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. Assets: Cash Investments Land Totals Liabilities and capitali Nonrecourse liabilities Tatsuki Robert Totals Tax basis Dave Basis Tatsuki $ 160,000 270,000 220,000 $ 650,000 Robert $ 220,000 215,000 215,000 $650,000 “Assume that Tatsuki’s basis and Robert’s basis in their LLC interests equal their tax basis capital accounts plus their respective shares of nonrecourse liabilities. Note: Leave no answer blank. Enter zero if applicable. Fair Market Value 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. $ 160,000 290,000 350,000 $800,000 $ 220,000. 290,000 290,000 $800,000
The Correct Answer and Explanation is :
When Dave LaCroix receives a profits interest in Cirque Capital LLC, his tax basis in his LLC interest is calculated based on the nature of the interest and the contributions made to the LLC. A profits interest does not provide any capital interest or equity ownership in the LLC, but it entitles the holder to a percentage of future profits and appreciation.
Let’s break down the scenario:
Tax Basis Calculation Before Dave Receives His Interest:
- Tatsuki and Robert’s Interests: Each member’s tax basis includes both the capital account (representing their investment) and their share of nonrecourse liabilities.
- Tatsuki’s tax basis before Dave joins:
Capital Account = $160,000 (Cash) + $270,000 (Investments) + $220,000 (Land) = $650,000
Tatsuki’s total tax basis is $650,000. - Robert’s tax basis before Dave joins:
Capital Account = $220,000 (Cash) + $215,000 (Investments) + $215,000 (Land) = $650,000
Robert’s total tax basis is $650,000.
- Nonrecourse Liabilities: These liabilities (debts for which no individual member is personally liable) affect each member’s tax basis because they represent shared obligations of the LLC. The total nonrecourse liabilities are split between Tatsuki and Robert, each having a share of $290,000. The tax basis of Tatsuki and Robert in their LLC interests is calculated as follows:
Tatsuki’s total basis = $650,000 (capital) + $290,000 (liabilities) = $940,000
Robert’s total basis = $650,000 (capital) + $290,000 (liabilities) = $940,000.
After Dave Receives His Profits Interest:
When Dave receives a profits interest in exchange for consulting services, he does not contribute any capital to the LLC. Instead, his interest is a right to share in future profits but does not affect the LLC’s capital structure. Importantly, his tax basis in his LLC interest is zero because no actual capital was contributed, and the LLC did not allocate any liabilities to him (which is typical for a profits interest).
Therefore, Dave’s tax basis immediately after receiving the profits interest is zero.
Final Summary:
- Tatsuki’s basis: $940,000
- Robert’s basis: $940,000
- Dave’s basis: $0
The tax basis in the LLC interest is a critical component of tax planning, especially in the context of LLC membership transfers, deductions, and allocations of income. Since Dave only holds a profits interest, he does not have a capital account or share in the existing liabilities, which is why his tax basis is zero.