Question

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 Capital's balance sheet on the day Dave received his capital interest appears below: (Negative amounts should be indicated by a minus sign. Leave no answer blank. Enter zero if applicable.)

Basis Fair Market

Value

Assets: Cash $ 200,000 $ 200,000

Investments 240,000 266,000

Land 240,000 350,000

Totals $ 680,000 $ 816,000

Liabilities and capital: Nonrecourse Debt $ 220,000 $ 220,000

Lance* 230,000 298,000

Robert* 230,000 298,000

Totals $ 680,000 $ 816,000

*Assume that Lance’s basis and Robert’s basis in their LLC interests equal their tax basis capital accounts plus their respective shares of nonrecourse debt.

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

Gain or loss recognized _____________ of ordinary income, short term capital gain, short tem capital loss or none.

b. Compute each member’s tax basis in his LLC interest immediately after Dave’s receipt of his interest.

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

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.

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

Answer 1

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.