Wozniacki and Wilcox form Jewel LLC, with each investor receiving a one-half interest in the capital and profits of the LLC. Wozniacki receives his one-half interest as compensation for tax planning services that he rendered prior to the formation of the LLC. Wilcox contributes $50,000 cash. The value of a one-half capital interest in the LLC (for each of the parties) is $50,000. Compute Wozniacki’s realized and recognized gain from joining Jewel. Generally, formation of LLC is treated the same as a partnership and no gain or loss is recognized at formation. One of the exceptions to this provision is when capital interest is received as compensation for services rendered. When this happens, it is not a tax-deferred transaction because services are not treated as “property” Since Wozniacki receives his half interest in the partnership for services rendered with a FMV of $50,000, he has a realized and recognized gain of $50,000 of ordinary income Compute Wozniacki’s basis in his interest in Jewel. Wozniacki’s recognized gain on the formation of Jewel is $50,000, is the amount of his basis. How does Jewel treat the services that Wozniacki has rendered? Since Wozniacki’s tax planning services are part of day-to-day management services performed by a partner, the $50,000 value of ordinary income recognized by him can be deducted.
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Wozniacki and Wilcox form Jewel LLC, with each investor receiving a one-half interest in the capital and profits of the LLC. Wozniacki receives his one-half interest as compensation for tax planning services that he rendered prior to the formation of the LLC. Wilcox contributes $50,000 cash. The value of a one-half capital interest in the LLC (for each of the parties) is $50,000.
Compute Wozniacki’s realized and recognized gain from joining Jewel.
Generally, formation of LLC is treated the same as a partnership and no gain or loss is recognized at formation. One of the exceptions to this provision is when capital interest is received as compensation for services rendered. When this happens, it is not a tax-deferred transaction because services are not treated as “property”
Since Wozniacki receives his half interest in the partnership for services rendered with a FMV of $50,000, he has a realized and recognized gain of $50,000 of ordinary income
Compute Wozniacki’s basis in his interest in Jewel.
Wozniacki’s recognized gain on the formation of Jewel is $50,000, is the amount of his basis.
How does Jewel treat the services that Wozniacki has rendered?
Since Wozniacki’s tax planning services are part of day-to-day management services performed by a partner, the $50,000 value of ordinary income recognized by him can be deducted.
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