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:

	Basis			Fair Market Value
Assets:
Cash	$	300,000		$	300,000
Investments		280,000			304,000
Land		130,000			290,000
Totals	$	710,000		$	894,000
Liabilities and capital:
Nonrecourse Debt	$	180,000		$	180,000
Lance*		265,000			357,000
Robert*		265,000			357,000
Totals	$	710,000		$	894,000

*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.

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

Part a)

The amount of any gain or loss Dave may have to recognize as a result of his admission to Cirque Capital is calculated as follows:

Description	Dave	Lance	Robert	Calculation/Explanation
1) /Opening Basis in LLC	0	355,000	355,000	265,000 (Tax Basis Capital Account) + 50%*180,000 (Nonrecourse Debt)
2) Ordinary Income	71,400	0	0	10%*(357,000 + 357,000) [Liquidation Value of Capital Interest]
3) Ordinary Deduction		-35,700	-35,700	71,400*50% (Transfer of Capital from Non-Service Partners)
4) Increase in Debt Allocation	18,000			180,000 (Nonrecourse Debt]*10% [Proft Sharing Ratio]
5) Decrease in Debt Allocation		-9,000	-9,000	18,000*50%
6) Ending Basis in LLC	$89,400	$310,300	$310,300	(1+2+3+4+5)

Dave will recognize ordinary income of $71,400 as calculated above.

Answer for Part a) is Ordinary Income of $71,400.

______

Part b)

The value of each member's tax basis immediately after Dave’s receipt of his interest is given as below:

Dave = $89,400 (from Part a)

Lance = $310,300 (from Part a)

Robert = $310,300 (from Part a)

______

Part c)

The balance sheet is provided as below:

	Cirque LLC
	Balance Sheet
Assets:	Tax Basis	FMV
Cash	300,000	300,000
Investments	280,000	304,000
Land	130,000	290,000
Totals	$710,000	$894,000
Capital:
Nonrecourse Debt	180,000	180,000
Capital-Lance	229,300 (265,000-35,700)	321,300 (357,000-35,700)
Capital-Robert	229,300 (265,000-35,700)	321,300 (357,000-35,700)
Capital-Dave	71,400	71,400
Totals	$710,000	$894,000

______

Part d)

The gain or loss Dave may have to recognize as a result of his admission to Cirque Capital if he receives only a profits interest is arrived as follows:

Description	Dave	Lance	Robert	Calculation
1) Opening Basis in LLC	0	355,000	355,000	265,000 (Tax Basis Capital Account) + 50%*180,000 (Nonrecourse Debt)
2) Ordinary Income	0			10%*(357,000 + 357,000) [Liquidation Value of Capital Interest]
4) Increase in Debt Allocation	18,000			180,000 (Nonrecourse Debt]*10% [Proft Sharing Ratio]
5) Decrease in Debt Allocation		-9,000	-9,000	18,000*50%
6) Ending Basis in LLC	$18,000	$346,000	$346,000	(1+2+3+4)

Dave will not recognize any ordinary income as he has received only the profits interest in the given case.

______

Part e)

The value of each member's tax basis immediately after Dave’s receipt of his interest is given as below:

Dave = $18,000 (from Part d)

Lance = $346,000 (from Part d)

Robert = $346,000 (from Part d)