United States: Investing In Tax Receivable Agreements


The enactment of tax reform last December provided investors increased certainty regarding corporate tax rates for the near future. One consequence of this has been an increased interest by certain investors in purchasing payment rights under existing so-called "tax receivable agreements" ("TRAs"). Briefly, TRAs are agreements entered into by a company (a "Pubco") in connection with an initial public offering ("IPO") to monetize tax attributes of the post-IPO Pubco for the benefit of pre-IPO owners and investors who purchase rights to payment under TRAs from such pre-IPO owners. Our prior article on TRAs focused on some of the ways in which tax reform might impact the value of TRA payment rights. Since the enactment of tax reform, we have witnessed a substantial increase in investor interest in acquiring TRA payment rights, particularly by hedge funds, family offices, and special purpose private investment funds. This article describes some of the features of a TRA that an investor should analyze prior to acquiring rights under a TRA.


Briefly, TRAs seek to provide to pre-IPO owners of a Pubco much of the actual tax savings benefit resulting from the Pubco's use of specified tax attributes. This benefit is typically measured on a "with and without" basis, essentially assuming that the Pubco first uses tax attributes that are not covered by the TRA (e.g., interest payments and capital expenditures) to shield its income from tax. The two most common forms of TRAs are "NOL TRAs" and "Step-Up TRAs."

  • NOL TRAs. Many companies complete IPOs when they have a substantial amount of net operating loss carryforwards ("NOLs"). Subject to certain limitations, these NOLs may reduce the post-IPO net taxable income and resulting tax obligations of the Pubco, thereby increasing its after-tax cash balance. An NOL TRA typically will provide, among other things, that the pre-IPO owners are entitled to 85% of the actual cash tax savings the Pubco realizes as a result of the pre-IPO NOLs.
  • Step-Up TRAs in Up-C Structures. A business that was historically conducted through an entity classified as a partnership for U.S. tax purposes may go public through the formation of a new Pubco that would serve as its general partner or managing member and acquire equity interests in the partnership. (These structures are often referred to as "Up-C structures" because the upper-tier entity that goes public is a corporation that is subject to tax under subchapter C of the U.S. income tax laws.) The pre-IPO owners obtain liquidity from time to time by transferring their partnership interests to the Pubco in exchange for Pubco stock and rights to payments under a TRA. These transfers typically result in the Pubco receiving a basis "step-up" with respect to the fraction of the assets of the partnership attributable to the transferred partnership interests, which is frequently amortizable over a fixed number of years (typically 15 years to the extent such step-up is attributed to the business's goodwill). Similar to the impact that pre-IPO NOLs have on reducing the Pubco's post-IPO tax burden, these amortization deductions may reduce the net taxable income and resulting tax obligations of the Pubco and increase the Pubco's after-tax available cash balance. A Step-Up TRA typically will provide, among other things, that the pre-IPO owners are entitled to 85% of the actual cash tax savings the Pubco realizes as a result of these amortization deductions.

Key Diligence Questions

Each particular TRA investment should be considered in light of the specific provisions of the TRA and the facts that apply to the relevant Pubco. Those specific facts may give rise to specific diligence questions. However, there are a number of issues to consider that apply to most purchases of TRA payment rights, including the following:

  • Assignability. Most TRAs provide the parties thereto with broad rights to assign their entitlements to payments pursuant to the TRA, but there is some variation. The Pubco may have certain consent rights.
  • Historical TRA payments by Pubco, projected net taxable earnings and impact of Pubco acquisitions and divestitures. As noted, most TRAs result in payments to parties thereto when the Pubco has net income before taking into account the attributes being monetized. Therefore, it is important to understand Pubco's projected income stream to understand the projected timing and extent to which it will be able to utilize its tax assets. It is also valuable to assess if the Pubco is expecting to make significant capital expenditures or acquisitions or divestitures that will generate current deductions, particularly in light of recent changes in law regarding the ability to immediately deduct the cost of acquired tangible assets. TRAs will also typically provide additional provisions on the impact of losses realized from non-ordinary-course acquisitions and divestitures of businesses for purposes of determining TRA payment obligations.
  • Ability for Pubco to defer payment obligations. A Pubco that is party to a TRA may have the ability to defer its obligations to make payments under certain circumstances (e.g., if the disinterested members of its board determine that the payments would adversely impact the Pubco). TRAs also vary in terms of the interest charges that apply to the Pubco for deferral of TRA payments.
  • Capital structure of Pubco. As TRA holders typically are unsecured creditors of the Pubco, it is important to determine the extent to which third parties have senior claims over the assets of the Pubco as well as the creditworthiness of Pubco.
  • Formulas for determining TRA payments. The technical formulas for determining a party's entitlement to payments under a TRA are complex and should be carefully scrutinized.
  • Impact of change-of-control transactions. TRAs vary as to whether a change-of-control of the Pubco will accelerate TRA obligations. These accelerated payments often make assumptions to calculate the amount payable pursuant to the TRA that are very favorable to TRA holders, and an investor should carefully analyze these so-called "valuation assumptions." In this context, it is also valuable to assess if a Pubco is in a sector that is likely to undergo consolidation.
  • Impact of breaches by Pubco. Similarly, TRAs vary as to whether a breach by the Pubco accelerates payment obligations or if another remedy applies.
  • Amendment provisions. TRAs widely vary as to the ability for amendments of their terms. Some TRAs only permit amendments upon a vote of persons holding entitlements to a majority or two-thirds of projected TRA payments, and others provide broad amendment rights to the principal beneficiary of a TRA.
  • Indemnification/clawback obligations. Most TRAs do not include any obligations of a recipient of TRA payments to ever return TRA payments, but this should be confirmed prior to investing.
  • Impact of future changes in law. Subject to the "valuation assumptions" that may apply in the context of a change-of-control transaction or a breach of the TRA, the calculation provisions under most TRAs simply rely on the prevailing applicable rates. However, there are exceptions, including TRAs entered into or amended shortly before the enactment of tax reform last year that adopted bespoke approaches to address pending tax law changes.
  • U.S. tax treatment of TRA payments. The U.S. tax treatment of TRA payments to purchasers of TRA rights is not free from doubt. For instance, an investor's ability to treat any TRA payments as a tax-free recovery of cost basis, and the timing of any such recovery, is unclear. Also, certain non-U.S. investors may be subject to U.S. withholding taxes in respect of TRA payments.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions