Memorial Day Monday, Ma 10:00 a.m.

Allocation Based Versus Distribution Based
Partnership Agreements
Exhibit Partnership Agreement Provisions and
Example Set
Copyright 2004
Paul A. Gordon and
Joan C. Arnold
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TABLE OF CONTENTS
Page
PARTNERSHIP AGREEMENT EXHIBIT 1 ................................................................................ 1
Well Drafted Allocation Based Partnership Agreement Provisions ................................... 1
I.
II.
Partnership Agreement Language............................................................... 1
Example Set Application ............................................................................ 5
PARTNERSHIP AGREEMENT EXHIBIT 2 .............................................................................. 14
Problematic Allocation Based Agreement Provisions ...................................................... 14
I.
II.
Partnership Agreement Language............................................................. 14
Example Set Application .......................................................................... 18
PARTNERSHIP AGREEMENT EXHIBIT 3 .............................................................................. 26
Distribution Based Allocation Approach -- Allocations only Follow Actual
Distributions (Non 704(b) Compliant Approach) ............................................................. 26
I.
II.
Partnership Agreement Language............................................................. 26
Example Set Application .......................................................................... 28
PARTNERSHIP AGREEMENT EXHIBIT 4 .............................................................................. 36
Distribution Based Allocation Approach --- Constructive Liquidation Method
(Section 704(b) Compliant Approach) .............................................................................. 36
I.
II.
Partnership Agreement Language............................................................. 36
Example Set Application .......................................................................... 40
PARTNERSHIP AGREEMENT EXHIBIT 5 .............................................................................. 50
Tax Distribution Drafting Issues Under a Distribution Based Allocation Approach........ 50
I.
II.
Partnership Agreement Language............................................................. 50
Example Set Application .......................................................................... 54
PARTNERSHIP AGREEMENT EXHIBIT 6 .............................................................................. 68
Special Allocations Under Distribution Based Agreements ............................................. 68
I.
II.
Partnership Agreement Language............................................................. 68
Example Set Application .......................................................................... 72
PARTNERSHIP AGREEMENT EXHIBIT 7 .............................................................................. 79
Profits Interest Drafting Issues Under Distribution Based Allocation Approach ............. 79
I.
II.
Partnership Agreement Language............................................................. 79
Example Set Application .......................................................................... 83
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PARTNERSHIP AGREEMENT EXHIBIT 1
Well Drafted Allocation Based Partnership Agreement Provisions
I.
Partnership Agreement Language
A.
Selected Distribution Provisions
1.1
Distributable Cash Flow. Distributable Cash Flow may be distributed to the
Members at such times as the Managers determine in accordance with the following
order and priority:
(a)
First, 100% of such Distributable Cash Flow shall be distributed to the
Members, in proportion to and to the extent of their respective then outstanding
Unsatisfied Preferred Returns;
(b)
Next, 100% of any remaining Distributable Cash Flow shall be distributed
to the Members in proportion to and to the extent of their respective then outstanding
Unreturned Capital Contribution Balances;
(c)
Next, until the aggregate amount of distributions made pursuant to this
Section 1.1(c) equals the sum of $1,000,000, 100% of any remaining Distributable Cash
Flow shall be distributed to the Members as follows:
(i)
80% to Member X; and
(ii)
20% to Member Y.
(d)
Thereafter, the balance of any remaining Distributable Cash Flow shall be
distributed to the to the Members as follows:
(i)
50% to Member X; and
(ii)
50% to Member Y.
1.2
Distributions Upon Liquidation. If all or substantially all of the assets of the
Company are sold in connection with a liquidation of the Company or the Company is
otherwise dissolved pursuant to [ Dissolution Section ], the assets of the Company shall
be distributed through the procedures outlined in [ Dissolution Section] in the following
order and priority:
(a)
[Creditor Payment, Liquidation Expense Payment, Reserve Holdback
Provision, State Law Liquidation Payment Provisions]
(b)
The balance of the proceeds, if any, to be distributed on or before the later
of (i) the end of the taxable year during which such liquidation occurs or (ii) ninety (90)
days after the date of such liquidation, to the extent of and in proportion to the positive
Capital Account balances of the Members, as determined after giving effect to all
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contributions, distributions, and allocations, for all periods and all other Capital Account
adjustments required by Treasury Regulation §1.704-1(b).
1.3.
Liquidation of Member’s Units. Except as otherwise specifically provided in this
Agreement, any distribution made to a Member as a result of the liquidation of such
Member’s entire interest in the Company (within the meaning of Treasury Regulations
Section 1.761-l(d)), which liquidation is not a result of Dissolution of the Company, shall
be made in accordance with the Capital Account limitation and adjustment principles set
forth in Section 1.2(b), taking into account all Company contributions, distributions, and
allocable items for all periods.
B.
Defined Terms
“Capital Account” [standard form agreement definition of §704(b) book capital
account].
“Gross Asset Value” [standard form agreement definition of §704(b) book gross asset
value].
“Profits” and “Losses” [standard form agreement definition of §704(b) net book income
and §704(b) net book loss].
“Preferred Return” means, with respect to any Member and a Unit of which the Member
is the record owner, a sum equal ten percent (10%) per annum (computed for the actual number
of days in the period for which such Preferred Return is being determined) cumulative, but noncompounded, of the average daily balance of the Unreturned Capital Contribution Balance which
relates to such Unit and commencing on the date of the first Capital Contribution which relates to
such Unit. In the event any Member transfers a Unit in accordance with the terms of this
Agreement, such Member’s transferee shall succeed to the Preferred Return which relates to such
Unit.
“Unreturned Capital Contribution Balance” means as to a Member and a Unit of which
the Member is the record owner, the aggregate Capital Contributions made with respect to such
Unit, reduced (but not below zero) by the aggregate amounts distributed pursuant to Section
1.1(b) with respect to such Unit (whenever made and regardless of the source or character
thereof). In the event any Member transfers a Unit in accordance with the terms of this
Agreement, such Member’s transferee shall succeed to the Unreturned Capital Contribution
Balance which relates to such Unit.
“Unsatisfied Preferred Return” means, with respect to each Unit, as of a given point in
time, the amount (if any) that (a) the Preferred Return on such Preferred Unit exceeds (b) the
aggregate amount of all distributions made in respect of such Unit (whenever made and
regardless of the source or character thereof) pursuant to Section 1.1(a).
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C.
General Allocation Provision
2.1.
Allocations of Profit and Loss. After giving effect to the special allocations set
forth in [ special allocation sections, including regulatory allocations], Profits or Losses
for any Allocation Period shall be allocated to the Members as follows:
(a)
and priority:
Profits. Profits shall be allocated in accordance with the following order
(i)
First, 100% of such Profits shall be allocated to the Members, in
proportion to and to the extent of the excess, if any, of (1) the sum of (A) the Preferred
Return of Return of each such Member (calculated from the commencement of the
Company through the last day of the applicable Allocation Period), plus (B) the
cumulative Losses allocated to such Member pursuant to Section 2.1(b)(iii) for all prior
Allocation Periods over (2) the cumulative Profits allocated to such Member pursuant to
this section 2.1(a)(i) for all prior Allocation Periods;
(ii)
Next, 100% of any remaining Profits shall be allocated to the
Members, in proportion to and to the extent of the excess, if any, of (1) the cumulative
Losses allocated to such Member pursuant to Section 2.1(b)(iv) for all prior Allocation
Periods over (ii) the cumulative Profits allocated to such Member pursuant to this Section
2.1(a)(ii) for all prior Allocation Periods
(iii)
Next, until the until the aggregate amount of Profits allocated
pursuant to this Section 2.1(a)(iii) equals the sum of (1) $1,000,000 plus (2) the
cumulative Losses allocated to such Member pursuant to Section 2.1(b)(ii) for all prior
Allocation Periods, 100% of any remaining Profits shall be allocated to the Members as
follows:
(1.)
80% to Member X; and
(2.)
20% to Member Y.
(iv)
Thereafter, the balance of any remaining Profits shall be allocated
to the Members as follows:
(b)
and priority:
(1.)
50% to Member X; and
(2.)
50% to Member Y.
Losses. Losses shall be allocated in accordance with the following order
(i)
First, 100% of such Losses shall be allocated to the Members, in
proportion to and to the extent of the excess, if any, of (1) the cumulative Profits
allocated to each such Members pursuant to Section 2.1(a)(iv) over (2) the cumulative
Losses allocated to such Member pursuant to this Section 2.1(b)(i) for all prior Allocation
Periods;
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(ii)
Next, 100% of any remaining Losses shall be allocated to the
Members, in proportion to and to the extent of the excess, if any, of (1) the cumulative
Profits allocated to each such Member pursuant to Section 2.1(a)(iii) over (2) the
cumulative Losses allocated to such Member pursuant to this Section 2.1(b)(ii) for all
prior Allocation Periods;
(iii) Next, 100% of any remaining Losses shall be allocated to the
Members, in proportion to and to the extent of the excess, if any, of (1) the cumulative
Profits allocated to each such Member pursuant to Section 2.1(a)(i) over (2) the
cumulative Losses allocated to such Member pursuant to this Section 2.1(b)(iii) for all
prior Allocation Periods; and
(iv)
Next, 100% of any remaining Losses shall be allocated to the
Members, in proportion to and to the extent of, their respective then Unreturned Capital
Contribution balances.
(v)
Thereafter, the balance of any remaining Losses shall be allocated
to the Members as follows:
(1.)
50% to Member X; and
(2.)
50% to Member Y.
[note, regulatory allocation provisions will modify last tier of losses]
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II.
Example Set Application
Formation (1/1/Yr 1) LLC §704(b) Book Balance Sheet
Liabilities
Member X Capital Contribution
$100,000
$0
Capital Accounts
Member X
Start
Capital
Contribution
$0
$100,000
Total
$100,000
Member Y
Start
Capital
Contribution
$0
$0
Total
$100,000
Grand Total
$100,000
$100,000
$100,000
Year 1 Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Section 704(b) Book Income
$1,500,000
(Section 704(b) Depreciation / Amortization ) ($10,000)
Other Section 704(b) Book Expense
($1,500,000)
Profit / (Loss)
($10,000)
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12/31/Yr 1 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$10,000
$10,000
$100,000
Member Y
$0
$0
$0
Totals
$10,000
$10,000
$100,000
Year 1 Actual Distributions (12/31/Yr 1)
Member X Member Y
Total Distributable Cash to be Distributed = $0
Section 1.1(a) – Unsatisfied Preferred Return Distributions
Section 1.1(b) – Unreturned Capital Balance Distributions
Section 1.1(d) – $1,000,000 80 / 20 Distribution
Section 1.1(e) – Residual 50 / 50 Distribution
Total Distributions:
$0
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$0
Year 1 Allocations (12/31/Yr 1)
Member X Member Y
$10,000 Loss
2.1(b)(i) – 50% / 50% Profit Chargeback
2.1(b)(ii) – 80% / 20% Profit Chargeback
2.1(b)(iii) – Preferred Return Profit Chargeback
2.1(b)(iv) Loss of Unreturned Capital
$10,000
2.1(b)(v) 50% / 50%, Subject to Reg. Stop Loss
Total Loss Allocation:
$10,000
$0
12/31/Yr 1 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
$100,000
($10,000)
$90,000
$0
Capital Accounts
Member X
Start
Loss Alloc.
$100,000
($10,000)
Total
$90,000
Member Y
Start
Loss Alloc.
