LSI 2010 Real Estate Joint Ventures conference materials.pdf

Brian Todd of Davis Wright Tremaine LLP
Andrew H. Zuccotti of K&L Gates LLP
• In connection with the grant of an interest in the LLC or partnership (other
than a de minimis interest) as consideration for the provision of services to
or for the benefit of the LLC or partnership by an existing member acting
in a member capacity, or by a new member acting in a member capacity or
in anticipation of being a member;
• A distribution by the LLC or partnership to a retiring or a continuing
member in consideration for an LLC or partnership interest; or
• If substantially all the assets of the LLC or partnership consist of stock,
securities, commodities, options, warrants or futures that are regularly
traded on an established securities exchange, then adjustments may be
made in accordance with generally accepted accounting principles
(GAAP). Treas. Reg. § 1.704-1(b)(2)(iv)(f).
This rule permits the capital accounts to be “booked up,” or “marked to market,”
in order that unrealized appreciation or depreciation in LLC or partnership property will
be allocated to the members who owned interests in the entity during the period in which
the appreciation or depreciation occurred. The rule further requires that subsequent
allocations of depreciation, depletion, amortization, gain and loss, as computed for tax
(not book or capital account maintenance) purposes, be determined so as to take into
account the variation between the adjusted basis of the property for tax purposes (which
is not adjusted) and the book value of the property (which is adjusted). This requirement
is imposed so that the tax burden associated with gain in partnership or LLC property, or
the tax benefit associated with depreciation or other loss deductions, follow their
correlative economic benefits and burdens.
C. Liquidating Distributions. The regulations require that liquidating
distributions be made in accordance with the members’ positive capital account balances.
For this purpose, a liquidation means either a liquidation of the entire LLC or partnership,
or a liquidation of the member’s entire interest in the LLC or partnership. In either case,
however, the members’ positive capital account balances are determined after taking into
account all capital account adjustments for the taxable year in which the liquidation
occurs.
D. Deficit Restoration Obligation.
1. In General. The third requirement necessary to satisfy the
economic effect prong of the substantial economic effect safe harbor is that each member
with a deficit in his or her capital account at the time of the liquidation be unconditionally
obligated to restore the deficit by the end of the LLC’s or partnership’s taxable year, or, if
later, within 90 days after the liquidation. However, requiring that each member be
obligated to restore his or her capital account deficit may eliminate the protection from
personal liability afforded LLC members and LLP partners under state law. Limited
liability company agreements and partnership agreements for LLPs therefore typically
provide that the members of the LLC do not have an obligation to restore any capital
account deficit.
Speaker 11: 3
Speaker 12: 3
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Law Seminars International | Real Estate Joint Ventures and Funds | 02/08/10 in Seattle, WA