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Tax Case Studies

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The promoters in this case, Sylvia Fairplay and Joseph Dealer, do not have to file documents with the Securities and Exchange Commission (SEC) by virtue of the exemption available to them under Regulation D of SEC. Thus, it would prepare a Private Placement Memorandum (PPM), containing all the relevant information that is as a rule found in the SEC filing.

The information that would be required would be in terms of: Details of the business & offer of the securities and income tax matters section.

The matters that need to be included in this section are with regard to the modalities of the issue and the factors that govern the public issue with particular regard to risk factors, terms and conditions of the issue, and other matters. In certain respects, this statement can also serve as a prelude to the prospectus in affording relevant investor information. However, it needs to be cautioned that potential investors must ascertain facts and figures relating to the investments before indulging in speculative transactions. “When offering securities to an investor, the issuer must not make any untrue statements of a material fact, or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” (Storms, 2007). Thus, it is seen that in this case the individual partners, Sylvia and Joseph, have relinquished their claims and liabilities on the partnerships and the properties and the total liabilities of $570,000 have been taken over by newly formed LLC.

          Details of owned properties      Mortgages  ($)       Fair market value ($)

Location  : 641Lincoln


: 1200 Baseline


:  231, Broadway















        570,000              870,000

The position that now emerges is that the total mortgages worth $570,000 are taken over by the LLC and the properties sold in order to pay off the partners.

Joseph’s adjusted share would be as follows:

Property at 641 Lincoln   62,000
1200 Baseline   90,000
231, Broadway   105,000

The new sharing ratio in the newly constituted LLC would be as follows:

Sylvia 30%
Joseph 30%
Public offer 40%
Total 100% 

The other aspects in this case study could be seen in terms of the fact that in order to attract potential investors for this public issue, it would be necessary for the company to offer them handsome inducements. This could be in the form of realization of income tax losses, sustainability of tax-free cash allocation, exemptions being awarded for Capital Gains Taxes (CGS) and other losses and write-offs.

It is seen that the members shall apportion the current distribution of cash or profits made by the LLC in the ratio of 3:3:4, which is their sharing ratio. Members shall also share the distribution(s) of cash and/or property upon liquidation of the LLC in the ratio of 3:3.

  1. Each member shall receive the amount of his/her drawings
  2. Secondly, each member shall receive the amount of his/her capital account.
  3. If the distributors(s) are in excess of the total of capital accounts of all the members, each member shall have to share such excess in their sharing ratio ; 3:3.

Thus, it could be maintained that the partners are now hold equal rights and shall share profits and losses equally.

There are many aspects that govern the tax liabilities of companies. It is believed that if a fund produces unrelated business tax incomes (UBTI) the company may suffer a tax liability,

UBTI could occur when a fund generates ongoing business income such as using fund capital for an investment in rental real estate. (Note on the private placement memorandum, 2003, P.3).


Storms, Matt. (2007). When raising capital, why use a Private Placement Memorandum? WTN NEWS. Retrieved June 21, 2008, from http://wistechnology.com/articles/3935/

Note on the private placement memorandum: Legal and Tax matters. (2003). Tuck School of Business at Dartmouth Center for Private Equity and Entrepreneurship. Case#5-0012. P.3. Retrieved June 21, 2008, from http://mba.tuck.dartmouth.edu/pecenter/research/pdfs/Private_placement_memo.pdf

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