J&J, LLC Was in Its Third Year of Operations When $\begin{array}{|cccccccccccccccccccc|}\hline&&&&&\text{J\&.J Limited Liability Company}\\\hline&&&&&\text{Balance Sheet}&&&&&&&&&&&&\end{array}$

question 7

Essay

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, andC. 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?
$\begin{array}{|cccccccccccccccccccc|}\hline&&&&&\text{J\&.J Limited Liability Company}\\\hline&&&&&\text{Balance Sheet}&&&&&&&&&&&&\end{array}$
$\begin{array}{|l|r|r|l|r|r|}\hline & {\text { Basis }} & {\text { FMV }} & & {\text { Basis }} & {\text { FMV }} \\\hline \text { Cash } & 20,000 & 20,000 & \text { Accounts Payable } & 7,000 & 7,000 \\\hline \text { Inventory } & 5,000 & 5,000 & \text { Mortgage Payable } & 20,000 & 20,000 \\\hline \text { Equipment } & 10,000 & 17,000 & & & \\\hline \text { Building } & 30,000 & 45,000 & \text { A - Capital } & 22,000 & 30,000 \\\hline &&&\text { B - Capital } & 16,000 & 30,000 \\\hline &&&&&\\\hline \text { Total Assets } & 65,000 & 87,000 & \text { Total Liab. \& OE } & 65,000 & 87,000 \\\hline\end{array}$

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Definitions:

Hemoglobin

The oxygen-carrying pigment and protein in the red blood cells.

Prothrombin

A protein in blood plasma that is the precursor to thrombin and plays a key role in blood clotting.

Antibody

A protein produced by the immune system that recognizes and binds to foreign substances, such as bacteria and viruses, to help in their destruction.

Antigen

A substance that provokes an immune response, leading to the production of antibodies.