J&J, LLC was in its third year of operations when J&J decided to expand the number of members from two, A & B, with equal profits and capital interests to three members, A, B, and C. The third member, C, will contribute her financial expertise to the LLC in exchange for a 1/3 capital interest in J&J. Given the balance sheet below reflecting the financial position of J&J on the date member C is admitted, what are the tax consequences to members A, B, and C, and to J&J when C receives her capital interest? If, instead, member C receives a 1/3 profit interest, what would be the tax consequences to members A, B, and C, and to J&J?
| J&J Limited Liability Company | |||||
| Balance Sheet | |||||
| Basis | FMV | Basis | FMV | ||
| Cash | 15,000 | 15,000 | Account Payable | 5,000 | 5,000 |
| Inventory | 4,000 | 4,000 | Mortgage Payable | 10,000 | 10,000 |
| Equipment | 5,000 | 12,000 | |||
| Building | 9,000 | 23,000 | A – Capital | 12,000 | 19,000 |
| B – Capital | 6,000 | 20,000 | |||
| Total Assets | 33,000 | 54,000 | Total Liab. & OE | 33,000 | 54,000 |
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