Discussion:Sale of LLC interest, Disproportionate Value and services as only asset.

The man identified as A below is my client so I want the best treatment for him:

One man,"A" forms LLC. He contributes services and $500 for 100% of membership interests. It is a single person LLC so far.

A couple days later A wants to sell to B 100% of his interests for $100,500.00 in three transactions:

1. 30% of his interests immediately for $70, 500 2. 19% of his interests at the opening of a second store for $29,999.00 3 51% of his interests after 2.5 years for $1 (one dollar) 4 At the time of the first sale a Special Allocation will be added to the Operating Agreement: that all, profit and loss and distributions will go to B from the moment of the sale of the first 70% of interests to A.

The parties agree that A's services (negotiating leases, setting up the business model, etc) are worth $100,000. There are no other assets yet at the time of the first sale of membership interests.

It seems there are at least 2 issues:

I. The valuation of the remaining 51% interest for $1. II. Treatment of the purchase price to A.

I. I guess an argument can be made that the remaining 51% interest to A is not worth much, since the Operating Agreement is amended to provide B with all profit and loss. Is this right? Is A’s only income at this point $1(subject to the answer in II)?

II. a. Should the capital account of A reflect $100,500 for the services and cash contributed. On sale of the interests, B would succeed to A's capital account for $100,500. So there should be no income to A. Or does Sec 83 cause ordinary income to A?

(After the proposed sale if there was a liquidation, B would get sums in A’s Capital Account; the only time that A could possibly get the Capital Account is in the event of a foreclosure on B's membership interests due to a default under a Note made by B to A for the amount of the purchase price of the interests. )

b.Or should A's capital account be only $500? I think that this would give A income on the sale, does it? $100,000 in income for services. If the $500 remains in the capital account for B, is the $500 subject to tax against A?

c. If the sale to B is consummated and B later sells his 100% interest, he would have a return of capital $100, 500 from the purchase from A. His capital account would also be increased by all the profits and loss received due to the special allocation?

Is there a way to get A out without income taxes or capital gain taxes?

Thanks. I really, really, appreciate your help.

Thanks. I really cant find much on this so I really would appreciate as much detail as I can get.