Selected Tax Issues and Provisions in Energy Joint

Report
Selected Tax Issues and Provisions in
Energy Joint Ventures
John R. Maxfield
Holland & Hart LLP
[email protected]
June 3, 2013
Partnership Hallmarks
 Flexible
 Complex
 Constantly Changing
“The combination of flexibility complexity and multifaceted change makes the partnership area one of
great opportunity for sophisticated practitioners
and one of great risk for novices.”
(McKee, Nelson, Whitmire, Kuller, Hallmark and Garcia, Structuring and
Drafting Partnership Agreements, ¶1.02, 3d Ed (2003).
2
Distribution Waterfall
 The heart of the deal and often the most important provisions in the
Agreement.
– Distributable Cash
– Operating Distributions
– Consider whether liquidating distributions should be in accordance
with the operating distribution waterfall or in accordance with
positive capital account balances
– Distributions in Kind
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3
Valuing the property
Capital account adjustments
Watch out for Mixing Bowl Issues (704(c)(1)(B) and 737)
Take in kind provisions in mining JVs – watch out for the
taxable income from property trap (613(a))
Distributable Cash
 Distributable Cash – means, as of any date, all cash, Cash
Equivalents and liquid investments (excluding Capital Contributions
and proceeds of loans) held by the Company as of such date less all
reserves that (a) other than those reserves required pursuant to the
Financing Documents, were expressly included in the Approved
Operating Budget, Approved Network Upgrades Budget, (b) are
necessary to prevent or mitigate an emergency situation, (c) are
established with the prior written consent of the Management
Committee, or (d) are necessary to allow the Company to meet
expenses that are clearly identified and expected with reasonable
certainty to become due within three (3) months from the date of
determination and that are not expressly included in the Approved
Operating Budget, [or] Approved Network Upgrades Budget.
4
Distribution Waterfall
– Tax Distributions
 Advances on waterfall distributions
 Purpose: Avoid forcing the owners to come out of
pocket to pay taxes on partnership income
 Usually at the same assumed rate on each partners
income. Note that taxable income is often not
proportionate with a partner’s 704(b) book income
 Coordinate with Debt Documents
5
Tax Distributions
(a) The Company shall Distribute Distributable Cash [not less
frequently than quarterly] to each Equity Owner in proportion to the
federal taxable income of the Company which will be [and has been]
allocated to such Equity Owner (“Tax Profits”) for the current [and all
prior] Fiscal Year[s] as reasonably estimated by the Managers no later
than 10 days prior to the dates that federal estimated quarterly taxes
are due for individuals an amount equal to the remainder, if any, of:
(i) the product of [40%][the Tax Rate] multiplied times the estimated
Tax Profits allocable to such Equity Owner for the [prior years and the]
portion of the year ending on the date of the distribution (or, for the
January distribution, the year preceding the date of the distribution),
minus (ii) the sum of all Distributions made to each such Equity Owner
pursuant to this Section ____ (a) with respect to such Fiscal Year[s],
plus the product of [40%][the Tax Rate] multiplied times any
Unrecovered Tax Losses attributable to such Equity Owner as of the
first day of the current Fiscal Year.
6
Tax Distributions cont.
The Unrecovered Tax Losses attributable to an Equity Owner means the
positive remainder, if any, of such Equity Owner’s share of the Company’s
federal tax losses for all prior Fiscal Years minus the Equity Owner’s share of
Tax Profits for all prior Fiscal Years. The objective of this Section ____(a) is to
make distributions with reference to each Equity Owner’s (and such Equity
Owner’s predecessor’s) share of cumulative Company taxable income or loss.
Without limiting this objective, for purposes of this Section ____(a), an Equity
Owner’s share of Tax Profits and Unrecovered Tax Losses will be determined
[with] [without] reference to Sections 704(c), 734, and 743 of the Code.
Discretionary Distributions actually made during the calendar year
pursuant to Section ____(b) will reduce the Distributions otherwise
contemplated by this Section ____(a). Distributions made pursuant to this
Section ____(a) will be treated as draws upon Distributions to be made
pursuant to Sections ____(b) and 12.3 such that future Distributions otherwise
contemplated by Sections ____(b) and 12.3 will be reduced by Distributions
made pursuant to this Section ____(a).
