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Selected Tax Issues and Provisions in Energy Joint Ventures

Selected Tax Issues and Provisions in Energy Joint Ventures. John R. Maxfield Holland & Hart LLP jmaxfield@hollandhart.com June 3, 2013. Partnership Hallmarks. Flexible Complex Constantly Changing

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Selected Tax Issues and Provisions in Energy Joint Ventures

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  1. Selected Tax Issues and Provisions inEnergy Joint Ventures John R. Maxfield Holland & Hart LLP jmaxfield@hollandhart.com June 3, 2013

  2. Partnership Hallmarks • Flexible • Complex • Constantly Changing “The combination of flexibility complexity and multi-faceted 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).

  3. 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 • 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))

  4. 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.

  5. 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

  6. 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.

  7. 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).

  8. 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) Third, to the Equity Owners in accordance with their Sharing Ratios.

  9. 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).

  10. 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.

  11. 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.

  12. 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).

  13. 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.

  14. 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].

  15. 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. 

  16. 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.

  17. 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 ofTreasury 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.

  18. 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.

  19. From O&GFarmout/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.

  20. From O&GFarmoutTPP 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.

  21. 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.

  22. 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.

  23. 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;

  24. 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.

  25. 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.

  26. 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.

  27. 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.

  28. 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 Drag-Along Purchaser.

  29. 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 paripassu with their relative Sharing Ratios and (b) the price to be paid for the Ownership Interests purchased by the Drag-Along 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).

  30. 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 Drag-Along 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].

  31. 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.

  32. 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.

  33. 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).

  34. 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 ____.

  35. Tax Matters Member cont. • 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 ____.

  36. 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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