Language Additions to a Long-Form Operating Agreement to Reflect the Newly Finalized
Non-Compensatory Partnership Option Regulations:
ARTICLE I -- DEFINITIONS:
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1.11 “Capital Account” means, with respect to any Unitholder, the capital account maintained for
such Unitholder in accordance with the following provisions:
(a)
To each Unitholder’s Capital Account there shall be credited such Unitholder’s Capital
Contributions, such Unitholder’s distributive share of Profits and any items in the nature of
income or gain which are specially allocated to such Unitholder, and the amount of any
Company liabilities assumed by such Unitholder, or which are secured by any Company property
distributed to such Unitholder.
(b)
To each Unitholder’s Capital Account there shall be debited the amount of cash and the
Gross Asset Value of any Company property distributed to such Unitholder pursuant to any
provision of this Agreement, such Unitholder’s distributive share of Losses and any items in the
nature of expenses or losses which are specially allocated to such Unitholder, and the amount of
any liabilities of such Unitholder assumed by the Company or which are secured by any property
contributed by such Unitholder to the Company.
(c)
In the event Units are Transferred and the transferee becomes the owner of such Units,
the transferee shall succeed to the Capital Account of the transferor to the extent it relates to
such Units.
(d)
If, after making the special allocations described in Section 7.2(d), the exercising
Unitholder’s Capital Account does not otherwise reflect that Unitholder’s right to share in
Company capital under this Agreement upon the exercise of a Noncompensatory Option, then
the Company must reallocate Company capital between the exercising Unitholder and the other
Unitholders, through adjustments in all such Unitholders’ Capital Accounts, so that the
exercising Unitholder’s Capital Account reflects the exercising Unitholder’s right to share in
Company capital under this Agreement (a “Capital Account Reallocation”). Any increase or
decrease in the Capital Accounts of Unitholders other than the exercising Unitholder that occurs
as a result of a Capital Account Reallocation under this Section 1.11(d) must be allocated among
such non-exercising Unitholders in accordance with the principles of Treas. Reg. § 1.7041(b)(2)(iv).
(e)
Capital Accounts shall otherwise be maintained as provided elsewhere in this
Agreement and in Treas. Reg. § 1.704-1(b)(2)(iv).
The foregoing provisions and the other provisions of this Agreement relating to the maintenance of
Capital Accounts are intended to comply with Treas. Reg. § 1.704-1(b)(2)(iv), including Treas. Reg. §
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1.704-1(b)(2)(iv)(f) while any Noncompensatory Option is outstanding and Treas. Reg. § 1.7041(b)(2)(iv)(s) on the exercise of a Noncompensatory Option, and shall be interpreted and applied in a
manner consistent with such Treasury Regulations. In the event any of the provisions of this Agreement
relating to the maintenance of Capital Accounts are deemed to be inconsistent with the requirements of
Treas. Reg. § 1.704-1(b)(2)(iv), the manner in which the Capital Accounts are maintained may be
modified to comply with such Treasury Regulations section, provided that such modification does not
materially affect the amount distributable to any Unitholder under the provisions of this Agreement
relating to the dissolution of the Company.
1.12
“Capital Account Reallocation” has the meaning set forth in Section 1.11(d).
1.13 “Capital Contribution” means, with respect to any Unitholder, the amount of money and the
initial Gross Asset Value of any property (other than money) contributed to the Company by such
Unitholder. In this regard, the Gross Asset Value of property contributed on the exercise of a
Noncompensatory Option does not include the fair market value of the Noncompensatory Option
privilege itself, but does include (a) the cash and the fair market value of the consideration paid to the
Company to acquire the Noncompensatory Option and (b) the cash and the Gross Asset Value of any
other property (other than the Noncompensatory Option) contributed to the Company on the exercise
of the Noncompensatory Option. [With respect to convertible debt, the Gross Asset Value of the
property contributed on the exercise of the Noncompensatory Option is the adjusted issue price of the
debt and the accrued but unpaid qualified stated interest (as defined in Treas. Reg. § 1.1273-1(c)) on the
debt immediately before the conversion, plus the fair market value of any other property (other than
the convertible debt) contributed to the Company on the exercise of the Noncompensatory Option.]
Capital Contributions shall include Additional Capital Contributions made to the Company pursuant to
Section 6.2. The initial Capital Contribution of the Unitholders to the Company shall be as set forth on
Schedule A.
1.18 “Corrective Allocation” means an allocation (consisting of a pro rata portion of each item) for
tax purposes of gross income and gain, or gross loss and deduction, that differs from the Company’s
allocation of the corresponding items to the Unitholders’ Capital Accounts.
1.24 “Gross Asset Value” means, with respect to any asset, the asset’s adjusted basis for federal
income tax purposes, except as follows:
(a)
The initial Gross Asset Value of any asset contributed by a Unitholder to the Company
shall be the gross fair market value of such asset.