7
Operating Distribution Waterfall
Operating Distribution Waterfall [and if Targeted Allocation
Provision is used, the Liquidating Distribution Waterfall].
(b) The Company may Distribute Distributable Cash [subject to the Approval in
accordance with Section ____ at such times and in such amounts as
determined by the Managers in their sole discretion]. The Company shall
make all such Distributions as follows:
(i)
First, to each Equity Owner, up to an amount of aggregate
Distributions under this Section _______ equal to Preferred Accrual of such
Equity Owner, in proportion to the Preferred Accruals of all Equity Owners.
(ii)
Second, to each Equity Owner, up to an amount that will cause
the Adjusted Capital Contribution of such Equity Owner to equal zero,
proportionate with the Adjusted Capital Contributions of all Equity Owners.
(iii)
Ratios.
8
Third, to the Equity Owners in accordance with their Sharing
Adjusted Capital Contribution
 Adjusted Capital Contribution.
An amount equal to the excess of such Equity
Owner’s Capital Contributions, if any, pursuant to
Section [____] and Section [____], over any
Distributions made to such Equity Owner pursuant
to Section ____(b)(ii).
9
Allocations of Profits and Losses
from Operations (“Layer Cake”)
(a) Except as provided in Sections 9.2 and 9.3, the Company shall allocate Profits and
Losses for each Fiscal Year as follows:
(i) The Company shall allocate Losses among the Equity Owners in accordance
with their relative Sharing Ratios.
(ii) The Company shall allocate Profits as follows:
(A)
First, to each Equity Owner that previously has been allocated
Losses pursuant to Section ___(i) that have not been fully offset by allocations of Profits
pursuant to this Section ___(ii)(A) (“Unrecovered Book Losses”) an amount of Profits
such that the total amount of Profits allocated to each such Equity Owner pursuant to this
Section ___(ii)(A) is equal to the total amount of Losses that have been allocated to such
Equity Owner pursuant to Section ___(i). Profits allocated pursuant to this
Section ___(ii)(A)will be allocated to the Equity Owners in proportion to their respective
Unrecovered Book Losses;
(B) Second, to each Equity Owner an amount equal to the total
amount of the Preferred Accrual proportionate with the Preferred Accruals of all Equity
Owners so that the aggregate amount allocated pursuant to this Section ___(ii)(B)
equals its Preferred Accrual.
(C) Third, to the Equity Owners in proportion to their Sharing Ratios.
10
Targeted Capital Account Method
To address the concern of many investors that
liquidating according to capital accounts will not
result in liquidating distributions intended by the
parties, investors in sophisticated investment
transactions now commonly choose to use the
targeted capital account allocation method rather
than the traditional layer-cake allocation method.
11
Target Capital Account Method cont.
What is it?
When using the target capital account method, the
agreement does not base liquidating distributions on the
members’ capital account balances (as in the third prong of
the substantial-economic-effect test) as it does with the
layer-cake method. Instead, liquidating distributions are
made according to the distribution waterfall. The allocation
of income and loss are then distribution driven (meaning
that capital accounts are maintained, and annual
allocations of profits and losses are made, in a way that
reflects the members’ distribution entitlement on a
hypothetical liquidation of the company).
12
Target Capital Account Method cont.
Advantage/Disadvantage
The advantage of the targeted capital account method is
that the parties can be more comfortable that the distributions
from their investment will reflect the economic deal. The
disadvantage is that it does not meet all the technical
requirements to satisfy the substantial-economic-effect safe
harbor with respect to how net income and net losses are
allocated. This creates uncertainty for the parties as to whether
the IRS will honor the allocations based on the target capital
account method (the IRS has not weighed in on this method) or
whether it may determine that the allocations lack substantial
economic effect under the Treasury regulations.
13
Target Capital Account Method cont.