$0
$0
Total
$0
Grand Total
$90,000
$90,000
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$90,000
Year 2 Profit / (Loss) (i.e. net §704(b) Income / Loss)
Gross Section 704(b) Book Income
$2,000,000
(Section 704(b) Depreciation / Amortization ) ($20,000)
Other Section 704(b) Book Expense
($980,000)
Profit / (Loss)
$1,000,000
12/31/Yr 2 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$20,000
$20,000
$100,000
Member Y
$0
$0
$0
Totals
$20,000
$20,000
$100,000
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Year 2 Actual Distributions (12/31/Yr 2)
Member X Member Y
Total Distributable Cash to be Distributed = $1,020,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions
$20,000
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$720,000
$180,000
Section 1.1(e) – Residual 50 / 50 Distribution
$0
$0
Total Distributions:
$840,000
$180,000
Year 2 Allocations (12/31/Yr 2)
Member X Member Y
$1,000,000 Profit
2.1(a)(i) – Pref. Return Alloc. / Loss Chrgback
$20,000
$0
2.1(b)(ii) – Unreturned Capital Loss Chrgback
$10,000
$0
2.1(b)(iii) – $1M 80 /20 Alloc. / Loss Chrgback $776,000
$194,000
2.1(b)(iv) – 50 / 50 Residual
$0
$0
Total Profit Allocation:
$806,000
$194,000
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12/31/Yr 2 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
$90,000
($20,000)
$70,000
Cash
Yr 2 Cash Earnings
Yr 2 Distributions
Ending Cash
$0
$1,020,000
$1,020,000
$0
$70,000
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$0
Capital Accounts
Member X
Start
Profit Alloc.
Distr.
Total
$90,000
$806,000
($840,000)
$56,000
Member Y
Start
Profit Alloc.
Distr.
Total
$0
$194,000
$180,000
$14,000
Grand Total
$70,000
$70,000
Year 3 Operating and Sale Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Operating Section 704(b) Book Income $1,015,000
(Section 704(b) Depreciation / Amortization ) ($5,000)
Other Section 704(b) Book Expense
($480,000)
Operating Profit / (Loss)
$500,000
4/1/Yr 1 Sale Proceeds
$3,000,000
Section 704(b) Book Basis
$570,000
Sale Profit / (Loss)
$2,430,000
Total Profit / (Loss)
$2,930,000
Exhibit 1 4/1/Yr 3 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$20,000
$0
$0
Member Y
$0
$0
$0
Totals
$20,000
$0
$0
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Year 3 Allocations (4/1/Yr 3)
Member X Member Y
$2,930,000 Profit
2.1(a)(i) – Pref. Return Alloc. / Loss Chrgback
$0
$0
2.1(b)(ii) – Unreturned Capital Loss Chrgback
$0
$0
2.1(b)(iii) – $1M 80 /20 Alloc. / Loss Chrgback $24,000
$6,000
2.1(b)(iv) – 50 / 50 Residual
$1,450,000
$1,450,000
Total Profit Allocation:
$1,474,000
$1,456,000
Year 3 Actual Distributions (4/1/Yr 3)
Member X Member Y
Total Liquidation Proceeds to be Distributed = $3,000,000
Section 1.2(b) – Post Allocation Positive Capital Accounts
$1,530,000
$1,470,000
Total Distribution:
$1,530,000
$1,470,000
Section 1.1(a) – Unsatisfied Preferred Return
$0
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$0
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$80,000
$20,000
Section 1.1(e) – Residual 50 / 50 Distribution
$1,450,000
$1,450,000
Total Distribution if Distributed Pursuant to Waterfall:
Total Over / (Under Distribution)
$1,530,000
$0
$1,470,000
$0
Check Against Section 1.1 Waterfall
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4/1/Yr 3 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
4/1/Yr 3 Sale
Ending Fixed Assets
Cash
Yr 3 Cash Earnings
4/1/Yr 3 Sale
Yr 3 Sale Proceeds
Yr 3 Distributions
Ending Cash
$70,000
($5,000)
($65,000)
$0
$0
$505,000
($505,000)
$3,000,000
($3,000,000)
$0
$0
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$0
Capital Accounts
Member X
Start
Profit Alloc.
Distr.
Total
$56,000
$1,474,000
($1,530,000)
$0
Member Y
Start
Profit Alloc.
Distr.
Total
$14,000
$1,456,000
($1,470,000)
$0
Grand Total
$0
$0
PARTNERSHIP AGREEMENT EXHIBIT 2
Problematic Allocation Based Agreement Provisions
I.
Partnership Agreement Language
A.
Selected Distribution Provisions, Defined Terms
1.1. Distributable Cash Flow. Distributable Cash Flow may be distributed to the
Members at such times as the Managers determine in accordance with the following
order and priority:
(a)
First, 100% of such Distributable Cash Flow shall be distributed to the
Members, in proportion to and to the extent of their respective then outstanding
Unsatisfied Preferred Returns;
(b)
Next, 100% of any remaining Distributable Cash Flow shall be distributed
to the Members in proportion to and to the extent of their respective then outstanding
Unreturned Capital Contribution Balances;
(c)
Next, until the aggregate amount of distributions made pursuant to this
Section 1.1(c) equals the sum of $1,000,000, 100% of any remaining Distributable Cash
Flow shall be distributed to the Members as follows:
(i)
80% to Member X; and
(ii)
20% to Member Y.
(d)
Thereafter, the balance of any remaining Distributable Cash Flow shall be
distributed to the to the Members as follows:
(i)
50% to Member X; and
(ii)
50% to Member Y.
1.2
Distributions Upon Liquidation. If all or substantially all of the assets of the
Company are sold in connection with a liquidation of the Company or the Company is
otherwise dissolved pursuant to [ Dissolution Section ], the assets of the Company shall
be distributed through the procedures outlined in [ Dissolution Section] in the following
order and priority:
(a)
[Creditor Payment, Liquidation Expense Payment, Reserve Holdback
Provision, State Law Liquidation Payment Provisions]
(b)
The balance of the proceeds, if any, to be distributed on or before the later
of (i) the end of the taxable year during which such liquidation occurs or (ii) ninety (90)
days after the date of such liquidation, to the extent of and in proportion to the positive
Capital Account balances of the Members, as determined after giving effect to all
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contributions, distributions, and allocations, for all periods and all other Capital Account
adjustments required by Treasury Regulation §1.704-1(b).
1.3.
Liquidation of Member’s Units. Except as otherwise specifically provided in this
Agreement, any distribution made to a Member as a result of the liquidation of such
Member’s entire interest in the Company (within the meaning of Treasury Regulations
Section 1.761-l(d)), which liquidation is not a result of Dissolution of the Company, shall
be made in accordance with the Capital Account limitation and adjustment principles set
forth in Section 1.2(b), taking into account all Company contributions, distributions, and
allocable items for all periods.
B.
Defined Terms
“Capital Account” [standard form agreement definition of §704(b) book capital
account].
“Gross Asset Value” [standard form agreement definition of §704(b) book gross asset
value].
“Profits” and “Losses” [standard form agreement definition of §704(b) net book income
and §704(b) net book loss].
“Preferred Return” means, with respect to any Member and a Unit of which the Member
is the record owner, a sum equal ten percent (10%) per annum (computed for the actual number
of days in the period for which such Preferred Return is being determined) cumulative, but noncompounded, of the average daily balance of the Unreturned Capital Contribution Balance which
relates to such Unit and commencing on the date of the first Capital Contribution which relates to
such Unit. In the event any Member transfers a Unit in accordance with the terms of this
Agreement, such Member’s transferee shall succeed to the Preferred Return which relates to such
Unit.
“Unreturned Capital Contribution Balance” means as to a Member and a Unit of which
the Member is the record owner, the aggregate Capital Contributions made with respect to such
Unit, reduced (but not below zero) by the aggregate amounts distributed pursuant to Section
1.1(b) with respect to such Unit (whenever made and regardless of the source or character
thereof). In the event any Member transfers a Unit in accordance with the terms of this
Agreement, such Member’s transferee shall succeed to the Unreturned Capital Contribution
Balance which relates to such Unit.
“Unsatisfied Preferred Return” means, with respect to each Unit, as of a given point in
time, the amount (if any) that (a) the Preferred Return on such Preferred Unit exceeds (b) the
aggregate amount of all distributions made in respect of such Unit (whenever made and
regardless of the source or character thereof) pursuant to Section 1.1(a).
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C.
General Allocation Provision
2.1.
Allocations of Profit and Loss. After giving effect to the special allocations set
forth in [ special allocation sections, including regulatory allocations], Profits or Losses
for any Allocation Period shall be allocated to the Members as follows:
(a)
and priority:
Profits. Profits shall be allocated in accordance with the following order
(i)
First, 100% of such Profits shall be allocated to the Members in a
manner that reverses any prior allocations of Losses to the Members, in proportion to the
prior allocations of Losses being offset by this Section 2.1(a)(i), until the cumulative
amount of Profits allocated pursuant to this Section 2.1(a)(i) equals the cumulative
amount of such Losses then and previously allocated;
(ii)
Next, 100% of any remaining Profits shall be allocated to the
Members, in proportion to and to the extent of their respective Unsatisfied Preferred
Returns;
(iii) Next, 100% of any remaining Profits shall be allocated to the
Members, in proportion to and to the extent of their respective Unreturned Capital
Contribution Balances; and
(iii) Next, until the aggregate amount of distributions made pursuant to
Section 1.1(c) equals the sum of $1,000,000, 100% of any remaining Profits shall be
allocated to the Members as follows:
(1.)
80% to Member X; and
(2.)
20% to Member Y.
(iv)
Thereafter, the balance of any remaining Profits shall be allocated
to the Members as follows:
(b)
and priority:
(1.)
50% to Member X; and
(2.)
50% to Member Y.
Losses. Losses shall be allocated in accordance with the following order
(i)
First, 100% of such Losses shall be allocated to the Members, in
proportion to and to the extent of the excess, if any, of (1) the cumulative Profits
allocated to each such Members pursuant to Section 2.1(a)(iv) over (2) the cumulative
Losses allocated to such Member pursuant to this Section 2.1(b)(i) for all prior Allocation
Periods;
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(ii)
Next, 100% of any remaining Losses shall be allocated to the
Members, in proportion to and to the extent of the excess, if any, of (1) the cumulative
Profits allocated to each such Member pursuant to Section 2.1(a)(iii) over (2) the
cumulative Losses allocated to such Member pursuant to this Section 2.1(b)(ii) for all
prior Allocation Periods;
(iii) Next, 100% of any remaining Losses shall be allocated to the
Members, in proportion to and to the extent of the excess, if any, of (1) the cumulative
Profits allocated to each such Member pursuant to Section 2.1(a)(i) over (2) the
cumulative Losses allocated to such Member pursuant to this Section 2.1(b)(iii) for all
prior Allocation Periods; and
(iv)
Next, 100% of any remaining Losses shall be allocated to the
Members, in proportion to and to the extent of, their respective then Unreturned Capital
Contribution balances.
(v)
Thereafter, the balance of any remaining Losses shall be allocated
to the Members as follows:
(1.)
50% to Member X; and
(2.)
50% to Member Y.
[note, regulatory allocation provisions will modify last tier of losses]
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II.
Example Set Application
Year 1 Profit / (Loss) (i.e. net §704(b) Income / Loss)
Gross Section 704(b) Book Income
$1,500,000
(Section 704(b) Depreciation / Amortization ) ($10,000)
Other Section 704(b) Book Expense
($1,500,000)
Profit / (Loss)
($10,000)
Exhibit 2 12/31/Yr 1 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$10,000
$10,000
$100,000
Member Y
$0
$0
$0
Totals
$10,000
$10,000
$100,000
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Year 1 Actual Distributions (12/31/Yr 1)
Member X Member Y
Total Distributable Cash to be Distributed = $0
Section 1.1(a) – Unsatisfied Preferred Return Distributions
Section 1.1(b) – Unreturned Capital Balance Distributions
Section 1.1(d) – $1,000,000 80 / 20 Distribution
Section 1.1(e) – Residual 50 / 50 Distribution
Total Distributions:
$0
$0
Year 1 Allocations (12/31/Yr 1)
Member X Member Y
$10,000 Loss
2.1(b)(iv) – Positive Capital Accounts $10,000
Total Loss Allocation:
$10,000
-19PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
12/31/Yr 1 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
$100,000
($10,000)
$90,000
$0
Capital Accounts
Member X
Start
Loss Alloc.
$100,000
($10,000)
Total
$90,000
Member Y
Start
Loss Alloc.
