ANNUAL ACCOUNTING AND TAX UPDATE FOR PRIVATE EQUITY FUNDS. January 17, 2017

ANNUAL ACCOUNTING AND TAX UPDATE FOR PRIVATE EQUITY FUNDS January 17, 2017

With you today Matthew Rotta Partner, Audit Financial Services RSM US LLP Michael Bahnick Senior Manager, Audit Financial Services RSM US LLP Tom Lenz Partner, Tax Financial Services RSM US LLP Joe Bergthold Partner, Tax Financial Services RSM US LLP 2

Agenda This two-hour webcast will cover: New and proposed accounting standards Best practices in private equity valuations Best practices in back-office operations Key issues impacting Small Business Investment Company (SBIC) funds Securities and Exchange Commission (SEC) observations and focus areas Update on the proposed fee waiver regulations New tax return due dates and their impact on your fund's compliance process Update on the new partnership audit rules Discussion of common private equity tax issues 3

ACCOUNTING UPDATE

NEW AND PROPOSED ACCOUNTING STANDARDS

ASU 2015-07 Fair value hierarchy disclosures for investments measured at NAV ASC 820 provides a practical expedient to measure the fair value of certain investments using net asset value (NAV) per share Investments are either categorized as Level 2 or Level 3 All entities eligible to elect the practical expedient are required to provide certain disclosures (regardless of whether they actually EXISTING make the election) 6

ASU 2015-07 Fair value hierarchy disclosures for investments measured at NAV ASC 820 provides a practical expedient to measure the fair value of certain investments using net asset value (NAV) per share Investments are either categorized as Level 2 or Level 3 All entities eligible to elect the practical expedient are required to provide certain disclosures (regardless of whether they actually EXISTING make the election) AMENDED No requirement to categorize within the fair value hierarchy investments measured at NAV Only entities that elect the practical expedient are required to provide certain disclosures 7

ASU 2015-07 Fair value hierarchy disclosures for investments measured at NAV 8

ASU 2016-18 Restricted cash Requires the statement of cash flows to explain the change in the total cash, cash equivalents, and restricted cash or restricted cash equivalents during the period Restricted cash and restricted cash equivalents should be included with cash and cash equivalents in the reconciliation of the beginning-of-period and end-of-period amounts shown on the statement of cash flows Disclosure about the nature of restrictions required 9

ASU 2016-18 Restricted cash Public business entities Other entities Effective date for calendar year-ends Required Permitted Permitted 2017 2018 Required 10

Technical corrections and improvements In December 2016, the FASB issued ASU 2016-19 - Technical Corrections and Improvements Amendments to Topic 820 Valuation approach vs. valuation technique Disclosures 11

Accounting standards updates not applicable ASU 2016 01 Financial Instruments Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ASU 2016-13 Financial Instruments Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments 12

Accounting matters for portfolio companies The following are accounting matters to consider for portfolio companies: Leases Revenue from Contracts with Customers 13

BEST PRACTICES IN PRIVATE EQUITY VALUATIONS

Best practices for private equity valuations Why are valuations important to your Limited Partners Valuation policy Valuation committee Valuation approach Consistency Build your own database Calibration Reliability of inputs Use of a valuation specialist 15

Best practices for private equity valuations (cont.) Detailed valuation narrative What should be included More detail is better Company performance Decision on valuation approach Explain your inputs Explanation of waterfall Additional support Company financial statements Governing documents Copies of LOI, or other relevant documents 16

Valuation of early stage portfolio companies Valuations of early stage companies What observable data is available Recent rounds Milestones Honest assessment Narrative and documentation of thought process 17

BEST PRACTICES IN BACK-OFFICE OPERATIONS

Institutional Limited Partners Association (ILPA) Initiative Institutional Limited Partners Association (ILPA) - trade association for institutional limited partners in the private equity asset class. ILPA mission ILPA initiatives 19

Equity allocations and distributions Understand key equity provisions in the Partnership Agreement Income allocations and distributions Targeted capital accounts American vs. European waterfalls Sources and uses of cash Clawbacks 20