(b)
The Gross Asset Values of all Company assets shall be adjusted to equal their respective
gross fair market values (i) in connection with an acquisition of an interest in the Company by
any new or existing Unitholder in exchange for more than a de minimis Capital Contribution, (ii)
in connection with the liquidation of the Company or a distribution by the Company to a
Unitholder of more than a de minimis amount of Company property as consideration for an
interest in the Company, (iii) in connection with the grant of more than a de minimis interest in
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the Company as consideration for the provision of services to or for the benefit of the Company
by an existing Unitholder acting in a Unitholder capacity, or by a new Unitholder acting in a
Unitholder capacity or in anticipation of being a Unitholder, (iv) in connection with the issuance
by the Company of a Noncompensatory Option (other than an option for a de minimis interest
in the Company) or (v) in connection with the exercise by the holder of a Noncompensatory
Option (other than an option for a de minimis interest in the Company) in the manner provided
in Section 1.24(f) of this definition of “Gross Asset Value,” provided, however, that the
foregoing adjustments shall be made only if they are necessary or appropriate to reflect the
relative economic interests of the Unitholders in the Company.
(c)
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(d)
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(e)
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(f)
In lieu of adjusting the Gross Asset Values of Company assets to equal their respective
gross fair market values immediately before the exercise of a Noncompensatory Option, the
Company shall adjust the Gross Asset Values of its assets to equal their respective gross fair
market values immediately after the exercise of any Noncompensatory Option.
(g)
Notwithstanding any language to the contrary in this Section 1.24 defining “Gross Asset
Value,” the Gross Asset Values of Company assets as reflected on the books of the Company
must be adjusted to account for any outstanding Noncompensatory Options on the
Revaluation Date. If the gross fair market value of any outstanding Noncompensatory Options
as of a Revaluation Date exceeds the consideration paid to the Company to acquire such
Noncompensatory Options, then the Gross Asset Values of Company assets as reflected on the
books of the Company must be reduced by that excess to the extent of the unrealized income
or gain in Company assets (that has not been reflected in the Unitholders’ Capital Accounts
previously). This reduction is allocated only to Company assets with unrealized appreciation in
proportion to those assets’ respective amounts of unrealized appreciation. If the consideration
paid to the Company to acquire its outstanding Noncompensatory Options exceeds the fair
market value of such Noncompensatory Options as of the Revaluation Date, then the Gross
Asset Values of Company assets as reflected on the books of the Company must be increased
by that excess to the extent of the unrealized loss in Company assets (that has not been
reflected in the Unitholders’ Capital Accounts previously). This increase is allocated only to
properties with unrealized loss in proportion to those assets’ respective amounts of unrealized
loss. However, any reduction or increase shall take into account the economic arrangement of
the Unitholders with respect to the Company assets.
1.35 “Noncompensatory Option” means an option issued by the Company, other than an option
issued in connection with the performance of services. For these purposes an “option” is any
contractual right to acquire an interest in the Company, including a call option, warrant, or other similar
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arrangement and the conversion feature of convertible debt or convertible equity of the Company.
[While the Noncompensatory Option is outstanding, the Person holding such Noncompensatory Option
will not be treated as a Unitholder of the Company pursuant to Treas. Reg. § 1.761-3.] [Definition of
Unitholder.]
1.42 “Profits” and “Losses” means, for each Fiscal Year or other period for which the Company is
required to compute Profits, Losses or other items of Company income, gain, loss, or deduction, an
amount equal to the Company’s taxable income or loss for such 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:
(a)
Any income of the Company that is exempt from federal income tax and not otherwise
taken into account in computing Profits and Losses pursuant to this Section 1.42 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 Treas. Reg. § 1.704-1(b)(2)(iv)(i), and not otherwise
taken into account in computing Profits or Losses pursuant to this Section 1.42 shall be subtracted from
such taxable income or loss;
(c)
In the event the Gross Asset Value of any Company asset is adjusted as provided in
Sections 1.24(b), (c), or (f) of the definition of “Gross Asset Value,” the amount of such adjustment shall
be taken into account as gain or loss from the disposition of such asset for purposes of computing
Profits and Losses, except to the extent otherwise provided in Section 7.2(d) with regard to the exercise
of a Noncompensatory Option;
(d)
Gain or loss resulting from any disposition of Company 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;
(e)
If the Gross Asset Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of a Fiscal Year, cost recovery deductions with respect to such asset shall be
computed by reference to the asset’s Gross Asset Value using the same method as is used to compute
cost recovery deductions for federal income tax purposes, provided, however, that if the adjusted basis
for federal income tax purposes of the asset at the beginning of such Fiscal Year is zero, cost recovery
deductions shall be computed by reference to the asset’s Gross Asset Value using any reasonable
method; and
(f)
Notwithstanding any other provision of this Section 1.42, any items of income, gain,
loss, or deduction which are specially allocated to a Unitholder, including Section 7.2, shall not be taken
into account in computing Profits or Losses.
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The amounts of the items of Company income, gain, loss, or deduction available to be specially allocated
under the provisions of this Agreement (if any) shall be determined by applying rules analogous to those
set forth in Sections 1.42(a) through 1.42(e) above.
1.45 “Revaluation Date” means the date of a revaluation of Company assets pursuant to Section
1.24(b) of this definition of “Gross Asset Value.”