$0
$0
Total
$0
Grand Total
$90,000
$90,000
$90,000
Year 2 Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Section 704(b) Book Income
$2,000,000
(Section 704(b) Depreciation / Amortization ) ($20,000)
Other Section 704(b) Book Expense
($980,000)
Profit / (Loss)
$1,000,000
-20PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Exhibit 2 12/31/Yr 2 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$20,000
$20,000
$100,000
Member Y
$0
$0
$0
Totals
$20,000
$20,000
$100,000
Year 2 Actual Distributions (12/31/Yr 2)
Member X Member Y
Total Distributable Cash to be Distributed = $1,020,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions
$20,000
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$720,000
$180,000
Section 1.1(e) – Residual 50 / 50 Distribution
$0
$0
Total Distributions:
$840,000
$180,000
-21PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 2 Allocations (12/31/Yr 2)
Member X Member Y
$1,000,000 Profit
2.1(a)(i) – Global Loss Chargeback
$10,000
$0
2.1(a)(ii) – Unsatisfied Preferred Return
$0
$0
2.1(a)(iii) – Unreturned Capital Contribution Balance $100,000
Allocation
$0
2.1(a)(iii) – 80 / 20 Until $1 M Distributed 80 / 20
$712,000
$178,000
2.1(a)(iv) – 50 / 50 Residual
$0
$0
Total Profit Allocation:
$822,000
$178,000
12/31/Yr 2 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
$90,000
($20,000)
$70,000
Cash
Yr 2 Cash Earnings
Yr 2 Distributions
Ending Cash
$0
$1,020,000
$1,020,000
$0
$70,000
-22PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
Capital Accounts
Member X
Start
Profit Alloc.
Distr.
Total
$90,000
$822,000
($840,000)
$72,000
Member Y
Start
Profit Alloc.
Distr.
Total
$0
$178,000
($180,000)
($2,000)
Grand Total
$70,000
$70,000
Year 3 Operating and Sale Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Operating Section 704(b) Book Income $1,015,000
(Section 704(b) Depreciation / Amortization ) ($5,000)
Other Section 704(b) Book Expense
($480,000)
Operating Profit / (Loss)
$500,000
4/1/Yr 1 Sale Proceeds
$3,000,000
Section 704(b) Book Basis
$570,000
Sale Profit / (Loss)
$2,430,000
Total Profit / (Loss)
$2,930,000
4/1/Yr 3 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$20,000
$0
$0
Member Y
$0
$0
$0
Totals
$20,000
$0
$0
-23PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 3 Allocations (4/1/Yr 3)
Member X Member Y
$2,930,000 Profit
2.1(a)(i) – Global Loss Chargeback
$0
$0
2.1(b)(ii) – Unsatisfied Preferred Return
$0
$0
2.1(b)(iii) – Unreturned Capital Contribution Balance $0
Allocation
$0
2.1(b)(iii) – 80 / 20 Until $1 M Distributed
$2,344,000
$586,000
2.1(b)(iv) – 50 / 50 Residual
$0
$0
Total Profit Allocation:
$2,344,000
$586,000
Year 3 Actual Distributions (4/1/Yr 3)
Member X Member Y
Total Liquidation Proceeds to be Distributed = $3,000,000
Section 1.2(b) – Post Allocation Positive Capital Accounts
$2,416,000
$584,000
Total Distribution:
$2,416,000
$584,000
Section 1.1(a) – Unsatisfied Preferred Return
$0
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$0
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$80,000
$20,000
Section 1.1(e) – Residual 50 / 50 Distribution
$1,450,000
$1,450,000
Total Distribution if Distributed Pursuant to Waterfall:
Total Over / (Under Distribution)
$1,530,000
$886,000
$1,470,000
($886,000)
Check Against Section 1.1 Waterfall
-24PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
4/1/Yr 3 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
4/1/Yr 3 Sale
Ending Fixed Assets
Cash
Yr 3 Cash Earnings
4/1/Yr 3 Sale
Yr 3 Sale Proceeds
Yr 3 Distributions
Ending Cash
$70,000
($5,000)
($65,000)
$0
$0
$505,000
($505,000)
$3,000,000
($3,000,000)
$0
$0
-25PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
Capital Accounts
Member X
Start
Profit Alloc.
Distr.
Total
$72,000
$2,344,000
($2,416,000)
$0
Member Y
Start
Profit Alloc.
Distr.
Total
($2,000)
$586,000
($584,000)
$0
Grand Total
$0
$0
PARTNERSHIP AGREEMENT EXHIBIT 3
Distribution Based Allocation Approach -- Allocations only Follow Actual Distributions (Non
704(b) Compliant Approach)
I.
Partnership Agreement Language
A.
Selected Distribution Provisions, Defined Terms
1.1
Distributable Cash Flow. Distributable Cash Flow may be distributed to the
Members at such times as the Managers determine in accordance with the following
order and priority:
(a)
First, 100% of such Distributable Cash Flow shall be distributed to the
Members, in proportion to and to the extent of their respective then outstanding
Unsatisfied Preferred Returns;
(b)
Next, 100% of any remaining Distributable Cash Flow shall be distributed
to the Members in proportion to and to the extent of their respective then outstanding
Unreturned Capital Contribution Balances;
(c)
Next, until the aggregate amount of distributions made pursuant to this
Section 1.1(c) equals the sum of $1,000,000, 100% of any remaining Distributable Cash
Flow shall be distributed to the Members as follows:
(i)
80% to Member X; and
(ii)
20% to Member Y.
(d)
Thereafter, the balance of any remaining Distributable Cash Flow shall be
distributed to the to the Members as follows:
(i)
50% to Member X; and
(ii)
50% to Member Y.
1.2
Distributions Upon Liquidation. If all or substantially all of the assets of the
Company are sold in connection with a liquidation of the Company or the Company is
otherwise dissolved pursuant to [ Dissolution Section ], the assets of the Company shall
be distributed through the procedures outlined in [ Dissolution Section] in the following
order and priority:
(a)
[Creditor Payment, Liquidation Expense Payment, Reserve Holdback
Provision, State Law Liquidation Payment Provisions]
(b)
The balance of the proceeds, if any, to be distributed on or before the later
of (i) the end of the Allocation Period during which such liquidation occurs and (ii)
-26PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
ninety (90) days after the date of such liquidation, to the Members in accordance with the
order and priority set forth in Section 1.1.
B.
General Allocation Provision
1.3.
Allocations of Profit and Loss. After giving effect to the special allocations set
forth in [ special allocation sections, including regulatory allocations], Profits or Losses
for any Allocation Period shall be allocated to the Members as follows:
(a)
and priority:
Profits. Profits shall be allocated in accordance with the following order
(i)
First, 100% of such Profits shall be allocated to the Members to the
extent the Members have received distributions pursuant to Section 1.1 during such
Allocation Period;
(ii)
Next, until the aggregate amount of distributions made pursuant to
Section 1.1(c) equals the sum of $1,000,000, 100% of any remaining Profits shall be
allocated to the Members as follows:
(1.)
80% to Member X; and
(2.)
20% to Member Y.
(iii) Thereafter, the balance of any remaining Profits shall be allocated
to the Members as follows:
(1.)
50% to Member X; and
(2.)
50% to Member Y.
(b)
Losses. Losses shall be allocated to the Members in accordance with the
manner that the Company’s accountants determine is appropriate to preserve accurate
Capital Account balances.
-27PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
II.
Example Set Application
Year 1 Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Section 704(b) Book Income
$1,500,000
(Section 704(b) Depreciation / Amortization ) ($10,000)
Other Section 704(b) Book Expense
($1,500,000)
Profit / (Loss)
($10,000)
12/31/Yr 1 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$10,000
$10,000
$100,000
Member Y
$0
$0
$0
Totals
$10,000
$10,000
$100,000
-28PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 1 Actual Distributions (12/31/Yr 1)
Member X Member Y
Total Distributable Cash to be Distributed = $0
Section 1.1(a) – Unsatisfied Preferred Return Distributions
Section 1.1(b) – Unreturned Capital Balance Distributions
Section 1.1(d) – $1,000,000 80 / 20 Distribution
Section 1.1(e) – Residual 50 / 50 Distribution
Total Distributions:
$0
Year 1 Allocations (12/31/Yr 1)
Member X Member Y
$10,000 Loss
2.1(b) – Accountant Discretion $10,000
Total Loss Allocation:
$10,000
-29PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
$0
12/31/Yr 1 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
$100,000
($10,000)
$90,000
$0
Capital Accounts
Member X
Start
Loss Alloc.
$100,000
($10,000)
Total
$90,000
Member Y
Start
Loss Alloc.
$0
$0
Total
$0
Grand Total
$90,000
$90,000
$90,000
Year 2 Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Section 704(b) Book Income
$2,000,000
(Section 704(b) Depreciation / Amortization ) ($20,000)
Other Section 704(b) Book Expense
($980,000)
Profit / (Loss)
$1,000,000
-30PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
12/31/Yr 2 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$20,000
$20,000
$100,000
Member Y
$0
$0
$0
Totals
$20,000
$20,000
$100,000
Year 2 Actual Distributions (12/31/Yr 2)
Member X Member Y
Total Distributable Cash to be Distributed = $1,020,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions
$20,000
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$720,000
$180,000
Section 1.1(e) – Residual 50 / 50 Distribution
$0
$0
Total Distributions:
$840,000
$180,000
-31PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 2 Allocations (12/31/Yr 2)
Member X Member Y
$1,000,000 Profit
2.1(a)(i) – Per Period Distributions
$823,530
$176,470
2.1(b)(ii) – 80 / 20 Until $1 M Distributed $0
$0
2.1(b)(iii) – 50 / 50 Residual
$0
$0
Total Profit Allocation:
$823,530
$176,470
12/31/Yr 2 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
$90,000
($20,000)
$70,000
Cash
Yr 2 Cash Earnings
Yr 2 Distributions
Ending Cash
$0
$1,020,000
$1,020,000
$0
$70,000
-32PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
Capital Accounts
Member X
Start
Profit Alloc.
Distr.
Total
$90,000
$823,530
($840,000)
$73,530
Member Y
Start
Profit Alloc.
Distr.
Total
$0
$176,470
($180,000)
($3,530)
Grand Total
$70,000
$70,000
Year 3 Operating and Sale Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Operating Section 704(b) Book Income $1,015,000
(Section 704(b) Depreciation / Amortization ) ($5,000)
Other Section 704(b) Book Expense
($480,000)
Operating Profit / (Loss)
$500,000
4/1/Yr 1 Sale Proceeds
$3,000,000
Section 704(b) Book Basis
$570,000
Sale Profit / (Loss)
$2,430,000
Total Profit / (Loss)
$2,930,000
4/1/Yr 3 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$20,000
$0
$0
Member Y
$0
$0
$0
Totals
$20,000
$0
$0
-33PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 3 Allocations (4/1/Yr 3)
Member X Member Y
$2,930,000 Profit
2.1(a)(i) – Per Period Distributions
$0
$0
2.1(b)(ii) – 80 / 20 Until $1 M Distributed
$2,344,000
$586,000
2.1(b)(iii) – 50 / 50 Residual
$0
$0
**Note, Approach Assumes No QIO / ACD
Gross Income Chargeback Provisions
Total Profit Allocation:
$2,344,000
$586,000
Year 3 Actual Distributions (4/1/Yr 3)
Member X Member Y
Total Liquidation Proceeds to be Distributed = $3,000,000
Section 1.1(a) – Unsatisfied Preferred Return
$0
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$0
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$80,000
$20,000
Section 1.1(e) – Residual 50 / 50 Distribution
$1,450,000
$1,450,000
Total Distribution:
$1,530,000
$1,470,000
-34PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
4/1/Yr 3 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
4/1/Yr 3 Sale
Ending Fixed Assets
Cash
Yr 3 Cash Earnings
4/1/Yr 3 Sale
Yr 3 Sale Proceeds
Yr 3 Distributions
Ending Cash
$70,000
($5,000)
($65,000)
$0
$0
$505,000
($505,000)
$3,000,000
($3,000,000)
$0
$0
-35PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
Capital Accounts
Member X
Start
Profit Alloc.
Distr.
Total
$73,530
$2,344,000
($1,530,000)
$887,530
Member Y
Start
Profit Alloc.
Distr.