Other best practices Internal documentation Internal polices and procedures Standardized forms and templates 21

KEY ISSUES IMPACTING SMALL BUSINESS INVESTMENT COMPANY (SBIC) FUNDS

Key updates impacting SBIC funds Late 2015 SBIC Advisers Relief Act Family of Funds limit - Increased to $350 million 2016 Proposed rules Proposed Management Fee Technote Increase to SBIC Licensing and Examination Fees New Schedules 5 & 6 in examinations 23

SEC OBSERVATIONS AND FOCUS AREAS

SEC enforcement / exam program Enforcement cases Monitoring Fees and Creative Loan Arrangements Allocating Fees Best practices Disclosure Focus Alert issued September 12, 2016 - Supervision Initiative 25

RSM PRIVATE EQUITY PRACTICE

RSM thought leadership for private equity www.rsmus.com http://rsmus.com/what-we-do/industries/privateequity/private-equity-fund-services.html Subscribe to the thought leadership, news, publications and events that interest you: http://response.rsmus.com/rsmpreferencecenter Economic: The Real Economy; Middle Market Insights; OnPoint Industry: Investment Industry Insights; PE Quarterly Industry Spotlights; M&A Mid-Market Pulse Audit/Tax/Consulting: Tax Insights; Tax Alerts; Financial Reporting Insights; Technology Bulletin International: Border Crossing 27

TAX UPDATE

UPDATE ON PROPOSED FEE WAIVER REGULATIONS

Overview of mechanics cashless contribution Managers receive a fixed fee (2 percent) along with carried interest in profits (20 percent) Managers are also investors in the fund and must contribute capital Managers waive a portion of their fixed fee replaced with a special profits interest to equal the waived fee amount The waived fee funds all or a portion of committed general partner capital Profits (however defined) must be generated to earn back the waived fee amount 30

Typical fund structure New York style Principal A Principal B Principal C Limited Partners Principal A Principal B Principal C Capital Capital General Partner, LLC Fund, LP (20% Carried Interest) 2% Management Fee Management Company, LLC 31

Alternative fund structure combined management company Principal A Principal B Principal C Limited Partners Capital General Partner, LLC Fund, LP 2% Management Fee 32

Variations on mechanics Special profits interest must be subject to risk Varying degrees of risk Gains from any transaction Net gains in any quarter Net gains in any year Net gains in any year limited to overall profits Fund must generate life of fund gains and profit Waivers at beginning of the fund versus periodic Periodic waivers executed in advance of services Valid arrangements contain book-up element 33

Overall result of fee waiver Can convert ordinary fee income to capital gain Can defer income recognition until special profits are earned 34

Proposed regulations: Two pronged attack Re-characterize the special profits interest as a disguised fee Remove profits interest protection of Rev. Proc. 93-27 General rule: profits interests are not taxable (zero value) Exceptions Substantially certain income stream Publicly traded partnership Disposition of interest within two years 35

Proposed regulations - summary Issued July 23, 2015 Authorized by 1984 Deficit Reduction Act Would recast the profits interest as a non-partner capacity service payment, presumably equal to the waived fee amount Effective once final regulations are issued Would apply to any waiver made on or after effective date Arrangement must be irrevocable and have significant entrepreneurial risk Significant risk defined generally as profitability over the fund s life 36

Proposed regulation example 5: Permissible arrangement Manager waives two percent management fee at time of fund formation Net profits are not highly likely nor reasonably determinable on fund formation Clawback if insufficient profits over the fund s life 37

Proposed regulation example 6: Proper notice and book-up Allows periodic year by year waiver 60 day notice given Profits interest issued to management company Net profits not highly likely nor reasonably determinable Clawback Requires book-up to fair market value (FMV) at time of waiver 38

Proposed regulation example 3: Insufficient risk Testing period for profits is any 12 month period Fund manager has ability to control timing of asset sales 39

