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:

Interest Accrue

The accumulation of interest expenses or revenues that have been incurred but not yet paid or received in cash.

Note Payment

The process of repaying the principal and/or interest on a promissory note or loan.

IFRS

International Financial Reporting Standards, which are a set of accounting principles used globally to ensure financial reporting consistency and transparency.

Current Liabilities Netted

The process of offsetting current assets against current liabilities to determine the net working capital or financial position in the short term.