Example of Liquidating Distribution Provision in
Agreement with Target Allocations:
Distribute the remaining assets to the Equity
Owners in accordance with [their positive Capital
Account balances] or [in accordance with the
distribution provisions of Section ______,] [NTD: the
cross reference here would be to the section that sets
forth the distribution waterfall].
14
Target Allocations (Alternative 1)
Allocations of Net Profit and Net Loss.
After giving effect to the special allocations set forth in Sections [Regulatory
Allocations], Net Profit and Net Loss for each Fiscal Year or other period shall be
allocated to the Members so as to reduce, proportionately, in the case of any Net Profit,
the difference between their respective Target Capital Accounts and Partially Adjusted
Capital Accounts for such Fiscal Year or other period and, in the case of Net Loss, the
difference between their respective Partially Adjusted Capital Accounts and Target
Capital Accounts for such Fiscal Year or other period. To the extent that, in the Fiscal
Year in which all or substantially all of the Company’s assets are disposed of, or in the
Fiscal Year in which the Company is liquidated, the allocation of Net Profit or Net Loss
set forth in the preceding sentence does not cause each Member’s Partially Adjusted
Capital Account balance to equal the balance of its Target Capital Account, items of
income or gain will be reallocated to any Member with a Partially Adjusted Capital
Account which is less than its Target Capital Account, and items of loss, deduction or
expense will be reallocated to any Member with a Partially Adjusted Capital Account that
is greater than its Target Capital Account in such manner as to reduce, to the greatest
extent possible, the difference between each Member’s respective balance in its Target
Capital Account and its Partially Adjusted Capital Account balance.
15
Target Allocations (Alternative 1) cont.
“Partially Adjusted Capital Account” means, with respect to any Member
and any Fiscal Year or other relevant period, the Capital Account of such
Member at the beginning of such Fiscal Year or period, adjusted for all
contributions and distributions during such year, increased by the amount (if
any) of such Member’s share of Company Minimum Gain and Member
Nonrecourse Debt Minimum Gain.
“Target Capital Account” means, with respect to any Member and any
Fiscal Year or other relevant period, an amount equal to the distribution such
Member would receive as a result of the hypothetical sale of the Company,
pursuant to which all Company assets are sold for cash equal to their Book
Values as of the date of hypothetical sale, all Company liabilities are satisfied
to the extent required by their terms, and the net assets of the Company are
distributed in full to the Members pursuant to Section 9.2(b)(iii) hereof, all as of
the last day of the year of the hypothetical sale. For the avoidance of doubt,
the foregoing does not required the Book Values of Company assets to be
adjusted to equal their gross fair market values as of the date of the
hypothetical sale.
16
Targeted Capital Account Allocation
Provision (Alternative 2)
In General.
Except as otherwise provided in this Agreement, Net Profits, Net Losses and, to the
extent necessary, individual items of income (including gross income), gain, loss or deduction will be
allocated in a manner that results in the balance in each Member’s Adjusted Capital Account
(determined without regard to clause (b) of the definition thereof), immediately after the allocation,
being, as nearly as possible, equal to the distribution that would be made to such Member pursuant to
Section 5.02(b) if the Company were dissolved, its affairs wound up, its assets sold for cash equal to
their respective Gross Asset Values, its liabilities satisfied (limited with respect to each nonrecourse
liability to the Gross Asset Value of the assets securing such nonrecourse liability), and its net assets
distributed in accordance with Section [
]
Adjusted Capital Account – means, with respect to any Member for any period, such Member’s
Capital Account as of the end of such period, after giving effect to the following adjustments:
(a)
Increase such Capital Account by any amounts that such Member is obligated to
restore pursuant to any provision of this Agreement or is deemed obligated to restore pursuant to
Treasury Regulation Section 1.704-1(b)(2)(ii)(c) or the penultimate sentences of Treasury Regulation
Sections 1.704-2(g)(1) and 1.704-2(i)(5); and
(b)
Decrease such Capital Account by the items described in Treasury Regulation
Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The adjustments in this definition of Adjusted Capital Account are intended to comply with the
provisions of Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith.
17
Targeted Capital Account Allocation
Provision (Alternative 2) cont.
