Final answer:
Dave LaCroix does not recognize gain or loss upon admission to Cirque Capital LLC with his capital and profits interest being considered ordinary income. Members' tax bases in the LLC likely remain unchanged after Dave's admission, and the updated balance sheet reflects new capital account proportions. With a profits interest, Dave generally does not recognize gain unless the interest has a substantial economic effect.
Step-by-step explanation:
Part A: Gains and Losses Recognized
Upon admission to Cirque Capital LLC, Dave LaCroix does not recognize any gain or loss because the transaction is treated as an exchange for services. The value of the interest he receives is considered compensation for the consulting services he provided. The income is characterized as ordinary income equivalent to the fair market value of the capital and profits interest obtained.
Part B: Tax Basis Calculation
Immediately after Dave's receipt of his 10% capital and profits interest in the LLC, the tax basis of each member's interest in Cirque Capital would be adjusted. Considering that Dave's interest likely does not affect the basis of the other member's interests, Lance and Robert's bases remain unchanged while Dave's tax basis would be equal to the value of the services provided.
Part C: Updated Balance Sheet
The balance sheet post Dave's admission would reflect the changes in the members' capital accounts, proportionately divided based on their interests, including Dave's 10% share. The fair market values would remain the same, adjusted only to account for capital account changes.
Part D: Gains and Losses with a Profits Interest
If Dave receives only a profits interest, he generally would not recognize any gain upon receipt, as profits interests are typically not considered to have a readily ascertainable fair market value at the time of receipt if certain conditions are met.
Part E: Tax Basis with a Profits Interest
The tax basis of member's interests after Dave receives a profits interest would likely remain unchanged unless the profits interest has a substantial economic effect and is recognized as having an initial value.