Total
($3,530)
$586,000
($1,470,000)
($887,530)
Grand Total
$0
$0
PARTNERSHIP AGREEMENT EXHIBIT 4
Distribution Based Allocation Approach --- Constructive Liquidation Method (Section 704(b)
Compliant Approach)
I.
Partnership Agreement Language
A.
Selected Distribution Provisions
Section 1.1 Distributable Cash Flow. Distributable Cash Flow may be distributed to
the Members at such times as the Managers determine in accordance with the following
order and priority:
(a)
First, 100% of such Distributable Cash Flow shall be distributed to the
Members, in proportion to and to the extent of their respective then outstanding
Unsatisfied Preferred Returns;
(b)
Next, 100% of any remaining Distributable Cash Flow shall be distributed
to the Members in proportion to and to the extent of their respective then outstanding
Unreturned Capital Contribution Balances;
(c)
Next, until the aggregate amount of distributions made pursuant to this
Section 1.1(c) equals the sum of $1,000,000, 100% of any remaining Distributable Cash
Flow shall be distributed to the Members as follows:
(i)
80% to Member X; and
(ii)
20% to Member Y.
(d)
Thereafter, the balance of any remaining Distributable Cash Flow shall be
distributed to the to the Members as follows:
(i)
50% to Member X; and
(ii)
50% to Member Y.
1.2
Distributions Upon Liquidation. If all or substantially all of the assets of the
Company are sold in connection with a liquidation of the Company or the Company is
otherwise dissolved pursuant to [ Dissolution Section ], the assets of the Company shall
be distributed through the procedures outlined in [ Dissolution Section] in the following
order and priority:
(a)
[Creditor Payment, Liquidation Expense Payment, Reserve Holdback
Provision, State Law Liquidation Payment Provisions]
(b)
The balance of the proceeds, if any, to be distributed on or before the later
of (i) the end of the Allocation Period during which such liquidation occurs and (ii)
ninety (90) days after the date of such liquidation, to the Members in accordance with the
-36PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
order and priority set forth in Section 1.1 (the “Final Distribution”). [Immediately prior
to the Final Distribution, the Capital Account balances of the Members shall be adjusted,
taking into account all items of Profit and Loss (including any allocable items of gross
income, gain, loss, and expense includible in the computation of Profit and Loss) for the
taxable year of the Company in which such liquidation occurs and in which the Final
Distribution is made, such that the Capital Account of each Member prior to the Final
Distribution equals (to the extent possible) the distribution to be received by such
Member pursuant to the Final Distribution.]
B.
Supporting Defined Terms
“Capital Account” [standard form agreement definition of §704(b) book capital
account].
“Gross Asset Value” [standard form agreement definition of §704(b) book gross asset
value].
“Profits” and “Losses” [standard form agreement definition of §704(b) net book income
and §704(b) net book loss].
“Preferred Return” means, with respect to any Member and a Unit of which the Member
is the record owner, a sum equal ten percent (10%) per annum (computed for the actual number
of days in the period for which such Preferred Return is being determined) cumulative, but noncompounded, of the average daily balance of the Unreturned Capital Contribution Balance which
relates to such Unit and commencing on the date of the first Capital Contribution which relates to
such Unit. In the event any Member transfers a Unit in accordance with the terms of this
Agreement, such Member’s transferee shall succeed to the Preferred Return which relates to such
Unit.
“Unreturned Capital Contribution Balance” means as to a Member and a Unit of which
the Member is the record owner, the aggregate Capital Contributions made with respect to such
Unit, reduced (but not below zero) by the aggregate amounts distributed pursuant to Section
1.1(b) with respect to such Unit (whenever made and regardless of the source or character
thereof). In the event any Member transfers a Unit in accordance with the terms of this
Agreement, such Member’s transferee shall succeed to the Unreturned Capital Contribution
Balance which relates to such Unit.
“Unsatisfied Preferred Return” means, with respect to each Unit, as of a given point in
time, the amount (if any) that (a) the Preferred Return on such Preferred Unit exceeds (b) the
aggregate amount of all distributions made in respect of such Unit (whenever made and
regardless of the source or character thereof) pursuant to Section 1.1(a).
C.
Approach 1 -- Vague Methodology Approach
1.
General Allocation Section
2.1. Allocations of Profit and Loss After giving effect to the special allocations set
forth in [ special allocation sections, including regulatory allocations] and Section 1.2,
-37PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Profits and Losses for any Allocation Period shall be allocated to the Members in such a
manner so that the Capital Accounts of the Members equal their respective rights to
Company distributions pursuant to Section 1.1.
D.
Approach 2 -- Broad Conceptual Approach
1.
General Allocation Section
2.1.
Allocations of Profit and Loss. After giving effect to the special allocations set
forth in [ special allocation sections, including regulatory allocations] and Section 1.2,
Profits or Losses for any Allocation Period shall be allocated to the Members in such a
manner so that the Capital Account of each Member equals (as of the end of such
Allocation Period and to the fullest extent possible) the amount that would be distributed
to such Member if all Properties of the Company, including cash, were sold for cash
equal to their respective Gross Asset Values, all liabilities allocable to such Properties
were then due and were satisfied according to their terms, all Minimum Gain chargebacks
required by [minimum gain chargeback regulatory provisions] of this Agreement were
made, and all obligations of Members to contribute additional capital to the Company
were satisfied and all remaining proceeds from such sale were distributed pursuant to the
order and priority of Section 1.1.
E.
Approach 3 -- Specific Formulaic Approach
1.
General Allocation Section
Allocations of Profit and Loss. After giving effect to the special allocations set
2.1.
forth in [ special allocation sections, including regulatory allocations] and Section 1.2,
Profits or Losses for any Allocation Period shall be allocated to the Members as follows:
(a)
The Company’s Profits for any Allocation Period shall be allocated to the
Members having Capital Account Shortfalls for such Allocation Period (as determined
after taking account of all contributions, distributions, and special allocations during such
Allocation Period, but before taking account of allocations of Profit or Loss for such
Allocation Period) to the extent of, and in proportion to, such Capital Account Shortfalls.
(b)
The Company’s Losses for any Allocation Period shall be allocated to the
Members having Capital Account Excesses for such Allocation Period (as determined
after taking account of all contributions, distributions, and special allocations during such
Allocation Period, but before taking account of allocations of Profit or Loss for such
Allocation Period) to the extent of, and in proportion to, such Capital Account Excesses.
2.
Supporting Defined Terms
“Capital Account Excess” means, with respect to each Member, the excess (if any) of
such Member’s Capital Account over such Member’s Target Account.
“Capital Account Shortfall” means, with respect to each Member, the excess (if any) of
such Member’s Target Account over such Member’s Capital Account.
-38PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
“Target Account” means, with respect to any Member for any Allocation Period or
period, an amount equal to the hypothetical distribution such Member would receive if all assets
of the Company, including cash, were sold for cash equal to their Gross Asset Value (taking into
account any adjustments to Gross Asset Value for such Allocation Period or period), all
liabilities allocable to such assets were then due and were satisfied according to their terms, all
Minimum Gain Chargebacks required by this Agreement were made, and all obligations of
Members to contribute additional capital to the Company were satisfied, and all remaining
proceeds from such sale were distributed pursuant to Section 1.1 (except that amounts deemed
constructively distributed pursuant to the computation of prior Target Account balances shall not
be treated as having been actually distributed for the computation of such given Target Account
balance).
-39PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
II.
Example Set Application
Year 1 Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Section 704(b) Book Income
$1,500,000
(Section 704(b) Depreciation / Amortization ) ($10,000)
Other Section 704(b) Book Expense
($1,500,000)
Profit / (Loss)
($10,000)
12/31/Yr 1 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$10,000
$10,000
$100,000
Member Y
$0
$0
$0
Totals
$10,000
$10,000
$100,000
-40PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 1 Actual Distributions (12/31/Yr 1)
Member X Member Y
Total Distributable Cash to be Distributed = $0
Section 1.1(a) – Unsatisfied Preferred Return Distributions
Section 1.1(b) – Unreturned Capital Balance Distributions
Section 1.1(d) – $1,000,000 80 / 20 Distribution
Section 1.1(e) – Residual 50 / 50 Distribution
Total Distributions:
$0
$0
Year 1 Allocations – First Determine Constructive Liquidation Amount
LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
$100,000
($10,000)
$90,000
$0
Capital Accounts
Member X
Start
Loss Alloc.
$100,000
????????
Total
Member Y
Start
Loss Alloc.
???
$0
????????
Total
Grand Total
$90,000
-41PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Assets –
Liabilities =
???
$90,000
$90,000
Constructive
Liquidation
Amount
Year 1 Allocations – Next, Set Target Balances
Member X Member Y
Total Constructive Liquidation Proceeds = $1,100,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $10,000
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$80,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$0
$0
Section 1.1(e) – Residual 50 / 50 Distribution
$0
$0
Total Target Balances:
$90,000
$0
Year 1 Allocations – Finally, Allocate to Match
Capital Account Shortfalls/(Excesses)
Profits
Alloc.
Loss
Alloc.
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
CA Shortfall CA Excess
(If Target >
Actual)
(If Target <
(Matched (Matched
Actual)
to
to
Shortfalls) Excesses)
Member
X
$100,000
$90,000
$0
$10,000
$0
$10,000
Member
Y
$0
$0
$0
$0
$0
$0
Total
$100,000
$90,000
$0
$10,000
$0
$10,000
-42PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 2 Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Section 704(b) Book Income
$2,000,000
(Section 704(b) Depreciation / Amortization ) ($20,000)
Other Section 704(b) Book Expense
($980,000)
Profit / (Loss)
$1,000,000
12/31/Yr 2 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$20,000
$20,000
$100,000
Member Y
$0
$0
$0
Totals
$20,000
$20,000
$100,000
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Year 2 Actual Distributions (12/31/Yr 2)
Member X Member Y
Total Distributable Cash to be Distributed = $1,020,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions
$20,000
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$720,000
$180,000
Section 1.1(e) – Residual 50 / 50 Distribution
$0
$0
Total Distributions:
$840,000
$180,000
Year 2 Allocations – First Determine Constructive Liquidation Amount
LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
$90,000
($20,000)
$70,000
Cash
Yr 2 Cash Earnings
Yr 2 Distributions
Ending Cash
$0
$1,020,000
$1,020,000
$0
$70,000
-44PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
Capital Accounts
Member X
Start
Profit Alloc.
Distr.
Total
$90,000
????????
($840,000)
???
Member Y
Start
Profit Alloc.
Distr.
Total
$0
????????
($180,000)
???
Grand Total
$70,000
Assets –
Liabilities =
$70,000
Constructive
Liquidation
Amount
Year 2 Allocations – Next, Set Target Balances
Member X Member Y
Total Constructive Liquidation Proceeds = $70,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $0
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$0
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$56,000
$14,000
Section 1.1(e) – Residual 50 / 50 Distribution
$0
$0
Total Target Balances:
$56,000
$14,000
Year 2 Allocations – Finally, Allocate to Match
Capital Account Shortfalls/(Excesses)
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
CA Shortfall
CA Excess
(If Target >
Actual)
(If Target
<Actual)
Profits
Alloc.
Loss
Alloc.
(Matched (Matched
to
to
Shortfalls) Excesses)
Member
X
($750,000)
$56,000
($806,000)
$0
$806,000
$0
Member
Y
($180,000)
$14,000
($194,000)
$0
$194,000
$0
Total
($930,000)
$70,000
$0
$0
$1,000,000 $0
-45PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 3 Operating and Sale Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Operating Section 704(b) Book Income $1,015,000
(Section 704(b) Depreciation / Amortization ) ($5,000)
Other Section 704(b) Book Expense
($480,000)
Operating Profit / (Loss)
$500,000
4/1/Yr 1 Sale Proceeds
$3,000,000
Section 704(b) Book Basis
$570,000
Sale Profit / (Loss)
$2,430,000
Total Profit / (Loss)
$2,930,000
4/1/Yr 3 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$20,000
$0
$0
Member Y
$0
$0
$0
Totals
$20,000
$0
$0
-46PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 3 Allocations (4/1/Yr 3) – First Determine
Constructive Liquidation Amount
LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
4/1/Yr 3 Sale
Ending Fixed Assets
$70,000
($5,000)
($65,000)
$0
Cash
Yr 3 Cash Earnings
4/1/Yr 3 Sale
Yr 3 Sale Proceeds
$0
$505,000
($505,000)
$3,000,000
Ending Cash
$3,000,000
$0
Capital Accounts
Member X
Start
Profit Alloc.