Targeted Capital Account Allocations should not be used in
partnerships where it is important that special allocations be respected.
In such cases it is generally necessary to liquidate in accordance
with positive capital account balances.
Examples:
 Renewable Energy--tax equity partnerships which specially allocate
ITC and/or MACRS; or
 Oil land Gas--farm-out tax partnerships that specially allocate IDCs,
etc. to the farmee.
In such cases (i.e., where liquidating distributions are in
accordance with positive capital accounts), it is very important to the
tax equity partner/farmor to avoid a liquidation of the JV when the
capital accounts are not in balance with the economic deal, and cannot
be brought into balance by a so-called tax balancing provision.
18
From O&G Farmout/TPP Specially
Allocating IDCs, etc.
Exploration cost, IDC, operating and
maintenance cost shall be allocated to each
Party in accordance with its respective
contribution, or obligation to contribute, to
such cost.
19
From O&G Farmout TPP which Liquidates
in Accordance with Capital Accounts
 Balancing of FMV Capital Accounts.
Following the reflection therein of the effects of the distributions in Section 7.1.2,
the FMV capital accounts of the Parties shall be determined as described hereafter. The
TRP shall take the actions specified under Secs. 7.2 through 7.6 in order to cause the
Parties’ FMV capital accounts to reflect, to the maximum extent possible, their interests
under the Agreement. These actions are hereafter referred to as the “balancing of the
FMV capital accounts” and, when each Party’s FMV capital account balance is equal to
the fair market value of its interest under the Agreement, the FMV capital accounts of the
Parties shall be referred to as “balanced.”
The FMV of all Tax Partnership properties shall be determined and the gain or loss
for each property, which would have resulted if sold at such FMV, shall be allocated in
accordance with Secs. 6.1.5, 6.1.6, and 6.1.7. If each Party’s FMV capital account
balance following such allocation does not correspond to the fair market value of its
respective interests under the Agreement, then notwithstanding anything to the contrary
in Secs. 6.1 and 6.2, income, gain, loss, and deduction for the fiscal year in which the
liquidation occurs shall be allocated among the Parties to cause, to the maximum extent
possible, the ratio of their positive FMV capital account balances to equal the fair market
value of their respective interests under the Agreement.
20
Farmout/Liquidate in Accordance with
Positive Capital Accounts
 Final Distribution.
After the FMV capital accounts of the Parties
have been adjusted pursuant to Secs. 7.2 to 7.6,
all remaining property and interests then held by
the Tax Partnership shall be distributed to the
Parties in accordance with their positive FMV
capital account balances.
21
Code Section 704(c); Certain Allocations for Income
Tax (But Not Book Capital Account) Purposes
Income Tax Allocations; Code Section 704(c); Certain Allocations for Income
Tax (But Not Book Capital Account) Purposes.
All items of income, gain, loss and deduction for Federal income tax purposes
shall be allocated in the same manner as the corresponding items are allocated for
purposes of maintaining Capital Accounts; provided, however, that, in accordance with
Section 704(c)(1)(A) of the Code and Treasury Regulation Section 1.704-1(b)(2)(iv)(d), if
a Member contributes (or, pursuant to Revenue Ruling 99-5, is deemed to contribute)
property with an initial Gross Asset Value that differs from its adjusted basis for federal
income tax purposes at the time of contribution, the Company shall allocate income,
gain, loss and deductions with respect to the property, solely for federal income tax
purposes (and not for Capital Account purposes), among the Members so as to take
account of any variation between the adjusted basis of such property to the Company
and its Gross Asset Value at the time of contribution pursuant to the [remedial method
under Section 1.704-3(d)] of the Regulations. In the event the Gross Asset Value of any
Company asset is adjusted pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
subsequent allocations of income, gain, loss, and deduction with respect to such asset
will take account of any variation between the adjusted basis of such asset for federal
income tax purposes and its fair market value in the same manner as under Code
Section 704(c) and the Regulations thereunder and such method as may be selected by
the Management Committee.
