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	$	210,000		$	210,000
Investments		100,000			126,000
Land		290,000			420,000
Totals	$	600,000		$	756,000
Liabilities and capital:
Nonrecourse Debt	$	230,000		$	230,000
Lance*		185,000			263,000
Robert*		185,000			263,000
Totals	$	600,000		$	756,000

*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. (Leave no answer blank. Enter zero if applicable.)

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

Answer is complete but not entirely correct.

	Gain or loss recognized $75,600 selected answer incorrect of Ordinary income selected answer correct

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

      

	Dave Lance Robert Tax basis

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.

   

	Cirque, LLC Balance Sheet Tax Basis 704(b)/FMV Assets: Cash Investments Land Totals $ $ Capital: Nonrecourse Debt Capital-Lance Capital-Robert Capital-Dave Totals $ $

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.

	Gain or loss recognized of

  

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.

	Dave Lance Robert Tax basis

Answer 1

Refer to the below images for the above asked questions, in a detailed way of solution with calculations and explanations.