$56,000
????????
Total
$3,000,000
-47PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
????
Member Y
Start
Profit Alloc.
Distr.
Total
$14,000
????????
($1,470,000)
????
Grand Total
$3,000,000
Assets –
Liabilities =
$3,000,000
Constructive
Liquidation
Amount
Year 3 Allocations – Next, Set Target Balances
Member X Member Y
Total Constructive Liquidation Proceeds = $3,000,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $0
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$0
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$80,000
$20,000
Section 1.1(e) – Residual 50 / 50 Distribution
$1,450,000
$1,450,000
Total Target Balances:
$1,530,000
$1,470,000
Year 2 Allocations – Finally, Allocate to Match
Capital Account Shortfalls/(Excesses)
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
CA Shortfall
CA Excess
(If Target >
Actual)
(If Target
< Actual)
Profits
Alloc.
Loss
Alloc.
(Matched (Matched
to
to
Shortfalls) Excesses)
Member
X
$56,000
$1,530,000
$1,474,000
$0
$1,474,000 $0
Member
Y
$14,000
$1,470,000
$1,456,000
$0
$1,456,000 $0
Total
$70,0000
$3,000,000
$2,930,000
$0
$2,930,000 $0
-48PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 3 Actual Distributions (4/1/Yr 3)
Member X Member Y
Total Liquidation Proceeds to be Distributed = $3,000,000
Section 1.1(a) – Unsatisfied Preferred Return
$0
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$0
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$80,000
$20,000
Section 1.1(e) – Residual 50 / 50 Distribution
$1,450,000
$1,450,000
Total Distribution:
$1,530,000
$1,470,000
4 4/1/Yr 3 LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
4/1/Yr 3 Sale
Ending Fixed Assets
Cash
Yr 3 Cash Earnings
4/1/Yr 3 Sale
Yr 3 Sale Proceeds
Yr 3 Distributions
Ending Cash
$70,000
($5,000)
($65,000)
$0
$0
$505,000
($505,000)
$3,000,000
($3,000,000)
$0
$0
-49PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
Capital Accounts
Member X
Start
Profit Alloc.
Distr.
Total
$56,000
$1,474,000
($1,530,000)
$0
Member Y
Start
Profit Alloc.
Distr.
Total
$14,000
$1,456,000
($1,470,000)
$0
Grand Total
$0
$0
PARTNERSHIP AGREEMENT EXHIBIT 5
Tax Distribution Drafting Issues Under a Distribution Based Allocation Approach
I.
Partnership Agreement Language
A.
Selected Distribution Provisions, Defined Terms
1.1
Distributable Cash Flow. Distributable Cash Flow may be distributed to the
Members at such times as the Managers determine in accordance with the following
order and priority:
(a)
First, 100% of such Distributable Cash Flow shall be distributed to the
Members, in proportion to and to the extent of their respective then outstanding
Unsatisfied Preferred Returns;
(b)
Next, 100% of any remaining Distributable Cash Flow shall be distributed
to the Members in proportion to and to the extent of their respective then outstanding
Unreturned Capital Contribution Balances;
(c)
Next, until the aggregate amount of distributions made pursuant to this
Section 1.1(c) equals the sum of $1,000,000, 100% of any remaining Distributable Cash
Flow shall be distributed to the Members as follows:
(i)
80% to Member X; and
(ii)
20% to Member Y.
(d)
Thereafter, the balance of any remaining Distributable Cash Flow shall be
distributed to the to the Members as follows:
(i)
50% to Member X; and
(ii)
50% to Member Y.
1.2
Distributions Upon Liquidation. If all or substantially all of the assets of the
Company are sold in connection with a liquidation of the Company or the Company is
otherwise dissolved pursuant to [ Dissolution Section ], the assets of the Company shall
be distributed through the procedures outlined in [ Dissolution Section] in the following
order and priority:
(a)
[Creditor Payment, Liquidation Expense Payment, Reserve Holdback
Provision, State Law Liquidation Payment Provisions]
(b)
The balance of the proceeds, if any, to be distributed on or before the later
of (i) the end of the Allocation Period during which such liquidation occurs and (ii)
ninety (90) days after the date of such liquidation, to the Members in accordance with the
order and priority set forth in Section 1.1 (the “Final Distribution”). [Immediately prior
-50PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
to the Final Distribution, the Capital Account balances of the Members shall be adjusted,
taking into account all items of Profit and Loss (including any allocable items of gross
income, gain, loss, and expense includible in the computation of Profit and Loss) for the
taxable year of the Company in which such liquidation occurs and in which the Final
Distribution is made, such that the Capital Account of each Member prior to the Final
Distribution equals (to the extent possible) the distribution to be received by such
Member pursuant to the Final Distribution.]
B.
General Allocation Section
2.1. Allocations of Profit and Loss. After giving effect to the special allocations set
forth in [ special allocation sections, including regulatory allocations] and Section 1.2,
Profits or Losses for any Allocation Period shall be allocated to the Members as follows:
(a)
The Company’s Profits for any Allocation Period shall be allocated to the
Members having Capital Account Shortfalls for such Allocation Period (as determined
after taking account of all contributions, distributions, and special allocations during such
Allocation Period, but before taking account of allocations of Profit or Loss for such
Allocation Period) to the extent of, and in proportion to, such Capital Account Shortfalls.
(b)
The Company’s Losses for any Allocation Period shall be allocated to the
Members having Capital Account Excesses for such Allocation Period (as determined
after taking account of all contributions, distributions, and special allocations during such
Allocation Period, but before taking account of allocations of Profit or Loss for such
Allocation Period) to the extent of, and in proportion to, such Capital Account Excesses.
1.
Supporting Defined Terms
“Capital Account Excess” means, with respect to each Member, the excess (if any) of
such Member’s Capital Account over such Member’s Target Account.
“Capital Account Shortfall” means, with respect to each Member, the excess (if any) of
such Member’s Target Account over such Member’s Capital Account.
“Target Account” means, with respect to any Member for any Allocation Period or
period, an amount equal to the hypothetical distribution such Member would receive if all assets
of the Company, including cash, were sold for cash equal to their Gross Asset Value (taking into
account any adjustments to Gross Asset Value for such Allocation Period or period), all
liabilities allocable to such assets were then due and were satisfied according to their terms, all
Minimum Gain Chargebacks required by this Agreement were made, and all obligations of
Members to contribute additional capital to the Company were satisfied, and all remaining
proceeds from such sale were distributed pursuant to Section 1.1 (except that amounts deemed
constructively distributed pursuant to the computation of prior Target Account balances shall not
be treated as having been actually distributed for the computation of such given Target Account
balance).
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C.
Approach 1 -- No Tax Distribution Waterfall True-Up Provision; Tax Distribution
is a Permanent Preference
1.3
Tax Distributions.
(a)
For each Fiscal Year, the Company shall, not later than ninety (90) days
following the end of such Fiscal Year, distribute to each Member, with respect to such
Fiscal Year, Distributable Cash Flow in an amount equal to such Member’s Presumed
Tax Liability for such Fiscal Year (a “Tax Distribution”).
(b)
The Company may distribute Tax Distributions in quarterly installments
on an estimated basis prior to the end of a Fiscal Year, but if the amounts distributed by
the Company as estimated quarterly Tax Distributions exceed the greater of (a) the
amount of Tax Distributions to which such Member is entitled for such Fiscal Year or (b)
the total amount of other distributions to which such Member is entitled in such Fiscal
Year, then the Member shall, within fifteen (15) days after the tax return for such Fiscal
Year is filed, return such excess to the Company and such excess will be treated as a Tax
Distribution to such Member pursuant to this Section 1.3 until it is returned.
(c)
All amounts withheld pursuant to the Code or any provision of any state,
local or foreign tax law with respect to any payment, distribution or allocation to the
Company or the Members shall be treated as amounts paid or distributed, as the case may
be, to the Members with respect to which such amount was withheld pursuant to this
Section 1.3(c) for all purposes under this Agreement and shall be treated as a Tax
Distribution for the purpose of this Section 1.3. The Company is authorized to withhold
from payments and distributions, or with respect to allocations to the Members, and to
pay over to any federal, state and local government or any foreign government, any
amounts required to be so withheld pursuant to the Code or any provisions of any other
federal, state or local law or any foreign law, and shall allocate any such amounts to the
Members with respect to which such amount was withheld.
D.
Approach 2 -- Tax Distribution Waterfall True-Up Provision; Tax Distribution is
Merely a Timing Preference
1.3
Tax Distributions.
(a)
For each Fiscal Year, the Company shall, not later than ninety (90) days
following the end of such Fiscal Year, distribute to each Member, with respect to such
Fiscal Year, Distributable Cash Flow in an amount equal to such Member’s Presumed
Tax Liability for such Fiscal Year (a “Tax Distribution”).
(b)
All amounts required to be distributed to a Member with respect to any
Fiscal Year pursuant to Section 1.3(a) shall be reduced by any distributions made
pursuant to Section 1.2 for such Fiscal Year or prior to the expiration of the ninety (90)
day period following the end of such Fiscal Year.
(c)
Any amount distributed pursuant to this Section 1.3 will be deemed to be
an advance distribution of amounts otherwise distributable to the Members pursuant to
-52PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Section 1.2 and will reduce the amounts that would subsequently otherwise be
distributable to the Members pursuant Section 1.2 in the order such distributions would
otherwise be distributed. [note, order and priority of true-up credit is point of
negotiation]
(d)
The Company may distribute Tax Distributions in quarterly installments
on an estimated basis prior to the end of a Fiscal Year, but if the amounts distributed by
the Company as estimated quarterly Tax Distributions exceed the greater of (a) the
amount of Tax Distributions to which such Member is entitled for such Fiscal Year or (b)
the total amount of other distributions to which such Member is entitled in such Fiscal
Year, then the Member shall, within fifteen (15) days after the tax return for such Fiscal
Year is filed, return such excess to the Company and such excess will be treated as a Tax
Distribution to such Member pursuant to this Section 1.3 until it is returned.
(d)
All amounts withheld pursuant to the Code or any provision of any state,
local or foreign tax law with respect to any payment, distribution or allocation to the
Company or the Members shall be treated as amounts paid or distributed, as the case may
be, to the Members with respect to which such amount was withheld pursuant to this
Section 1.3(d) for all purposes under this Agreement and shall be treated as a Tax
Distribution for the purpose of this Section 1.3. The Company is authorized to withhold
from payments and distributions, or with respect to allocations to the Members, and to
pay over to any federal, state and local government or any foreign government, any
amounts required to be so withheld pursuant to the Code or any provisions of any other
federal, state or local law or any foreign law, and shall allocate any such amounts to the
Members with respect to which such amount was withheld.
-53PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
II.
Example Set Application
Exhibit 5 Year 1 Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Section 704(b) Book Income
$2,500,000
(Section 704(b) Depreciation / Amortization ) ($10,000)
Other Section 704(b) Book Expense
($1,490,000)
Profit / (Loss)
$1,000,000
Exhibit 5 Year 1 Distributions
Member X $0
Member Y $0
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Year 1 Allocations – First Determine
Constructive Liquidation Amount
LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
$100,000
($10,000)
$90,000
Cash
Yr 3 Cash Earnings
Yr 2 Distributions
Ending Cash
$0
$1,010,000
$0
$1,010,000
$0
Capital Accounts
Member X
Start
Profit Alloc.
$100,000
????????
Total
Member Y
Start
Profit Alloc.
???
$0
????????
Total
Grand Total
$1,100,000
-55PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Assets –
Liabilities =
???