22
Net Profits or Net Losses
Adjusting Taxable Income/Loss to 704(b) Net Profit/Net Loss
Net Profits or Net Losses – means for each Fiscal Year or other period, an amount equal to the
Company's taxable income or loss for such Fiscal Year or period, determined in accordance with
Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be
stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss),
with the following adjustments (without duplication):
(a) Any income of the Company that is exempt from federal income tax and not otherwise taken into
account in computing Net Profits or Net Losses pursuant to this definitional Section shall be added to
such taxable income or loss;
(b) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section
705(a)(2)(B) expenditures pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i), and not
otherwise taken into account in computing Net Profits or Net Losses pursuant to this definitional
Section, shall be subtracted from such taxable income or loss;
(c) Any expenditure of the Company that shall be deductible for federal income tax purposes subject to
the application of a limitation based on a taxpayer’s gross income or adjusted gross income shall be
deemed to be allowable as a deduction without regard to such limitation;
(d) In the event the Gross Asset Value of any Company asset is adjusted pursuant to clauses (b) or (c) of
the definition of Gross Asset Value, the amount of such adjustment shall be treated as an item of gain
(if the adjustment increases the Gross Asset Value of the asset) or as an item of loss (if the
adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and
shall be taken into account for purposes of computing Profits or Losses;
23
Net Profits or Net Losses cont.
(e) Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized
for federal income tax purposes shall be computed by reference to the Gross Asset Value of the
property disposed of, notwithstanding that the adjusted tax basis of such property differs from its
Gross Asset Value;
(f) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in
computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal
Year or other period, computed in accordance with the definition thereof;
(g) To the extent an adjustment to the adjusted tax basis of any asset pursuant to Code Section 734(b) is
required, pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in
determining Capital Account balances as a result of a distribution other than in liquidation of a
Member’s Membership Interest, the amount of such adjustment shall be treated as an item of gain (if
the adjustment increases the basis of the asset) or an item of loss (if the adjustment decreases such
basis) from the disposition of such asset and shall be taken into account for purposes of computing
Net Profits or Net Losses; and
(h) Notwithstanding any other provision of this definition, any items which shall be specifically allocated
pursuant to Section _____ or Section _____ [Regulatory Allocations] shall not be taken into account in
computing Net Profit or Net Loss.
24
Tax Flavored Transfer Restrictions
from Wind/Solar JV
No Disposition of a Membership Interest shall result in (x) ITC recapture
or (y) Cash Grant recapture, repayment disallowance or invalidation to any
Member other than the Disposing Member and the non-Disposing Member
shall have received a favorable opinion of nationally recognized tax counsel to
the effect that such Disposition would not result in the Company’s termination
within the meaning of Section 708(b)(1)(B) of the Code; provided however, that
an opinion under this Section _____shall not be required if the Disposing
Member indemnifies non-Disposing Member for any adverse tax
consequences caused by the Disposition to such non-Disposing Member, with
Credit Support from an entity whose Credit Rating is at least Investment Grade
and otherwise reasonable acceptable to the non-Disposing Member; provided
further, that if such Disposition would result in ITC or Cash Grant recapture,
repayment disallowance or invalidation or MACRS schedule reset that can be
quantified at the time of such Disposition, such Disposing Member’s indemnity
under this Section _____shall include a payment in immediately available
funds to the non-Disposing Member of such amount on or before the date of
such Disposition.
25
For Wind & Solar or Other Cash Grant
Partnerships – Prohibit Transfer to Disqualified
Persons
Transfers to Disqualified Persons.
New Member and any Assignees to whom it may
Dispose all or any part of its Membership Interest shall not
permit any direct or indirect owner of New Member’s or
Assignee’s Membership Interest to Dispose of any of such
Membership Interest, or to otherwise become, to a
Disqualified Person at any time before five years from the
Placed in Service Date unless such Disposition is of shares of
stock in a corporation which is taxable under Section 11 of the
Code, which at no time during the Cash Grant Recapture
Period makes an election to be taxable as an S corporation or
otherwise becomes a pass-through entity for federal tax
purposes.
