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Applying Waterfall Allocations: Calculating Standard and Complex Layered and Target Allocations

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Wednesday, January 11, 2023

Recorded event now available

or call 1-800-926-7926

This webinar will provide flow-through practitioners with the tools necessary to interpret and allocate waterfall provisions in partnership operating agreements. This webinar will review standard allocation methods between partners and members and provide hands-on examples of the corresponding calculations of income and loss, distributions, liquidating distributions, and the maintenance of capital accounts by a partner based on these specifications.

Description

Waterfall allocations are complex. Yet, there is common language used in operating agreements that practitioners need to recognize. An agreement may be allocation-based, where income and loss are allocated based on explicit allocation rules and accounts are liquidated based on capital accounts, or distribution-based, where cash is distributed based on explicit rules and income or loss is allocated in accordance with expected distributions.

Allocations can be target or layered. Target allocations are made so that a partner's ending capital equals the target amount. Layered allocations compute each partner's share of profit and loss based on specific allocation rules. Distribution-based agreements with target allocations are now the norm for complex deals. Identifying specific types of agreements and allocations in partnership documents is not enough. Practitioners must interpret the language and be able to make the required allocations properly by partner. Nuances in operating agreements can dramatically alter the allocation, distribution, and liquidation requirements.

Listen as our panel of waterfall allocation experts walks you through interpreting and calculating waterfall allocations in partnership agreements.

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Outline

  1. Waterfall provisions
  2. Types of agreements
    1. Allocation based
    2. Distribution based
  3. Types of allocations
    1. Layered allocations
    2. Target allocations
  4. Examples
  5. IRS requirements
  6. Issues with waterfall allocations

Benefits

The panel will cover these and other critical issues:

  • Differences in layered and target allocations
  • How deficit restoration obligations and qualified income offsets affect waterfall allocations
  • Maintaining substantial economic effect under IRC Section 704(b)
  • The importance of granting override authority in agreements so that allocation provisions function as intended

Faculty

Browne, James
James R. Browne
Partner
Barnes & Thornburg

Mr. Browne advises clients on the U.S. income tax aspects of domestic and international business transactions and...  |  Read More

Yeates, Tanner
Tanner Yeates

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