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ARTICLE 5 PROFITS AND LOSSES 5. l Profits. After giving effect

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ARTICLE 5 PROFITS AND LOSSES
5. l Profits. After giving effect to the special allocations set forth in _Sections 5.3 and 5.4, Profits for any Fiscal Year shall be allocated to the Unit Holders in proportion to the number of Units then held by each Unit Holder.
5.2 Losses. After giving effect to the special allocations set forth in Sections 5.3 and 5.4, and subject to Section 5.5, Losses far any Fiscal Year shall be allocated to the Unit Holders its proportion to the number of Units then held by each Unit Holder.
5.3 Special Allocations. The following special allocations shall be made in the following order:
(a) Minimum Gain Chargebaek. Except as otherwise provided in Treasury Regulation Section 1.704-2(f), notwithstanding any other provision of this Article 5, if there is a net decrease in Company Minimum Gain during any Fiscal Year, each Unit Holder shall be specially allocated items of Company income and
gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such unit Holder's share of the net decrease in Company Minimum Gain, determined in accordance with Treasury Regulation Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Unit Holder pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulation Sections 1,704-2(f)(6) and 1.704-20)(2). This Section 5,3(a) is intended to comply with the minimum gain chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith.
(b) Unit Holder Minimum Gain Chargeback. Except as otherwise provided in Treasury Regulation Section 1.704-2(i)(4), notwithstanding any other provision of this Article 5, if there is a net decrease in Unit Holder Nonrecourse Debt Minimum Gain attributable to a Unit Holder Nonrecourse Debt during any Fiscal Year, each Unit Holder who has a share of the Unit Holder Nonrecourse Debt Minimum Gain attributable to such Unit Holder Nonrecourse Debt, determined in accordance with Treasury Regulation Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal to such Unit Holder's share of the net decrease in Unit Holder Nonrecourse Debt, determined in accordance with Treasury Regulation Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Unit Holder pursuant thereto. The items to be so allocated shall be determined in accordance with Treasury Regulation Sections 1.7042(Ix4) and 1.704-2(i)(2). This Section 5.3(b) is intended to comply with the minimum gain chargeback requirement in "Creasury Regulation Section 17!34-2(i)(4) and shall be interpreted consistently therewith.
(c) Qualified Income Offset. In the event any Unit Holder unexpectedly receives any adjustments, allocations or distributions described in paragraphs (4), (5) or (6) of Treasury Regulation Section 1.704-I(bX2)(ii)(d), items of Company income and gain shall be specially allocated to such Unit Holder in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Adjusted Capital Account Deficit of such Unit Holder as quickly as possible; provided that an allocation pursuant to this Section .3c2 shall be made only if and to the extent that the Unit Holder would have an Adjusted Capital Account Deficit aftar all other allocations provided for in this Article 5 have been tentatively made as if this Section 5.3~c) were not in the Agreement.
(d) Gross Income Allocation. In the event any Unit Holder has a deficit Capital Account at the end of any Fiscal Year that is in excess of the sum of (i) the amount that such Unit Holder is obligated to restore pursuant to any provision of this Agreement, and (ii) the amount that such Unit Holder is deemed to be obligated to restore pursuant to the penultimate sentences of Treasury Regulation Sections 1.704-2(g)(1) and 1.704-2(1)(5), each such Unit Holder shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible; provided that an allocation pursuant to this Section 3
.3(d) shall be made only if and to the extent
that such Unit Holder would have a deficit Capital Account in excess of such sum after all other allocations provided for in this Article 5 have been made as if Section 5.3(e) and this Section 5.3(d) were not in the Agreement.
(e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Unit Holders in proportion to the number of Units then held by each Unit Holder,
(f) Unit Holder Nonrecourse Deductions. Any Unit Holder Nonrecourse Deductions for any Fiscal Year shall be specially allocated to the Unit Holder who bears the economic risk of loss with respect to the Unit Holder Nonrecourse Debt to which such Unit Holder Nonrecourse Deductions are attributable in accordance with Treasury Regulation Section 1,704-2(i)(1).
(6) Code Section 754 Adjustments. 'I'o the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Coda Section 734(b) or Code Section 743(b) is required, pursuant to 'treasury Regulation Sections 1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining
Capital Accounts as the result of a distribution to a Unit Holder in complete liquidation of such Unit Holder's Units, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis), and such gain or loss shall be specially allocated to the Unit Holders in proportion to their ownership of Units in the event Treasury Regulation Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Unit Holder to whom such distribution was made in the event 'treasury Regulation Section 1.704-1(b)(2)(ivxm)(4) applies.
(h) Allocations Relating to Taxable Issuance of Units. Any income, gain, loss or deduction realized as a direct or indirect result of the issuance of Units by the Company to a Unit Holder (the "Issuance Items") shall be allocated among the Unit Holders so that, to the extent possible, the net amount of such Issuance Items, together with all other allocations under this Agreement to each Unit Holder shall be equal to the net amount that would have been allocated to each such Unit Holder if the Issuance Items had not been realized.
5.4 Curative Allocations. 'the allocations set forth in Sections S_3(a) throup,h (lt) and 5.5 (the "Regulatory Allocations") are intended to comply with certain requirements of the 'treasury Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Section 5.4. 'Therefore, notwithstanding any other provision of this Article 5 (other than the Regulatory Allocations), the Board of Managers shall make such offsetting special allocations of Company income, gain, loss or deduction so that, after such offsetting allocations are made, each Unit Holder's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Unit Holder would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Sections 5,1, S.2 and 5.3 h .
5.5 Loss Limitation, Losses allocated pursuant to Section 5.2 hereof shall not exceed the maximum amount of Losses that can be allocated without causing any Unit Holder to have an Adjusted Capital Account Deficit at the and of any Fiscal Year. In the event some but not all of the Unit Holders would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section_ 5.2 hereof, the limitation set forth in this Section 5.5 shall be applied on a Unit Holder by Unit Holder basis, and Losses allocable to any Unit Holder as a result of such limitation shall be allocated to the other Unit Holders in proportion to the positive balances in such Unit Holders' Capital Accounts so as to allocate the maximum permissible Losses to each Unit Holder under Treasury Regulation Section 1.704-1(b)(2)(ii)(d).
5.6 Other Allocation Rules.
(a) For purposes of determining the Profits, Losses or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly or other basis, as determined by the Board of Managers using any permissible method under Code Section 706 and the 'Treasury Regulations thereunder.
(b) The Unit Holders are aware of the income tax consequences of the allocations made under this Article 5 and hereby agree to be bound by the provisions of this _Article 5 in reporting their respective shares of Company income and loss for income tax purposes.
(c) Solely for purposes of determining a Unit Holder's propoitionate shape of the "excess nonrecourse liabilities" of the Company within the meaning of Treasury Regulation Section 1.752-3(a)(3), the Unit Holders' interests in Company Profits are in proportion to the number of Units then held by each Unit Holder.
'to the extent permitted by Section 1.704-2(h)(3) of-the Treasury Regulations, the Board of Managers shall endeavor to treat distributions of Available Cash Flow as having been made from the proceeds of a Nonrecourse liability or a Unit Holder Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit far any Unit Holder.
5.7 Special Tax Allocations: Code Section 704(e). In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Unit Holders so as to take account of
any variation between the Adjusted Basis of such property to the Company for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition of Gross Asset Value) using the traditional method pursuant to the Treasury Regulations under Code Section 704(c), In the event the Gross Asset Value of any Company asset is adjusted pursuant to paragraph (b) of the definition of Gross Asset Value, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the Adjusted Basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(e) and the 'treasury Regulations thereunder. The Board of Managers shall make any elections or other decisions relating to such allocations in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section 5.7 are solely tier purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Unit Holder's Capital Account or share of Profits, losses, other items or distributions pursuant to any provision orthis Agreement.
ARTICLE 6 MANAGEMENT
Submitted: 4 years ago.
Category: Business Law
Expert:  FiveStarLaw replied 4 years ago.
Hello,

