LSI 2010 Real Estate Joint Ventures conference materials.pdf

Brian Todd of Davis Wright Tremaine LLP
Andrew H. Zuccotti of K&L Gates LLP
was less than what Insight would otherwise receive, then the LLC was to allocate other
income, such as capital gain, to make up the difference. The term “ordinary income” was
not defined. Insight argued that the term “ordinary income” excluded capital gain and
moved for summary judgment. The LLC argued that the plan meaning of “ordinary
income” is income taxed at ordinary income tax rates and that the term includes,
therefore, short term capital gain. The court held that the term “ordinary income”
unambiguously excluded short-term capital gain.
Speaker 11: 8
Speaker 12: 8
2004WL.
2. Interactive Corp v. Vivendi Universal, S.A. (Del. Ch. 2004)
In this case, an LLLP was formed and its agreement provided for a profits
allocation waterfall in which preferred units received a priority profits allocation in a
specified annual percentage (the “Preferred Return”) and after such allocation residual
profits were allocated based on percentage interests. Tax distributions were to be made
annually in an amount “[e]qual to the product of (a) the amount of taxable income
allocated to such partner for such taxable year pursuant to Section 7.02 [the entire
waterfall] and (b) the highest aggregate marginal statutory federal, state, local and foreign
income tax rate . . ..” Thus, the LLLP Agreement in effect made the preferred return an
after-tax amount. Vivendi contended that the LLLP was not required to make tax
distributions to the preferred interest holder, the tax distribution having already been
satisfied by the distribution of the Preferred Return. In addition, Vivendi argued the
doctrines of waiver, estoppel, unclean hands, mutual mistake and unilateral mistake, all
of which it claimed supported reformation of the contract. The count rejected each of
these arguments and followed the “plain meaning” of the agreement.
III.
Examples.
A. “Liquidation-By-Capital-Accounts” Allocation Provisions.
8.4 Capital Accounts.
8.4.1 Maintenance. A capital account (“Capital
Account”) shall be determined and maintained for each Member in
accordance with the principles of Regulation Section 1.704-1(b) at all
times throughout the full term of the Company. In the event of a
permitted sale or assignment of all or any part of an Interest, the Capital
Account of the transferor shall become the Capital Account of the
transferee to the extent it relates to the transferred Interest.
8.4.2 Capital Account Adjustments, in General. The
book value of all Company properties shall, upon Board Approval, be
adjusted to equal their respective gross fair market values (as reasonably
determined by the Board) as of the following times: (a) in connection with
the acquisition of an Interest in the Company by a new or existing
Member for more than a de minimis Capital Contribution; (b) in
connection with the liquidation of the Company as defined in Regulation
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Law Seminars International | Real Estate Joint Ventures and Funds | 02/08/10 in Seattle, WA