$1,100,000
$1,100,000
Constructive
Liquidation
Amount
12/31/Yr 1 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$10,000
$10,000
$100,000
Member Y
$0
$0
$0
Totals
$10,000
$10,000
$100,000
Year 1 Allocations – Next, Set Target Balances
Member X Member Y
Total Constructive Liquidation Proceeds = $1,100,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $10,000
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$792,000
$198,000
Section 1.1(e) – Residual 50 / 50 Distribution
$0
$0
Total Target Balances:
$902,000
$198,000
-56PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 1 Allocations – Finally, Allocate to Match
Capital Account Shortfalls/(Excesses)
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
CA Shortfall
CA Excess
(If Target >
Actual)
(If Target
< Actual)
Profits
Alloc.
Loss
Alloc.
(Matched (Matched
to
to
Shortfalls) Excesses)
Member
X
$100,000
$902,000
$802,000
$0
$802,000
$10,000
Member
Y
$0
$198,000
$198,000
$0
$198,000
$10,000
Total
$100,000
$1,100,000
$1,000,000
$0
$1,000,000 $0
Year 2 Profit/(Loss)
(i.e. net §704(b) Income/Loss)
Gross Section 704(b) Book Income
$4,000,000
(Section 704(b) Depreciation / Amortization ) ($20,000)
Other Section 704(b) Book Expense
($1,980,000)
Profit / (Loss)
$2,000,000
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Year 1/1/Yr 2 Tax Distributions (No Other Yr 2 Distributions)
Member X $320,800 (i.e. 40% * Year 1 Tax Allocation)
Member Y $79,200 (i.e. 40% * Year 1 Tax Allocation)
12/31/Yr 2 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$20,000
$20,000
$100,000
Member Y
$0
$0
$0
Totals
$20,000
$20,000
$100,000
-58PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Year 2 Allocations – First Determine Constructive Liquidation Amount
LLC §704(b) Book Balance Sheet
Liabilities
Fixed Assets
Depreciation
Ending Fixed Assets
Cash
Yr 2 Cash Earnings
Yr 2 Tax Distributions
Ending Cash
$90,000
($20,000)
$70,000
$1,010,000
$2,020,000
($400,000)
$2,630,000
$2.700,000
-59PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
Capital Accounts
Member X
Start
Profit Alloc.
Tax Distr.
Total
$902,000
????????
($320,800)
???
Member Y
Start
Profit Alloc.
Tax Distr.
Total
$198,000
????????
($79,200)
???
Grand Total
$2,700,000
Assets –
Liabilities =
$2,700,000
Constructive
Liquidation
Amount
Year 2 Allocations – Next, Set Target Balances,
Approach 1 (No Tax Dist. True-Up)
Member X Member Y
Total Constructive Liquidation Proceeds = $2,700,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $20,000
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
$790,000
$790,000
Total Target Balances:
$1,710,000
$990,000
Year 2 Allocations – Next, Set Target Balances,
Approach 2 (Tax Dist. True-Up)
Member X Member Y
True Up Calculation
Targets adding Hypoth. Dist. of Unrecvd Tax Distr.
Target Balances Under Approach 1 + Actual Tax Dist.
True Up Adjustment
$1,910,000
$2,030,800
($120,800)
$1,190,000
$1,069,200
$120,800
Total Constructive Liquidation Proceeds = $2,700,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $20,000
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
True Up Adjustment
Total Target Balances:
$790,000
($120,800)
$1,589,200
$790,000
$120,800
$1,110,800
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Year 2 Allocations – Finally, Allocate to Match
Capital Account Shortfalls/(Excesses), Approach 1
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
(If Target >
Actual)
CA Excess Profits
Alloc.
(If Target
(Matched
< Actual)
to
Shortfalls)
CA Shortfall
Loss
Alloc.
(Matched
to
Excesses)
Member
X
$581,200
$1,710,000
($1,128,800)
$0
$1,128,800 $0
Member
Y
$118,800
$990,000
($871,200)
$0
$871,200
Total
$700,000
$2,700,000
$2,000,000
$0
$2,000,000 $0
$0
Year 2 Allocations – Finally, Allocate to Match
Capital Account Shortfalls/(Excesses), Approach 2
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
(If Target >
Actual)
CA Excess Profits
Alloc.
(If Target
(Matched
< Actual)
to
Shortfalls)
CA Shortfall
Loss
Alloc.
(Matched
to
Excesses)
Member
X
$581,200
$1,589,200
($1,008,000)
$0
$1,008,000 $0
Member
Y
$118,800
$1,110,800
($992,000)
$0
$992,000
Total
$700,000
$2,700,000
($2,000,000)
$0
$2,000,000 $0
-61PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
$0
Year 3 Operating and Sale Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Operating Section 704(b) Book Income $1,015,000
(Section 704(b) Depreciation / Amortization ) ($5,000)
Other Section 704(b) Book Expense
($480,000)
Operating Profit / (Loss)
$500,000
4/1/Yr 1 Sale Proceeds
$6,000,000
Section 704(b) Book Basis
$2,400,000
Sale Profit / (Loss)
$3,600,000
Total Profit / (Loss)
$4,100,000
Exhibit 5 Year 1/1/Yr 3 Tax Distr., Approach 1
Member X $451,520 (i.e. 40% * Year 1 Tax Allocation)
Member Y $348,480 (i.e. 40% * Year 1 Tax Allocation)
Total
$800,000
Year 1/1/Yr 3 Tax Distr., Approach 2
Member X $403,200 (i.e. 40% * Year 1 Tax Allocation)
Member Y $396,800 (i.e. 40% * Year 1 Tax Allocation)
Total
$800,000
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4/1/Yr 3 Key Distribution Concept Values
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$22,500
$22,500
$100,000
Member Y
$0
$22,500
$100,000
Totals
$22,500
$22,500
$100,000
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Year 3 Allocations (4/1/Yr 3) – First Determine
Constructive Liquidation Amount
LLC §704(b) Book Balance Sheet
Fixed Assets
Depreciation
4/1/Yr 3 Sale
Ending Fixed Assets
Cash
Yr 3 Cash Earnings
1/1/Yr3 Tax Distributions
4/1/Yr 3 Sale
Yr 3 Sale Proceeds
Ending Cash
$70,000
($5,000)
($65,000)
$0
$2,630,000
$505,000
($800,000)
($2,335,00)
$6,000,000
$6,000,000
$6,000,000
-64PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Liabilities
$0
Capital
Accounts
Approach 1
Member X
Start
Profit Alloc.
Tax Dist.
Total
Member Y
Start
Profit Alloc.
Tax Distr.
Total
Approach 2
Member X
Start
Profit Alloc.
Tax Dist.
Total
Member Y
Start
Profit Alloc.
Tax Distr.
Total
Grand Total
Assets –
Liabilities =
$1,710,000
????????
($451,520)
????
$990,000
????????
($348,480)
????
$1,589,200
????????
($403,200)
????
$1,110,800
????????
($396,800)
????
$6,000,000
$6,000,000
Const. Liq. Amt.
Year 3 Allocations – Next, Set Target Balances,
Approach 1 (No Tax Dist. True-Up)
Member X Member Y
Total Constructive Liquidation Proceeds = $6,000,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $22,500
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
$2,438,750
$2,438,750
Total Target Balances:
$3,361,250
$2,638,750
Year 3 Allocations – Next, Set Target Balances,
Approach 2 (Tax Dist. True-Up)
Member X Member Y
True Up Calculation
Targets adding Hypoth. Dist. of Unrecvd Tax Distr.
Target Balances Under Approach 1 + Actual Tax Dist.
True Up Adjustment
$3,961,250
$4,085,250
($124,000)
$3,238,750
$3,114,750
$124,000
Total Constructive Liquidation Proceeds = $6,000,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $22,500
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
True Up Adjustment
Total Target Balances:
$2,438,750
($124,000)
$3,237,250
$2,438,750
$124,000
$2,762,750
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Year 3 Allocations – Finally, Allocate to Match
Capital Account Shortfalls / (Excesses). Approach 1
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
CA Shortfall
(If Target >
Actual)
CA Excess Profits
Alloc.
(If Target
< Actual) (Matched
to
Shortfalls)
Loss
Alloc.
(Matched
to
Excesses)
Member
X
$1,258,480
$3,361,250
$2,102,770
$2,102,770 $0
Member
Y
$641,520
$2,638,750
$1,997,230
$1,997,230 $0
Total
$1,900,000
$6,000,000
$4,100,000
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$0
$4,100,000 $0
Year 3 Actual Distributions (4/1/Yr 3) – Approach 1 (No Tax Dist. True – Up)
Member X Member Y
Total Liquidation Proceeds to be Distributed = $6,000,000
Section 1.1(a) – Unsatisfied Preferred Return
$22,500
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
$2,438,750
$2,438,750
Total Distribution:
$3,361,250
$2,638,750
Year 3 Actual Distributions (4/1/Yr 3) – Approach 2 (Tax Dist. True – Up)
Member X Member Y
True Up Calculation
Liq Dist adding Hypoth. Dist. of Unrecvd Tax Distr.
Approach 1 Distribution + Actual Tax Dist.
True Up Adjustment
$3,961,250
$4,085,250
($124,000)
$3,238,750
$3,114,750
$124,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions
$22,500
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
True Up Adjustment
Total Distributions:
$2,438,750
($124,000)
$3,237,250
$2,438,750
$124,000
$2,762,750
Total Liquidation Proceeds to Be Distributed = $6,000,000
-67PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
PARTNERSHIP AGREEMENT EXHIBIT 6
Special Allocations Under Distribution Based Agreements
I.
Partnership Agreement Language
A.
Approach 1 -- Special Allocations Without Corresponding Distribution Section
Changes; Incorrect Approach
1.
Selected Distribution Provisions, Defined Terms
1.1
Distributable Cash Flow. Distributable Cash Flow may be distributed to the
Members at such times as the Managers determine in accordance with the following
order and priority:
(a)
First, 100% of such Distributable Cash Flow shall be distributed to the
Members, in proportion to and to the extent of their respective then outstanding
Unsatisfied Preferred Returns;
(b)
Next, 100% of any remaining Distributable Cash Flow shall be distributed
to the Members in proportion to and to the extent of their respective then outstanding
Unreturned Capital Contribution Balances;
(c)
Next, until the aggregate amount of distributions made pursuant to this
Section 1.1(c) equals the sum of $1,000,000, 100% of any remaining Distributable Cash
Flow shall be distributed to the Members as follows:
(i)
80% to Member X; and
(ii)
20% to Member Y.
(d)
Thereafter, the balance of any remaining Distributable Cash Flow shall be
distributed to the to the Members as follows:
(i)
50% to Member X; and
(ii)
50% to Member Y.
1.2
Distributions Upon Liquidation. If all or substantially all of the assets of the
Company are sold in connection with a liquidation of the Company or the Company is
otherwise dissolved pursuant to [ Dissolution Section ], the assets of the Company shall
be distributed through the procedures outlined in [ Dissolution Section] in the following
order and priority:
(a)
[Creditor Payment, Liquidation Expense Payment, Reserve Holdback
Provision, State Law Liquidation Payment Provisions]
(b)
The balance of the proceeds, if any, to be distributed on or before the later
of (i) the end of the Allocation Period during which such liquidation occurs and (ii)
-68PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
ninety (90) days after the date of such liquidation, to the Members in accordance with the
order and priority set forth in Section 1.1 (the “Final Distribution”). [Immediately prior
to the Final Distribution, the Capital Account balances of the Members shall be adjusted,
taking into account all items of Profit and Loss (including any allocable items of gross
income, gain, loss, and expense includible in the computation of Profit and Loss) for the
taxable year of the Company in which such liquidation occurs and in which the Final
Distribution is made, such that the Capital Account of each Member prior to the Final
Distribution equals (to the extent possible) the distribution to be received by such
Member pursuant to the Final Distribution.]
2.
Defined Terms
Member Y Staff Bonuses shall mean the Company equity value based bonuses paid to the
Company employees upon a Capital Event pursuant to the Company Bonus Plan
implemented by Member Y.
3.
General Allocation Section
2.1.
Allocations of Profit and Loss. After giving effect to the special allocations set
forth in [ special allocation sections, including regulatory allocations] and Section 1.2,
Profits or Losses for any Allocation Period shall be allocated to the Members as follows:
(a)
The Company’s Profits for any Allocation Period shall be allocated to the
Members having Capital Account Shortfalls for such Allocation Period (as determined
after taking account of all contributions, distributions, and special allocations during such
Allocation Period, but before taking account of allocations of Profit or Loss for such
Allocation Period) to the extent of, and in proportion to, such Capital Account Shortfalls.