Grandfathering Implication in regulations: only applicable to post publication waivers However, the preamble states that: In the case of any arrangement entered into or modified before the final regulations are published in the Federal Register, the determination of whether an arrangement is a disguised payment for services is made on the basis of the statute and the guidance provided regarding that provision in the legislative history The preamble also states that: Pending the publication of final regulations, the position of the Treasury Department and the IRS is that the proposed regulations generally reflect Congressional intent as to which arrangements are appropriately treated as disguised payments for services 40

Concerns regarding profits interest safe harbor Two statements made in preamble to regulations The profits interest is not issued to the service provider The IRS intends to modify Rev. Proc. 93-27 to exclude fee waiver arrangements What will the ultimate revision look like? 41

Possible courses of action Examine existing arrangements Assess set-up of fund structure and management services contract Consider multiple year election before finalization of regulations Wait and see Fee waiver regulations were supposed to be finalized early summer 2016. Now on the 2016-2017 Priority Guidance Plan 42

NEW TAX RETURN DUE DATES

New tax return due dates The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 Changed tax return due dates for Partnerships due March 15/ extension Sept. 15 Trusts due April 15/ extension Sept. 30 S corporations due date March 15/ extension Sept. 15 C corporations due April 15/ extension Sept. 15/ June 30 fiscal year due Sept. 15, after 2025 due is Oct. 15 FinCEN (Foreign Bank Account Report) due April 15/ extension Oct.15 Effective for tax years ended December 31, 2016 44

New tax return due dates Accelerated timing will impact compliance process of PE funds: Coordination with portfolio companies Communicate timing expectations Will need information from portfolio companies that are partnerships/limited liability corporations to prepare extensions/ estimates Preparation of extensions early in busy season Impact on delivery of Schedule K-1s to investors? 45

UPDATE ON NEW PARTNERSHIP AUDIT RULES

New partnership audit rules Why were the partnership audit rules changed Partnership assets have increased tenfold in real terms since 1982 Large partnerships: Small amounts costly to bill Multiple tiers: Difficult to identify and bill ultimate partners Fear of "audit-proof" businesses led some to argue for a corporate tax on large partnerships Real compliance rate may be quite high, but economists said reform would raise billions 47

New partnership audit rules 48

New partnership audit rules Overview of the major provisions Partnership level examinations Partnership level adjustments to items of income, gain, loss, deduction, or credit of a partnership (and any partner s distributive share thereof) Partnership level tax, penalties, and interest related to the partnership level adjustments (including any tax associated with a partner s distributive share of those items) Applicable to all partnerships, but allows certain partnerships to elect out of the regime 49

New partnership audit rules Election out of the new partnership rules Partnerships issuing 100 or fewer Schedule K-1s and having partners who are individuals, corporations (including S corporations and foreign entities taxed as corporations for U.S. tax purposes), or estates of deceased partners can elect out of the new provisions Special rules apply to S corporation partners of a partnership Election out is done pursuant to rules prescribed by Treasury/IRS For partnerships that elect out, pre-tefra (Tax Equity and Fiscal Responsibility Act of 1982) audit rules apply Partnership and partner are placed under examination Audit adjustments are assessed against the partner 50

New partnership audit rules Partnership representative (PR) replaces Tax Matters Partner Designated by the partnership (manner to be prescribed in regulations) Must be a partner or other person with a substantial presence in the U.S. If no person is designated by the Treasury/IRS can designate the PR PR has sole authority to act on behalf of the partnership The partnership and all partners are bound by the actions taken by the PR under the provisions and by any final decision in a proceeding brought under the rules with respect to the partnership 51

New partnership audit rules Required consistency of partnership reporting: Partners must report partnership items on their return or be subject to math error-type assessments Exception by filing Form 8082 identifying inconsistent treatment of partnership related item 52

