J&J, LLC, was in its third year of operations when J&J decided to expand the number of members from two, A and 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 one-third 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 one-third profits interest, what would be the tax consequences to members A, B, and C, and to J&J?
Definitions:
Direct Manufacturing Cost
Expenses directly related to the production of goods, including labor and materials.
Incremental Manufacturing Cost
The extra expense associated with manufacturing an additional unit of a product.
Contribution Margin
The amount remaining from sales revenue after variable expenses are subtracted, contributing towards covering fixed costs and profit.
Variable Selling Expenses
Costs that fluctuate with the level of sales, such as commissions or shipping fees.
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