What is your specific legal question concerning this document?
Customer: replied 4 years ago.
I don't understand the document at all.This is one section of an LLC agreement,most of which of which is pretty straightforward.I need an interpretation of this section; its meaning and intent.
Expert:  FiveStarLaw replied 4 years ago.
Hello,

Simply put, Article 5 states that all profits and losses shall be allocated according to the percentage of ownership.
Customer: replied 4 years ago.
I kind of assumed that and thank you,but could you briefly explain some of the terminogy:minimum gain chargeback,non recourse deductions,non recourse debt minimum gain,company minimum gain.I believe this is probably governmentese,but I need to be able to explain this to my partners.Any help would be apreciated
Expert:  FiveStarLaw replied 4 years ago.
You are correct. The language is "IRS governmentese". I will try to explain.

minimum gain chargeback - see this explanation: http://www.bkflaw.com/node/104

non recourse deductions - deductions related to nonrecourse debt. Nnonrecourse debt its debts secured by property but without personal liability of any partner.

non recourse debt minimum gain - the amount of gain if any that the partnership would realize if it disposed of property subject to nonrecourse debt in a taxable transaction

company minimum gain - The total minimum gain for all partnership property subject to nonrecourse liabilities. Also see this discussion: http://www.allbusiness.com/accounting-reporting/corporate-taxes-joint/231668-1.html

I hope this helps.
FiveStarLaw, Attorney
Category: Business Law
Satisfied Customers: 36494
Experience: 25 years of experience helping people like you.
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