New partnership audit rules Partnership may seek reduction or modification of the Imputed Underpayment if approved by the IRS May request reduction based on the tax status of its partners Tax rate is the highest corporate or individual rate Penalties and interest are included in the Imputed Underpayment The Imputed Underpayment is assessed and collected in the same manner as if it were a tax imposed for the adjustment year; except for an Administrative Adjustment Request that reports an underpayment that the partnership will pay which is paid immediately by the partnership with the filing of the AAR 53

New partnership audit rules Partnership may elect to push out the adjustment to its partners Issues a special K-1 to the partners related to the reviewed year in the adjustment year Partners must report the special K-1 items on their returns for the year in which they receive the special K-1 and pay the associated tax, penalties and interest 54

New partnership audit rules Concerns with the push-out option A workable push-out addresses the uncertainties or potential problems with entity-level tax Push-out for tiered partnerships was expected, apparently intended, according to key staff members IRS/Treasury officials have indicated they disfavor push-out and may try to limit it to a single tier Even with push-out, there could be added taxes due in excess of partner underpayments, and even with no partner underpayments Taking most conservative possible position will not necessarily avoid issues or problems 55

Tax Technical Corrections Act of 2016 Provided clarifications or changes to the new partnership audit rules. Changes application of partnership audit rules to include all partnership related items versus income, gain, loss, deduction, or credit Clarifies other taxes such as self-employment tax, net investment income tax are not assessed at the partnership level under new partnership audit rules Modification to the computation of imputed underpayment penalty As originally enacted all increases and decreases to partnership income would be netted, result then multiplied by highest marginal tax rate Modified so all adjustments are determined separately within each category of items reported to partners on K-1, then netted if appropriate. 56

Tax Technical Corrections Act of 2016 Clarification regarding the push-out election and application in tiered structures. Provides upper tier partnership can either choose to pay the entity level tax or push out further any adjustments If elect to push out further must provide IRS with allocation of adjustment Definite timeline in which the push out must occur Statements to provided by the tax return due date of the audited partnership, which includes the date the final determination was made. 57

Tax Technical Corrections Act of 2016 Provides procedures for avoiding entity level tax for adjustments not resulting in an imputed underpayment Filing of amended tax return, account for all adjustments and tax is paid with amended return. Alternative procedure to filing amended return Provide information to the IRS on what the tax would be on an amended return, without filing an amended return Tax is paid by partner 58

PARTNERSHIP TRANSFER OF INTEREST NEW SECTION 706 REGULATIONS

New section 706(c) regulations Taxable year of a partnership closes with respect to a partner whose entire interest in the partnership terminates (whether by reason of death, liquidation, or otherwise) Required to include in return for the tax year within which the closing occurs distributive share of partnership income, gain, loss, deduction, or credit, as well as any guaranteed payments for the short partnership year Generally impacts year of inclusion of income 60

New section 706(c) regulations What will cause an entire interest in partnership to terminate: Traditional sales Transfers of partnership interests in most corporate reorganizations Contributions of partnership interests either to controlled corporations in exchange for corporate stock under section 351 or to other partnerships pursuant to section 721 Gifts or transfers from estate Probably not Transfer to bankruptcy estate Probably not 61

New section 706(c) regulations Section 706(d)(1) If there is a change in a partner s interest in the partnership during the partnership s taxable year, each partner s distributive share of any partnership item of income, gain, loss, deduction, or credit for such taxable year is determined by the use of any method prescribed by the secretary by regulations which takes into account the varying interests of the partners in the partnership during such taxable year Disposition of a partial or entire interest in a partnership Partner whose interest in a partnership is reduced by the entry of a new partner 62

New section 706(c) regulations Final regulations now provide a step-by-step process for making allocations when there are changes to a partner s interest in the partnership 63

New section 706(c) regulations Interim closing method Can use month end or mid-month close and prorate to date of transfer Required unless the partners agree to use the proration method Monthly conventions Default method for allocations 64

New section 706(c) regulations Proration method Estimated using the portion of the partnership year that elapsed prior to the sale or liquidation Absent an agreement of the partners to use the proration method, the partnership shall use the interim closing method 65