26
Disqualified Person
Disqualified Person means:
(a) any Federal, State or local government (or any political subdivision, agency or
instrumentality thereof);
(b) any organization described in Section 501(c) of the Code and exempt from tax under
Section 501(a) of the Code;
(c) any organization which is a “tax-exempt entity” as defined in Section 168(h)(2) of the
Code, except for a corporation that is a “tax-exempt controlled entity” as defined in IRS
Notice 2012-23, 2012-11 IRB 483.
(d) any entity referenced in Section 54(j)(4) of the Code;
(e) any partnership or other "pass-through entity" (within the meaning of paragraph (g)(4) of
Section 1603 of the American Recovery and Reinvestment Act of 2009), any direct or
indirect partner (or other holder of an equity or profits interest) of which is described in
clauses (a), (b), (c) or (d);
(f) any foreign Person as defined in Section 168(h)(2)(C) of the Code unless the exception
under Section 168(h)(2)(B) of the Code applies with respect to the income from the
Project for that Person;
g) a real estate investment trust, as defined in Section 856(a) of the Code; and
(h) any Indian tribal government described in Section 7701(a)(40) of the Code.
27
Drag Along Rights
Excerpts from Drag Along and Tag Along that Address
Non-Fungibility of Membership Interests.
Except as otherwise provided in Section 10.4(e), if the Members holding
a Majority Interest (“Majority Members”) propose to sell all or substantially all of
their Ownership Interests to any person that is not an affiliate of such Members
(the “Drag-Along Purchaser”) pursuant to a bona fide offer, in one transaction
or a series of related transactions (the “Drag-Along Offer”), then the Majority
Members will have the right, exercisable as set forth below, to require the other
Members and Equity Owners to sell to the Drag-Along Purchaser all, but not
less than all, of the other Equity Owners’ Interests free and clear of all liens
and encumbrances, and on equivalent terms and conditions (including
representations, warranties and indemnities made by the Majority Members)
for an amount equal to the Hypothetical Liquidation Amount for each Equity
Owner based on the Drag-Along Value at the date of the closing with the DragAlong Purchaser.
28
Tag Along Rights
Tag Along Rights.
If the Majority Members propose to Sell all or substantially all
of their Ownership Interest to a Drag-Along Purchaser pursuant to a bona fide offer, and the
Majority Members have not timely sent a Drag-Along Notice, then the other Equity Owners will
have the right to Transfer all of their Ownership Interest to the Drag-Along Purchaser Interests
free and clear of all liens and encumbrances, for an amount equal to the Hypothetical
Liquidation Amount for an amount equal to the Hypothetical Liquidation Amount for each
Equity Owner based on the Drag-Along Value at the date of the closing with the Drag-Along
Purchaser (and on equivalent terms and conditions including representations, warranties and
indemnities) as the Members holding a Majority Interest (or their successor in interest);
provided, however, that if the Drag-Along Purchaser does not desire to acquire all of the
Ownership Interests of all Equity Owners, then (a) the Majority Members and the other Equity
Owners shall Transfer to the Drag-Along Purchaser the percentage Ownership Interests
desired to be acquired by the Drag-Along Purchaser on a basis pari passu with their relative
Sharing Ratios and (b) the price to be paid for the Ownership Interests purchased by the DragAlong Purchaser shall be apportioned between the Ownership Interests purchased from the
Equity Owners in proportion to the relative Hypothetical Liquidation Amount for each such
Equity Owner based on the Drag-Along Value at the date of the closing with the Drag-Along
Purchaser (and on equivalent terms and conditions including representations, warranties and
indemnities) as the Members holding a Majority Interest (or their successor in interest).
29
Hypothetical Liquidation Amount
Hypothetical Liquidation Amount.
An amount (but not less than zero) that each Unitholder would receive
from the Company if (a) all of the Company Property were sold for the DragAlong Value; (b) the Company paid off, or set aside adequate reserves for the
payment of all of its liabilities, including the amounts, if any, due on loans to the
Company from the Unitholders and their Affiliates; (c) to the extent that the
Company had contingent or unquantified expenses at such time, adequate
reserves were set aside for the payment of such expenses (and such reserves
were treated as expenses of the Company); (d) the Company incurred normal
and customary transaction costs in disposing of all of its assets; (e) any Profit
or Loss resulting from such Sale were allocated to the Unitholders in
accordance with Article 9; and (f) the net proceeds available to the Company,
after discharging all such expenses and setting aside the necessary reserves,
were then Distributed to the Unitholders in accordance with Section ___ [the
Section that sets forth how liquidating distributions are made].
