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Profits, Interests, Capital Interests, and the Holder As A Partner 

September, 2014 - J. Leigh Griffith, LL.M., CPA

On 12/3/13, the Tax Court decided Crescent Holdings LLC,1 which involved a $1.6 billion transaction.  The Tax Court's opinion (1) underlines the fact that the exact language in an operating agreement does matter and (2) clearly demonstrates that compensatory partnership/LLC interests are technically complicated and require the active role of tax counsel.


FACTS


Duke Energy Corp., a publicly traded corporation, owned 100% of Crescent Resources LLC ("Crescent Resources") through its subsidiaries.  In turn, Crescent Resources owned, developed and managed extensive real estate holdings primarily in the southeastern and southwestern Unites States.  Duke Energy desired to monetize its interest in Crescent Resources' extensive real estate holdings.  To that end, Duke Energy's subsidiaries and various hedge funds affiliated with Morgan Stanley in 2006. They formed Crescent Holdings LLC ("Crescent Holdings"), which was classified as a partnership for federal tax purposes.  Crescent Holdings then owned 100% of Crescent Resources, which owned the real estate.


As part of the transaction, Crescent Resources was recapitalized.  It borrowed $1.25 billion, $1,187,000,000 of which was distributed to Duke Energy.  Duke Energy (or its subsidiaries) sold 49% of Crescent Holdings to the Morgan Stanley hedge funds for another $415 million.  As another part of the restructuring, Arthur Fields ("the CEO"), who had been president of Crescent Resources, entered into a new arrangement (the "Fields Agreement") to be president and chief executive officer of Crescent Resources going forward.  Certainly this series of complex, large-dollar real estate and related transactions was extensively lawyered and presumably had a heavy involvement by the applicable accounting firms.


For further reading, please see below.

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