DISCUSSION OF COMMON PRIVATE EQUITY TAX ISSUES

SECTION 305(C) PROPOSED REGULATIONS

Section 305(c) proposed regulations Proposed Regulations issued April 13, 2016 Summary Clarified holder of a convertible bond/ stock, or a stock right can have taxable dividend income as a result of an increase in such holder s entitlement to such shares of stock deemed dividend FMV of deemed dividend is based on the value of the right to acquire the stock vs. the current value of the stock Deemed dividend will generally occur at the time the holder is legally entitled to additional stock Required withholding on deemed dividends for non-us holders of stock Withholding required after reported by issuer on Form 8937 as required by section 6045(B) Clarifies holders of shares of actual stock can have taxable divided income when others entitlements to shares of that stock are reduced. While proposed regulations are controversial amount practitioners, IRS believes the proposed regulations simply clarify existing guidance and are consistent with Congressional intent 68

Section 305(c) proposed regulations Applies to private equity transactions Convertible debt/ similar instruments Contain anti-dilution provisions a change in conversion ratio may be treated as a deemed distribution subject to section 301 Deemed distribution has occurred if: applicable adjustment has occurred and It has an effect described in section(b)(2)-(5). Exception bona fide reasonable adjustment formula Applicable adjustment made to compensate for a cash or property distribution to shareholders that is taxable is not eligible for exception 69

Section 305(c) proposed regulations Example 1 Corporation with two classes of stock A and B. B stock is convertible into A stock. The conversion price of the B stock is adjusted pursuant to a reasonable anti-dilution provision. The Corporation sells A stock to the public at a price below the conversion price and, pursuant to the anti-dilution provision, the conversion price of the B stock is adjusted downward Adjustment to conversion price is an applicable adjustment; however not a deemed distribution due to the bona fide reasonable adjustment formula exception 70

Section 305(c) proposed regulations Example 2 Corporation with one class of stock and outstanding convertible debt securities. Terms of convertible debt include a bona fide, reasonable anti-dilution provision, and the conversion ratio is increased for distributions of stock divides or stock rights. Treat convertible debtholders as shareholders Convertible debt treated as right to acquire stock Although applicable adjustment, not a deemed distribution due to bona fide, reasonable adjustment formula exception 71

Section 305(c) proposed regulations Example 3 Corporation with one class of stock and outstanding convertible debt securities. Terms of convertible debt include a conversion ratio formula that is not considered a bona fide, reasonable adjustment formula and the conversion ration of the debt is increased for distributions of cash dividends to the corporation s stockholders Conversion ratio adjustment is an applicable adjustment Results in a deemed distribution taxable distribution under code section 301 72

Section 305(c) proposed regulations Reporting / withholding Deemed distributions under proposed section 305(c) regulations subject to reporting under Code section 6045B on Form 8937 Deemed distribution gives rise to a withholding obligation by a withholding agent on non-u.s. holders Timing of withholding rules in regulations contingent on satisfaction of notice or actual knowledge withholding trigger rule 73

COMMON PRIVATE EQUITY TRANSACTIONS THAT MAY CREATE UNRELATED BUSINESS TAXABLE INCOME AND EFFECTIVELY CONNECTED INCOME

What is UBTI? Tax-exempt investors What is UBTI The Internal Revenue Code grants certain organizations tax exempt status Income deemed to be unrelated business income tax (UBIT) may be taxed Unrelated business taxable income: Income from a trade or business regularly carried on by an exempt organization that is not substantially related to the organizations exempt purpose. Unrelated debt-financed income Certain items generally not subject to tax may be recast if deemed unrelated debt-financed income. This will occur if investment property is acquired with borrowed funds 75

Tax considerations for the tax exempt investor Tax-exempt investors For private equity funds UBTI may occur when: Funds invest in portfolio companies organized as passthrough entities Tax-exempt investor will be taxed on distributive share of UBTI from Fund Unrelated debt-financed income At either the fund or portfolio company level Fee income earned by the fund Management and monitoring fees other fees for services Origination / commitment fees Break-up and finder s fees Other transaction-related payments May exclude fee income as UBTI if doesn t rise to the level of regularly carried on 76