30
Drag Along Value
Drag Along Value.
The gross value of the Company Property that
would yield a Hypothetical Liquidation Amount for
the Members holding a Majority Interest equal to
the amount to be received by the Members
holding a Majority Interest from the Drag-Along
Purchaser for their Ownership Interests as set
forth in the Drag-Along Offer.
31
Tax Returns
 Tax Returns.
The Company shall prepare or cause to be prepared and timely file (taking into
account valid extensions) all tax returns required to be filed by the Company and any of its
subsidiaries pursuant to the Code and all other tax returns, including but not limited to any sales, use,
property, or excise tax returns, deemed necessary and required in each jurisdiction in which the
Company or any of its subsidiaries does business pursuant to Applicable Law. To facilitate the timely
filing of Tax returns, the Members shall cause the audit of the Company and any subsidiary for the
preceding Fiscal Year to be completed no later than ninety (90) Days after the end of such Fiscal Year
and all draft income Tax returns for the Company and any subsidiary to be completed no later than
one hundred twenty (120) Days after the end of such Fiscal Year. Unless a Member (“Disagreeing
Member”) provides each other Member with notice (“Disagreement Notice”) within fifteen (15) Days
after receipt from the Company of a proposed income Tax return for the Company, each Member shall
report partnership items on the Member’s income Tax returns in a manner that is consistent with the
treatment of such items on the Company’s proposed income Tax returns, except as otherwise agreed
by the Management Committee. Upon receipt of a Disagreement Notice, the Disagreeing Member
and the other Members shall endeavor in good faith to resolve any differences. If any such differences
cannot be resolved prior to the time that a Member determines in good faith that it must file its income
Tax return, then the Disagreeing Member shall not be required to report partnership items on its
income Tax returns in a manner that is consistent with the treatment of such items on the Company’s
income Tax returns. Each Member shall provide, and shall cause its Affiliates to provide, such
information as the Company may request such that the Company may adequately and accurately
complete Tax returns required to be filed by the Company and respond to enforceable administrative
information requests (or discovery in litigation). The Company shall bear the costs of the preparation
and filing of its respective returns.
32
Tax Elections
 Tax Elections.
The Company shall make and maintain the following elections for tax purposes:

to adopt the calendar year as the Company’s taxable year, unless otherwise required under the Code;

to adopt the accrual method of accounting and to keep a set of the Company’s books and records on
such method for income tax purposes;

an election to adjust basis pursuant to Section 754 of the Code if requested by the affected Member;

to elect to amortize the organizational expenses of the Company pursuant to Section 709(b) of the
Code and to amortize the start-up expenditures of the Company pursuant to Section 195 of the Code
ratably over the shortest period permitted by such sections;

upon the request of New Member, to make an election (including a protective election under Section
1.52-1(b)) of the Treasury Regulations to be treated as under common control with Member; and

any other election the Members may deem appropriate and in the best interests of the Company and
the Members; provided that the Company is not permitted to elect to be classified as an association
taxable as a corporation for any tax purpose. The Members shall take all reasonable actions,
including the amendment of this Agreement and the execution of other documents, (i) as may
reasonably be required for the Company, in its capacity as a limited liability company, to qualify for
and receive “partnership” treatment for federal, state, local and foreign income tax purposes and (ii) to
realize this intention including, but not limited to, such actions as prescribed by Treasury Regulations
Section 301.7701-3(c).
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Tax Matters Member
 Tax Matters Member.
Until otherwise determined by the Management Committee, Member
shall be the “tax matters partner” of the Company pursuant to Code Section 6231(a)(7) (the “Tax
Matters Member”). The Tax Matters Member shall comply with the responsibilities outlined in
Sections 6221 through 6233 of the Code (including any Treasury Regulations promulgated
thereunder).

