Connie recently provided legal services to the Winterhaven LLC and received a 5 percent interest in the LLC as compensation. Winterhaven currently has $43,000 of accounts payable and no other debt. The current fair market value of Winterhaven’s capital is $270,000. (Leave no answer blank. Enter zero if applicable.) a. If Connie receives a 5 percent capital interest only, how much income must she report and what is her tax basis in the LLC interest?
Income
Tax Basis
b. If Connie receives a 5 percent profits interest only, how much income must she report and what is her tax basis in the LLC interest?
Income
Tax Basis
c. If Connie receives a 5 percent capital and profits interest, how much income must she report and what is her tax basis in the LLC interest?
Income
Tax Basis

Answer and Explanation:

a. Connie registers $13,500 of ordinary revenue or 5% of the LLC's $270,000 property. Her LLC investment base is $13,500 as well.

b. Connie does not disclose any profits but will have an interest rate equal to her share of the LLC 's debt in the LLC. Since debt from the LLC is a non-recourse loan, it needs to be distributed to her through interest on earnings from Connie. Therefore her investment in the LLC is equivalent to $2,150 or 5% of the $43,000 accounts payable by the LLC.

c. Connie reports $13,500 of ordinary revenue or 5 percent of the $270,000 capital of the LLC. Her LLC interest base is $13,500, too. Her base in the LLC is $15,650 consists of the $13,500 benefit she accepts for earning her capital gain and her $2,150 non-recourse tax payable from the LLC.

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