Tax considerations for the tax exempt investor Generally funds will use a line of credit to float a capital call UBTI concerns No specific precedent supporting conclusion that a capital call bridge loan used to acquire an investment does not give rise to acquisition indebtedness If debt extinguished by the end of year prior to receipt of interest / dividend, income will not be considered UBTI If debt extinguished 12 months before the disposition of the property, the gain loss on sale would not be UBTI Suggest bridge financing should extend beyond the time needed to call capital. Some advisors use logic in issued private letter rulings and the debt be outstanding for no more than 30 days 77

Tax considerations for the foreign investor Foreign investors Effectively connected income (ECI) Code section 871(b) subjects foreign persons to U.S. tax on income that is deemed effectively connect with the conduct of a U.S. trade or business with in the U.S. Section 875 treats a foreign person that is a partner in a partnership that is a partner in another partnership which is engaged in any trade or business, as being engaged in the trade or business in which that partnership is engaged Summary Both the fund and the foreign investors are deemed to be engaged in the U.S. trade or business in which any of the portfolio companies taxed as passthrough entities are engaged 78

Tax considerations for the foreign investor Foreign investors For private equity funds, ECI may occur when Fund invests in portfolio pass-through entities Distributive share of portfolio company ECI will be taxable to foreign investor Sale of a partnership interest by the fund that is engaged in a U.S. trade or Business will be deemed to be ECI, per Rev. Rul. 91-32 Investments in U.S. Real Property Interests (Foreign Investment in Real Property Tax Act) Fees earned by the fund Generally more inclusive than UBTI 79

Tax considerations for the foreign investor Foreign investors ECI generated by the portfolio company will cause the fund to perform withholding on behalf of the foreign investors Income will be taxed in the same manner and same rates as the income of a U.S. person Foreign individual Taxed at Individual rates 39.6 percent Foreign corporations taxed at corporate rates 35 percent Foreign partnerships Taxed at Individual rates 39.6 percent Reported on Forms 8804, 8805, and 8813 Form 8804 reports the total amount of ECI and amount of tax withheld by the fund Form 8805 reports to each foreign investor, their distributive share of ECI and tax withheld We also recommend footnoting components of ECI on the Federal Schedule K-1 Form 8813 Form used to report quarterly estimated payments 80

USE OF BLOCKER CORPORATIONS

Blocker corporations How to mitigate exposure to certain investors Use of a blocker corporation What is a blocker corporation An entity formed as a corporation will be placed between the tax-exempt or foreign investors and the source of the UBTI or ECI The blocker recognizes the income from the pass-through entities and pays the tax, thus blocking the tax-exempt and foreign investors After tax proceeds can be distributed to the tax-exempt or foreign investors (shareholders of the corporation.) Distribution will not be UBTI or ECI and generally will be non-taxable to a tax-exempt; however for a foreign investor portion of distribution deemed dividend will be subject to Chapter 3, Fixed, Determinable, Annual and Periodical Income (FDAP) withholding at 30 percent tax rate (unless reduced by treaty or some other provision in the Internal Revenue Code) 82

Blocker corporations Many variations of blocker structures Alternative Investment Vehicle (AIV) Blocker / splitter Parallel blocker structure Option alternative to blocker structure Optimal structure dependent upon several factors: Investor type Home jurisdiction of investor / tax treaty benefits Type of income generated by investments of the fund Frequency of distributions 83

Blocker corporation above the fund ECI/UBTI Sensitive Investors GP Non-ECI/UBTI Sensitive Investors Blocker Corporation Fund Fund Portfolio Companies 84

Blocker corporation below the fund ECI/UBTI Sensitive Investors GP Non-ECI/UBTI Sensitive Investors Fund Fund Blocker Corporation Portfolio Companies 85

