozniacki’s basis in the LLC interest?
c. How will Jewel treat this amount?

Answer 1

Answer and Explanation:

a. $50,000 compensation income (As it is already mentioned that Wozniacki receives the money for tax planning service prior to the formation of the LLC as compensation.

b. $50,000 (For each member it is $50,000. Therefore, for Wozniacki it will be also be $50,000)

c. As a business deduction (due to partnership) Wozniacki and Wilcox have formed Jewel LLC, therefore, distribution is a business deduction in the form of payments to both the partners.