The Tax Matters Member shall keep each other Member informed as to the status of any audit or
administrative or judicial proceeding relating to the Company, including, without limitation, any dispute
with the Internal Revenue Service or any state, local or foreign tax authority, and shall promptly
deliver to each other Member copies of any written communications or notices received by the Tax
Matters Member in connection with any such audit, dispute, or administrative or judicial proceeding.

The Tax Matters Member shall not submit any written communications to the Internal Revenue
Service or other taxing authority or to any administrative body or governmental or judicial authority on
behalf of the Company or the Sub without first providing such communications to the Members with
adequate time for review and comment. The Tax Matters Member shall give advance notice to the
Members of any hearings or proceedings relating to the Company and shall permit the Members to
participate in any such hearings or proceedings. The Tax Matters Member shall obtain the written
consent of the Members prior to entering into any settlement, making any filings (other than tax
returns or filings in a tax controversy matter) with or entering into any agreements with the Internal
Revenue Service or any state, local or foreign tax authority on behalf of the Company or the Sub only
be liable to the extent provided in Section ____ and shall be indemnified as provided in Section ____.
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Tax Matters Member cont.

35
The Tax Matters Member shall endeavor in good faith to obtain the written
consent of the Members prior to making any filings with any court, the Internal
Revenue Service or other governmental Tax authority on behalf of the
Company in connection with any material federal, state or local tax controversy
matter, and shall provide each other Member with reasonable notice and
opportunity to comment before making any such filings. Any third party fees or
other expenses reasonably incurred by the Tax Matters Member in connection
with its duties, including the preparation for or pursuance of administrative or
judicial proceedings, shall be paid by the Company. The Tax Matters
Members shall only be liable to the extent provided in Section ____ and shall
be indemnified as provided in Section ____.
Tax Matters Partner

Any Manager selected by a vote of the Managers, so long as the Manager so selected is also a Member, is hereby
designated the Tax Matters Partner (“TMP”) as defined in Section 6231(a)(7) of the Code. The TMP and the other
Equity Owners shall use their reasonable efforts to comply with the responsibilities outlined in Sections 6221 through
6233 of the Code (including any Regulations promulgated thereunder), and in doing so will incur no liability to any other
Equity Owner. [In the event the Company is the subject of an income tax audit by any federal, state or local authority,
to the extent the Company is treated as an entity for purposes of such audit, including administrative settlement and
judicial review, the TMP is hereby authorized, empowered and directed to act for, and its decision will be final and
binding upon the Company and each Equity Owner. Without limiting the foregoing, the TMP will have the right to
extend the statute of limitations for assessing or computing any tax liability against the Company or compromise, settle
or concede the amount of any partnership tax item. The Company shall reimburse the TMP for expenses of such
administrative proceedings undertaken by the TMP in its capacity as TMP as such expenses are incurred.

In the event of an audit, investigation, settlement or review, at the expense of the Company, the TMP shall participate
in, and retain accountants and other professionals to participate in, the audit, investigation, settlement or review, and, if
deemed appropriate by the TMP in its sole discretion, contest assertions by the auditing agent or otherwise that may
be adverse to the Equity Owners, the Company and the Company’s filing position. Each Equity Owner shall cooperate
(which, in the case of an Equity Owner that is a partnership for United States federal income tax purposes, shall
include obtaining the cooperation of each of its partners or members) with the TMP and do or refrain from doing (and
cause any such member to do or refrain from doing) any and all things reasonably required by the TMP in connection
with such audit or contest, administrative settlement, judicial review, or other resulting administrative or judicial
proceedings.

Except to the extent prohibited by law, each Equity Owner hereby waives the right to participate in any administrative
proceedings relating to the determination of partnership items at the Company level, except as otherwise Approved by
the Managers. Each Equity Owner who elects to participate in such proceedings shall pay any expenses incurred by
such Equity Owner in connection with such participation. The cost of any resulting audits or adjustments of an Equity
Owner’s tax return will be borne solely by the affected Equity Owner.]
6132938
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