Blocker corporation below the fund/splitter/ parallel fund ECI/UBTI Sensitive Investors GP Non-ECI/UBTI Sensitive Investors Fund Fund Blocker Corporation Splitter 86 Portfolio Companies

Blocker corporation AIV Non-ECI/UBTI Sensitive Investors ECI/UBTI Sensitive Investors Fund Blocker Corporation 87 Portfolio Companies

Blocker corporations Domestic versus foreign blocker entity Domestic Taxed on 100 percent of its income Distributions could be subject to 30 percent withholding Sale of operating co will be taxed at U.S. corporate rates Foreign blocker Taxed on ECI Subject to branch profits tax effective tax rate 54.5 percent + state tax Distributions up to blocker may be withheld at 30 percent (or reduced if treaty benefit applies) Distributions out of foreign blocker not taxed at U.S. or state level; may need to consider foreign jurisdiction Tax on sale of operating company will depend on if the company is a corporation or an operating partnership 88

QUALIFIED SMALL BUSINESS STOCK

Qualified small business stock Gain exclusion 50 percent gain exclusion for tax years prior to 2009 75 percent gain exclusion for tax year 2009 through 9/27/2010 100 percent gain exclusion starting 9/28/2010. No alternative minimum tax (AMT) preference items Determination of gain exclusion is performed at partner level 90

Qualified small business stock Requirements: Stock in a domestic C corporation Acquired at original issue Aggregate gross assets immediately before the issuance and immediately after the issuance did not exceed $50 million Active business requirement Generally excludes service businesses Exclusion limited to greater of $10 million less any prior exclusions Ten times basis Must hold stock for more than five years Gain exclusion applies to non-corporate taxpayers Be careful with redemption transactions as these could disqualify the sale of the stock from favorable QSBS treatment. Best practice note proper documentation when investment is made and disclosure on Schedule K-1 footnotes 91

Rollover of gains from small business stock Rollover of gains from sale of small business stock if Stock qualifies as qualified small business stock Held for more than six months Proceeds from sale of small business stock reinvested in new qualified small business stock within 60 days from the original sale Basis of newly acquired small business stock reduced for gain deferred Rollover election can be made at partnership or individual investor level Applies to non-corporate taxpayers 92

WHO MUST SIGN PARTNERSHIP TAX RETURN

Who must sign tax return Who is able to sign our fund s partnership tax return Must be a partner to be valid return Partnerships must be signed by GP LLCs signed by member manager Officers, employees are not valid signatories of the partnership tax return New for 2016, an Officer ID number will be required to electronically file state tax returns 94

OTHER NEW DEVELOPMENTS

Other new developments Carried interest update Taxation at ordinary rates not part of GOP Tax Blueprint Under GOP tax plan taxed at 16.5% tax rate If taxed at ordinary income rates under GOP plan, then taxed at 25% tax rate. Other developments Section 385: debt equity regulations Leveraged partnership regulations Allocation of partnership liability regulations California franchise tax Swart implications 96

Other new developments Top priority regulatory projects Fee waiver Partnership audit Guidance on targeted capital accounts Treatment of noncompensatory partnership options 97

STATE TAX CONSIDERATIONS

State tax considerations State tax exposure Exit considerations Sale of member/ partnership interest versus sale of assets Taxation of gain for state tax purposes generally different Same of member interest Generally, treated as sale of intangible asset and taxed in partner / member s state of residency / commercial domicile however not always Sale of assets Gain generally subject to portfolio company s apportionment formula and gains will be passed through on state K-1s 99

State tax considerations How should revenue be apportioned at the management company Market sourcing versus cost of performance Market sourcing sources revenues where customer receives the benefits Illinois, California, New York Who is the customer? Fund versus investor California guidance requires a look-through to the investor Cost of performance sources revenues where services are being performed 100

State tax considerations Analysis to be performed Is management company domiciled in a market based or cost of performance state Review of revenue sources Review of limited partners to determine if any are in market based states 101

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