1.49 “Unitholder” means any Person who holds Units in the Company, regardless of whether such
Person is a Member. The term “Unitholder” as used herein shall include the Manager. Any reference to
“Unitholders” in this Agreement shall be deemed a reference both to Unitholders who are Members
and Unitholders who are not Members, but any reference to “Members” in this Agreement shall be
deemed a reference only to those Unitholders who are Members. [Notwithstanding any language in this
Agreement to the contrary, while a Noncompensatory Option is outstanding, the Person holding such
Noncompensatory Option will not be treated as a Unitholder of the Company pursuant to Treas. Reg. §
1.761-3.]
ARTICLE VII—ALLOCATIONS:
7.2
Special Allocations Required by Tax Law.
allocations:
The Company shall make the following special
(a)
Limitation on Allocation of Losses. * * *
(b)
Qualified Income Offset. * * *
(c)
Special Provisions Applicable in the Event of Nonrecourse Borrowings. * * *
(d)
Special Provisions Applicable in the Event of an Exercise of a Noncompensatory Option.
Upon the exercise of a Noncompensatory Option and the revaluation of Company assets by adjustments
of their respective Gross Asset Values pursuant to Section 1.24(b)(v), the Company shall first allocate
any unrealized income, gain, or loss in Company assets (that has not been reflected in the Unitholders’
Capital Accounts previously) to the exercising Unitholder to the extent necessary to reflect that
Unitholder’s right to share in Company capital under this Agreement, and then shall allocate any
remaining unrealized income, gain, or loss (that has not been reflected in the Unitholders’ Capital
Accounts previously) to the other Unitholders, to reflect the manner in which the unrealized income,
gain, or loss in Company assets would be allocated among those Unitholders if there were a taxable
disposition of such Company asset for its fair market value on the Revaluation Date. For purposes of the
preceding sentence, if the exercising Unitholder’s initial Capital Account, as determined under
Section 1.11 and taking into consideration Capital Contributions of the exercising Unitholder as provided
in Section 1.13, would be less than the amount that reflects the exercising Unitholder’s right to share in
Company capital under this Agreement, then only income or gain may be allocated to the exercising
Unitholder from Company assets with unrealized appreciation, in proportion to those assets’ respective
amounts of unrealized appreciation. If the exercising Unitholder’s initial Capital Account, as determined
under Section 1.11 and taking into consideration Capital Contributions of the exercising Unitholder as
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provided in Section 1.13, would be greater than the amount that reflects the exercising Unitholder’s
right to share in Company capital under this Agreement, then only loss may be allocated to the
exercising Unitholder from Company assets with unrealized loss, in proportion to those assets’
respective amounts of unrealized loss. However, any allocation must take into account the economic
arrangement of the Unitholders with respect to the Company assets.
7.3
Curative Allocations. [Consider application of Section 7.2(d) as a “Regulatory Allocation.”]
7.5
Tax Allocations:
(a)
In accordance with Code section 704(c) and the Treasury Regulations thereunder, income, gain,
loss, and deduction with respect to any property contributed to the capital of the Company shall, solely
for tax purposes, be allocated among the Unitholders so as to take account of any variation between the
adjusted basis of such property to the Company for federal income tax purposes and its initial Gross
Asset Value, using any method authorized by Treas. Reg. § 1.704-3 as determined by the Managers.
(b)
In the event the Gross Asset Value of any Company asset is adjusted pursuant to Sections
1.24(b) and 1.24(g) of the definition of “Gross Asset Value,” subsequent allocations of income, gain, loss,
and deduction with respect to such asset shall take account of any variation between the adjusted basis
of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under
Code section 704(c), using any method described in Treas. Reg. § 1.704-3 as determined by the
Managers.
(c)
Solely for tax purposes, if Company capital is reallocated between existing Unitholders and a
Unitholder exercising a Noncompensatory Option as a Capital Account Reallocation pursuant to
Section 1.11(d), then the Company shall, beginning with the Fiscal Year of the exercise and in all
succeeding Fiscal Years until the required allocations are fully taken into account, make Corrective
Allocations so as to take into account the Capital Account Reallocation. If the Capital Account
Reallocation is from non-exercising Unitholders to the exercising Unitholder, then the Corrective
Allocations must first be made with items of gross income and gain of the Company. If an allocation of
gross income and gain alone does not completely take into account the Capital Account Reallocation in a
given Fiscal Year, then the Company must also make corrective allocations using a pro rata portion of
items of its gross loss and deduction so as to further take into account the Capital Account Reallocation.
Conversely, if the Capital Account Reallocation is from the exercising Unitholder to the non-exercising
Unitholders, then the Corrective Allocations must first be made with items of gross loss and deduction
of the Company. If an allocation of gross loss and deduction alone does not completely take into
account the Capital Account Reallocation in a given Fiscal Year, then the Company must also make
Corrective Allocations using a pro rata portion of items of its gross income and gain so as to further take
into account the Capital Account Reallocation. Code section 706 and the Treasury Regulations and
principles thereunder shall apply in determining the items of income, gain, loss, and deduction that may
be subject to Corrective Allocations.
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