(b)
The Company’s Losses for any Allocation Period shall be allocated to the
Members having Capital Account Excesses for such Allocation Period (as determined
after taking account of all contributions, distributions, and special allocations during such
Allocation Period, but before taking account of allocations of Profit or Loss for such
Allocation Period) to the extent of, and in proportion to, such Capital Account Excesses.
4.
Supporting Defined Terms
“Capital Account Excess” means, with respect to each Member, the excess (if any) of
such Member’s Capital Account over such Member’s Target Account.
“Capital Account Shortfall” means, with respect to each Member, the excess (if any) of
such Member’s Target Account over such Member’s Capital Account.
“Target Account” means, with respect to any Member for any Allocation Period or
period, an amount equal to the hypothetical distribution such Member would receive if all assets
of the Company, including cash, were sold for cash equal to their Gross Asset Value (taking into
account any adjustments to Gross Asset Value for such Allocation Period or period), all
liabilities allocable to such assets were then due and were satisfied according to their terms, all
Minimum Gain Chargebacks required by this Agreement were made, and all obligations of
-69PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Members to contribute additional capital to the Company were satisfied, and all remaining
proceeds from such sale were distributed pursuant to Section 1.1 (except that amounts deemed
constructively distributed pursuant to the computation of prior Target Account balances shall not
be treated as having been actually distributed for the computation of such given Target Account
balance).
2.2
Special Allocation of Member Y Staff Bonuses.
The Company deduction
attributable to the Member Y Staff Bonuses for any Allocation Period and otherwise
includable in the computation of Profits and Losses shall be excluded from such
computation and specially allocated to Member Y.
B.
Approach 2 -- Special Allocations With Corresponding Distribution Section
Changes; Correct Approach
1.
Selected Distribution Provisions, Defined Terms
Section 1.1
Distributable Cash Flow. Distributable Cash Flow may be distributed to
the Members at such times as the Managers determine in accordance with the following
order and priority, subject to Section 1.3:
(a)
First, 100% of such Distributable Cash Flow shall be distributed to the
Members, in proportion to and to the extent of their respective then outstanding
Unsatisfied Preferred Returns;
(b)
Next, 100% of any remaining Distributable Cash Flow shall be distributed
to the Members in proportion to and to the extent of their respective then outstanding
Unreturned Capital Contribution Balances;
(c)
Next, until the aggregate amount of distributions made pursuant to this
Section 1.1(c) equals the sum of $1,000,000, 100% of any remaining Distributable Cash
Flow shall be distributed to the Members as follows:
(i)
80% to Member X; and
(ii)
20% to Member Y.
(d)
Thereafter, the balance of any remaining Distributable Cash Flow shall be
distributed to the to the Members as follows:
(i)
50% to Member X; and
(ii)
50% to Member Y.
Section 1.2
Distributions Upon Liquidation. If all or substantially all of the assets of
the Company are sold in connection with a liquidation of the Company or the Company
is otherwise dissolved pursuant to [ Dissolution Section ], the assets of the Company
shall be distributed through the procedures outlined in [ Dissolution Section] in the
following order and priority:
-70PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
(a)
[Creditor Payment, Liquidation Expense Payment, Reserve Holdback
Provision, State Law Liquidation Payment Provisions]
(b)
The balance of the proceeds, if any, to be distributed on or before the later
of (i) the end of the Allocation Period during which such liquidation occurs and (ii)
ninety (90) days after the date of such liquidation, to the Members in accordance with the
order and priority set forth in Section 1.1 (the “Final Distribution”). [Immediately prior
to the Final Distribution, the Capital Account balances of the Members shall be adjusted,
taking into account all items of Profit and Loss (including any allocable items of gross
income, gain, loss, and expense includible in the computation of Profit and Loss) for the
taxable year of the Company in which such liquidation occurs and in which the Final
Distribution is made, such that the Capital Account of each Member prior to the Final
Distribution equals (to the extent possible) the distribution to be received by such
Member pursuant to the Final Distribution.]
Section 1.3
Member Y Distribution Offset for Member Y Staff Bonus Payments.
Member Y Staff Bonus payments will be deemed to be in satisfaction of amounts
otherwise distributable to the Member Y pursuant to Section 1.1 and, if not yet applied
against Section 1.1 amounts, against Section 1.2 and will reduce the amounts that would
subsequently otherwise be distributable to the Member Y pursuant to Section 1.1 or
Section 1.2 in the order such distributions would otherwise be distributed.
2.
General Allocation Section
Section 2.1
Allocations of Profit and Loss. After giving effect to the special
allocations set forth in [ special allocation sections, including regulatory allocations] and
Section 1.2, Profits and Losses for any Allocation Period shall be allocated to the
Members in such a manner so that the Capital Accounts of the Members equal their
respective rights to Company distributions pursuant to Section 1.1.
Section 2.2
Special Allocation of Member Y Staff Bonuses.
The Company
deduction attributable to the Member Y Staff Bonuses for any Allocation Period and
otherwise includable in the computation of Profits and Losses shall be excluded from
such computation and specially allocated to Member Y.
-71PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
II.
Example Set Application
Year 3 Operating and Sale Profit/(Loss) - Same as Ex. 5 Except for Member Y Staff Bonuses
Gross Operating Section 704(b) Book Income
$1,015,000
(Section 704(b) Depreciation / Amortization )
($5,000)
Other Section 704(b) Book Expense
($480,000)
Operating Profit / (Loss)
$500,000
4/1/Yr 1 Sale Proceeds
$6,000,000
Section 704(b) Book Basis
$2,400,000
Member Y Bonuses, Specially Allocated per Section ($800,000)
2.2 to Member Y
Sale Profit / (Loss)
$3,600,000
Total Profit / (Loss)
$4,100,000
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Year 3 Allocations (4/1/Yr 3) – First Determine
Constructive Liquidation Amount
LLC §704(b) Book Balance Sheet
Fixed Assets
Depreciation
4/1/Yr 3 Sale
$70,000
($5,000)
($65,000)
Ending Fixed Assets
$0
Cash
Yr 3 Cash Earnings
Member Y Bonuses
4/1/Yr 3 Sale
Yr 3 Sale Proceeds
Ending Cash
$2,630,000
$505,000
($800,000)
($2,335,000)
$6,000,000
$6,000,000
$6,000,000
-73PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Liabilities
$0
Capital
Accounts
Member X
Start
Profit Alloc.
Dist.
Total
Member Y
Start
Member Y
Staff Bonus
Special
Allocation per
Section 2.2
Dist.
Profit Alloc.
Total
Grand Total
Assets –
Liabilities =
$990,000
????????
$0
????
$1,710,000
($800,000)
$0
????????
????
$6,000,000
$6,000,000
Const. Liq. Amt.
4/1/Yr 3 Key Distribution Concept Values
(Note, No Pre-Year 3 Distributions)
Preferred Return
Unsatisfied
Preferred Return
Unreturned Capital
Balance
Member X
$22,500
$22,500
$100,000
Member Y
$0
$22,500
$100,000
Totals
$22,500
$22,500
$100,000
Year 3 Allocations – Next, Set Target Balances,
Approach 1 (No Dist. Reduction for Special Allocation )
Member X Member Y
Total Constructive Liquidation Proceeds = $6,000,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $22,500
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
$2,438,750
$2,438,750
Total Target Balances:
$3,361,250
$2,638,750
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Year 3 Allocations – Next, Set Targets,
Approach 2 (Dist. Red. for Special Allocation )
Member X Member Y
Total Constructive Liquidation Proceeds = $6,000,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $22,500
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
$2,438,750
$2,438,750
Section 1.3 Member Y Staff Bonus Adjustment
Total Target Balances:
$400,000
$3,761,250
($400,000)
$2,238,750
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Year 3 Allocations – Finally, Allocate to Match
Capital Account Shortfalls/(Excesses). Approach 1
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
(If Target >
Actual)
CA Excess Profits
Alloc.
(If Target
< Actual) (Matched
to
Shortfalls)
CA Shortfall
Loss
Alloc.
(Matched
to
Excesses)
Member
X
$910,000
$3,761,250
$2,451,250
$0
$2,451,250 $0
Member
Y
$990,000
$2,638,750
$1,648,750
$0
$1,648,750 $0
Total
$1,900,000
$6,000,000
$4,100,000
$0
$4,100,000 $0
Year 3 Allocations – Finally, Allocate to Match
Capital Account Shortfalls / (Excesses). Approach 2
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
(If Target >
Actual)
CA Excess Profits
Alloc.
(If Target
< Actual) (Matched
to
Shortfalls)
CA Shortfall
Loss
Alloc.
(Matched
to
Excesses)
Member
X
$910,000
$4,161,250
$2,851,250
$0
$2,851,250 $0
Member
Y
$990,000
$2,238,750
$1,248,750
$0
$1,248,750 $0
Total
$1,900,000
$6,000,000
$4,100,000
$0
$4,100,000 $0
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Year 3 Actual Distributions (4/1/Yr 3) –
Approach 1 (No Dist. Reduction for Special Allocation)
Member X Member Y
Liquidation Proceeds = $6,000,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions $22,500
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
Total Distributions:
$2,438,750
$3,361,250
$2,438,750
$2,638,750
-77PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
Exhibit 6 Year 3 Actual Distributions (4/1/Yr 3) –
Approach 2 (Dist. Reduction for Special Allocation)
Member X Member Y
Total Liquidation Proceeds to Be Distributed = $6,000,000
Section 1.1(a) – Unsatisfied Preferred Return Distributions
$22,500
$0
Section 1.1(b) – Unreturned Capital Balance Distributions
$100,000
$0
Section 1.1(d) – $1,000,000 80 / 20 Distribution
$800,000
$200,000
Section 1.1(e) – Residual 50 / 50 Distribution
$2,438,750
$2,438,750
Section 1.3 Member Y Staff Bonus Adjustment
Total Distributions:
$400,000
$3,761,250
($400,000)
$2,238,750
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PARTNERSHIP AGREEMENT EXHIBIT 7
Profits Interest Drafting Issues Under Distribution Based Allocation Approach
I.
Partnership Agreement Language
A.
Approach 1 -- No Distribution Waterfall Amendment to Reflect Issuance Value of
Partnership; Profits Interest with Stuffing Allocation (Due to Profits Interest
Override Provision)
1.
Selected Provisions
1.1
Distributable Cash Flow. Except as otherwise provided in this Agreement,
Distributable Cash Flow may be distributed to the Members at such times as the
Managers may determine in proportion to their respective Percentages Interests.
1.2
Distributions Upon Liquidation. If all or substantially all of the assets of the
Company are sold in connection with a liquidation of the Company or the Company is
otherwise dissolved pursuant to [ Dissolution Section ], the assets of the Company shall
be distributed through the procedures outlined in [ Dissolution Section] in the following
order and priority:
(a)
[Creditor Payment, Liquidation Expense Payment, Reserve Holdback
Provision, State Law Liquidation Payment Provisions]
(b)
The balance of the proceeds, if any, to be distributed on or before the later
of (i) the end of the Allocation Period during which such liquidation occurs and (ii)
ninety (90) days after the date of such liquidation, to the Members in accordance with the
order and priority set forth in Section 1.1 (the “Final Distribution”). [Immediately prior
to the Final Distribution, the Capital Account balances of the Members shall be adjusted,
taking into account all items of Profit and Loss (including any allocable items of gross
income, gain, loss, and expense includible in the computation of Profit and Loss) for the
taxable year of the Company in which such liquidation occurs and in which the Final
Distribution is made, such that the Capital Account of each Member prior to the Final
Distribution equals (to the extent possible) the distribution to be received by such
Member pursuant to the Final Distribution.]
