This is all balance sheet. It appears that the interest was never paid and just accumulated; in a case like this the IRS may want to take a position that this was equity from the beginning so converting makes sense.
Additionally, it appears that the other member contributing more $$ as well, the economics stay the same; which is good.
On your balance sheet you would just make the following entry; Dr. Member Loan Cr. Member Equity. Essentially you are just reclassing the loan to equity.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