1.3
Profits Interest Distribution Limitation. Notwithstanding anything in this
Agreement to the contrary, no distributions shall be made to a Member pursuant to this
Article 1 with respect to Profits Interest Units issued pursuant to this Section 3.1 to the
extent such distributions would create or increase an Adjusted Capital Account Deficit of
such Member and are not considered a draw on Company Profits pursuant to Regulation
Section 1.731-1(a)(1)(ii). For the purpose of applying this limitation to distributions of
liquidation proceeds under Section 1.2, the Capital Account adjustments required by
Section 1.2(b) shall be made prior to applying such limitation. Any amounts prohibited
from distribution to a Members pursuant to this Section 1.3 shall instead be distributed to
the Members having positive Capital Account balances in proportion to such positive
Capital Account balances.
-79PHLEGAL: #1645050 v4 (Z9B%04!.DOC)
3.1
Issuance of Profits Interest Units.
(a)
As of the date hereof, the Company is issuing to the Member Z, [
]
Units in consideration of services provided to or to be provided to the Company and
which shall entitle Member Z to the distributions set forth in Article 1 and the allocations
set forth in Article 2 (the “Profits Interest Units”) and is admitting Member Z as a
Member of the Company with respect to such Profits Interest Units, provided all terms of
admittance to the Partnership required by this Agreement are complied with.
(b)
The Profits Interests Units are intended to constitute and be classified as
“profits interests” as such term is used in Rev. Proc. 93-27 and Rev. Proc. 2001-43 and
the provisions of this Agreement governing Profits Interest Units shall be interpreted and
applied in a manner consistent with such classification. Accordingly, issuances of Profits
Interest Units are intended to be nontaxable to their recipients to the fullest extent
permitted by law, although none of the Company, Managers, or Members makes any
representation as to the tax consequences of the issuance of Profits Interest Units
pursuant to this Agreement. Notwithstanding anything in this Agreement to the contrary,
the Gross Asset Values of all Partnership assets shall be adjusted to equal their respective
gross fair market values (taking Code Section 7701(g) into account), as determined in
accordance with [valuation and book up section] immediately prior to the issuance of
Profits Interests pursuant to this Section 3.1. A Member may forfeit its Profits Interest
Units upon the terms and conditions set forth in any employment agreement entered into
between the Member and the Company. Upon such forfeiture the Member shall cease to
be a Member with respect to the forfeited Profits Interest Units for all purposes of this
Agreement
2.1.
Allocations of Profit and Loss. After giving effect to the special allocations set
forth in [ special allocation sections, including regulatory allocations] and Section 1.2,
Profits or Losses for any Allocation Period shall be allocated to the Members as follows:
(a)
The Company’s Profits for any Allocation Period shall be allocated to the
Members having Capital Account Shortfalls for such Allocation Period (as determined
after taking account of all contributions, distributions, and special allocations during such
Allocation Period, but before taking account of allocations of Profit or Loss for such
Allocation Period) to the extent of, and in proportion to, such Capital Account Shortfalls.
(b)
The Company’s Losses for any Allocation Period shall be allocated to the
Members having Capital Account Excesses for such Allocation Period (as determined
after taking account of all contributions, distributions, and special allocations during such
Allocation Period, but before taking account of allocations of Profit or Loss for such
Allocation Period) to the extent of, and in proportion to, such Capital Account Excesses.
2.
Supporting Defined Terms
“Capital Account Excess” means, with respect to each Member, the excess (if any) of
such Member’s Capital Account over such Member’s Target Account.
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“Capital Account Shortfall” means, with respect to each Member, the excess (if any) of
such Member’s Target Account over such Member’s Capital Account.
“Target Account” means, with respect to any Member for any Allocation Period or
period, an amount equal to the hypothetical distribution such Member would receive if all assets
of the Company, including cash, were sold for cash equal to their Gross Asset Value (taking into
account any adjustments to Gross Asset Value for such Allocation Period or period), all
liabilities allocable to such assets were then due and were satisfied according to their terms, all
Minimum Gain Chargebacks required by this Agreement were made, and all obligations of
Members to contribute additional capital to the Company were satisfied, and all remaining
proceeds from such sale were distributed pursuant to Section 1.1, expect for such purpose,
Section 1.3 shall be disregarded, (except that amounts deemed constructively distributed
pursuant to the computation of prior Target Account balances shall not be treated as having been
actually distributed for the computation of such given Target Account balance).
3.
Defined Terms
“Adjusted Capital Account Deficit” means, with respect to any Member, the deficit
balance, if any, in such Member’s Capital Account as of the end of the relevant Fiscal Year, after
giving effect to: (a) credit to such Capital Account any amounts which such Member is obligated
to restore pursuant to any provision of this Agreement or is deemed obligated to restore pursuant
to Treas. Reg. §§1.704-2(g)(1) and 1.704-2(i)(5); and (b) debit to such Capital Account the items
described in Treas. Reg. §§1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.7041(b)(2)(ii)(d)(6). The foregoing definition is intended to comply with the provisions of Treas.
Reg. §1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
“Percentage Interest” shall mean as to a Member, a fraction (expressed as a
percentage), the numerator of which is the number of Units of which such Member is the record
owner and the denominator of which is the aggregate number of issued and outstanding Units.
B.
Approach 2 -- Distribution Waterfall Amendment to Reflect Issuance; Equity is
Traditional Profits Interest With Uniform Allocation Ratio
3.1
Compensatory Issuance of Profits Interest Units
(a)
Pursuant to the 2004 Equity Plan and upon the terms and conditions set
forth in the 2004 Equity Plan and the applicable Equity Grant Letter, the Company may
issue special profits interest series of Units as equity compensation for services provided
to or to be provided to the Company by Company employees, Managers, consultants,
independent contractors, or advisors (“Profits Interest Units”). Such Units are intended to
constitute “profits interests,” as such term is used by Rev. Proc. 93-27 and Rev. Proc.
2001-43. Accordingly, issuances of Profits Interest Units are intended to be nontaxable
to their recipients to the fullest extent permitted by law, although none of the Company,
Managers, or Members makes any representation as to the tax consequences of the
issuance of Profits Interest Units pursuant to this Agreement.
(b)
Immediately prior to each issuance of Profits Interest Units pursuant to
this 3.1 (each a “P Series” of Units, to be consecutively designated as “Series P-1,”
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“Series P-2,” etc.), the Gross Asset Value of all Company Property shall be adjusted to
equal their respective gross fair market values (taking Section 7701(g) of the Code into
account) as determined [pursuant to valuation and book-up section].
(c)
Each P Series of Profits Interest Units issued shall entitle its record owner
to share in the appreciation in the [Net Fair Market Value] of the Company Property from
the date of issuance of such P Series of Profits Interest Unit with respect to amounts
distributable pursuant to Section 1.2 in proportion to the Percentage Interest applicable to
such P Series Profits Interest Unit and not in any Net Fair Market Value of Company
Property accrued prior to the issuance of such P Series Profits Unit.
(d)
In connection with the issuance of each P Series of Profits Interest Units
pursuant to this Section 3.1, using the Gross Asset Value of the Company Property
determined above in Section 3.1(b) in computing the Net Fair Market Value of Company
Property, the Managers shall amend Section 1.1(b) to provide for a subsection
corresponding to each P Series of Profits Interest Units and establishing the then Net Fair
Market Value of Company Property as the minimum aggregate distribution amount that
must be made pursuant to sections 1.1(b) with respect to Units of the Company issued
and outstanding prior to the issuance of such P Series of Profits Interest Units before such
P Series of Profits Interest Units shall share in distributions pursuant to 1.1(b) (the
“Threshold Amount” of such P Series of Profits Interest Units).
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II.
Example Set Application
Exhibit 7, Member Z Profits Int. Issuance (1/1/Yr 5)
(Note, assume all prior earnings have been distributed when earned)
LLC §704(b) Book Balance Sheet
Liabilities
Book
Tax
Fixed Assets
$100,000
$100,000
Goodwill
$900,000
$0
Book
Tax
$0
$0
Capital Accounts
Book
Tax
Member X
Start
Book Up Gain
$50,000
$450,000
$50,000
$0
Total
$500,000
$50,000
Member Y
Start
Book Up Gain
$50,000
$450,000
$50,000
$0
Total
$500,000
$50,000
Member Z
Start
Book Up Gain
Total
$0
$0
$0
$0
$0
$0
$1,000,000
$1,000,000
$100,000
$100,000
Grand Total
$1,000,000
$100,000
Year 5 Profit/(Loss) (i.e. net §704(b) Income/Loss)
Gross Section 704(b) Book Income
$2,000,000
(Section 704(b) Depreciation / Amortization ) ($20,000)
Other Section 704(b) Book Expense
($980,000)
Profit / (Loss)
$1,000,000
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12/31/Yr 5 Key Distribution Concept Values
Number of Units
Owned
Percentage Interest
Member X
45
45%
Member Y
45
45%
Member Z
10
10%
Totals
100
100%
Year 5 Actual Distributions (12/31/Yr 5)
Member
X
Member
Y
Member
Z
Section 1.1 Percentage Interest Based
$225,000
$225,000
$50,000
Total Distributions:
$225,000
$225,000
$50,000
Total Distributable Cash to be Distributed =
$500,000
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Year 5 Allocations – First Determine Constructive Liquidation Amount
LLC §704(b) Book Balance Sheet
Liabilities
Book
Fixed Assets
Depreciation
Ending Fixed Assets
$100,000
($20,000)
$80,000
Tax
$100,000
($20,000)
$80,000
Book
Tax
$0
$0
Capital Accounts
Goodwill
Cash
Yr 2 Cash Earnings
Yr 2 Distributions
Ending Cash
$900,000
$0
$1,020,000
($500,000)
$520,000
$1,500,000
$0
$0
$1,020,000
($500,000)
$520,000
$600,000
Book
Tax
Member X
Start
Profits Alloc.
Dist.
Total
$500,000
????
($225,000)
???
$50,000
????
($225,000)
???
Member Y
Start
Profits Alloc.
Dist.
Total
$500,000
????
($225,000)
???
$50,000
????
($225,000)
???
Member Z
Start
Profits Alloc.
Dist.
Total
$0
????
($50,000)
???
$0
????
($50,000)
???
Grand Total
Assets –
Liabilities =
$1,500,000
$1,500,000 Cons.
Liqui. Amt.
$600,000
$600,000
Year 5 Allocations Target Bal, Appr 1
Member
X
Member
Y
Member
Z
Section 1.1 – Percentage Interest Based
$675,000
$675,000
$150,000
Total Target Balances:
$675,000
$675,000
$150,000
Total Constructive Liquidation Proceeds =
$1,500,000
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Year 2 Allocations – Target Bal, Appr 2
Member
X
Member
Y
Member
Z
Total Constructive Liquidation Proceeds =
$1,500,000
Section 3.1 Pre Issuance Threshold Amt.
Section 1.1 – Percentage Interest Based
$500,000
$225,000
$500,000
$225,000
$0
$50,000
Total Target Balances:
$725,000
$725,000
$50,000
Year 5 Allocations – Finally, Allocate to Match
Capital Account Shortfalls/(Excesses), App. 1
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
CA
Shortfall (If
Target >
Actual)
CA Excess
(If Target
< Actual)
Profits Alloc.
(Matched to
Shortfalls)
Loss Alloc.
(Matched
to Excesses)
Member X
$275,000
$675,000
$400,000
$0
$400,000
$0
Member Y
$275,000
$675,000
$400,000
$0
$400,000
$0
Member Z
($50,000)
$150,000
$200,000
Total
$500,000
$1,500,000
$1,000,000
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$200,000
$0
$1,000,000
$0
Year 5 Allocations – Finally, Allocate to Match
Capital Account Shortfalls/(Excesses), App. 2
Pre Alloc.
Capital
Account
Pre Alloc.
Target
Account
CA
Shortfall (If
Target >
Actual)
CA Excess
(If Target
< Actual)
Profits Alloc.
(Matched to
Shortfalls)
Loss Alloc.
(Matched to
Excesses)
Member X
$275,000
$725,000
$450,000
$0
$450,000
$0
Member Y
$275,000
$725,000
$450,000
$0
$450,000
$0
Member Z
($50,000)
$50,000
$100,000
$100,000
$0
Total
$500,000
$1,500,000
$1,000,000
$1,000,000
$0
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$0
`