Structuring and Investing in Tax Receivable Agreements

Key Provisions for IPO and M&A Transactions, Impact of Tax Reform, Due Diligence Concerns

Recording of a 90-minute premium CLE/CPE webinar with Q&A

Conducted on Tuesday, October 30, 2018

Recorded event now available

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Course Materials

This CLE/CPE course will discuss the key features of tax receivable agreements (TRAs) in various contexts, the impact of tax reform on the structuring of TRAs, and due diligence and other issues for hedge funds and other investors considering purchasing TRAs.


Most simply, a TRA is a contract between parties to monetize specified tax attributes in various situations. TRAs have become an integral part of the IPO market, where the relevant public company (Pubco) agrees to pay the pre-IPO owners for tax attributes of Pubco. Parties may also enter a TRA in connection with a sale of a private company to monetize tax attributes of the target company.

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’ 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.

Counsel should have a thorough understanding of the legal, tax and economic ramifications of TRAs before including them in an IPO or M&A transaction.

TRAs typically include broad assignment provisions which enable TRA holders to sell future entitlements to outside investors. Tax reform has provided more certainty regarding corporate tax rates in the near term, resulting in increased interest by hedge funds and other private investment vehicles in purchasing payment rights under TRAs. Counsel should consider each such investment in light of the specific provisions of the TRA and due diligence of the company obligated to make the TRA payments.



  1. TRAs and IPO valuation
  2. Common types of TRAs
    1. NOL TRAs
    2. “Step-up” or basis TRAs
      1. IRC Section 338(h)(10) transaction
      2. Up-C structure
  3. Principal terms of a TRA: allocation of tax benefits (85%/15%), prepayment provisions relating to change of control, assignment provisions
  4. TRAs in private transactions
  5. Concerns with investing in TRAs


The panel will review and discuss the following:

  • When are parties most likely to enter into TRAs?
  • What are the key features of TRAs?
  • How should tax attributes of a pre-IPO company be valued?
  • What are the key diligence considerations when seeking to purchase TRA rights?


Greenwood, Adam
Adam D. Greenwood

Ropes & Gray

Mr. Greenwood is a partner practicing in the tax & benefits department. His practice focuses on transactional tax...  |  Read More

Marcellino, Carl
Carl P. Marcellino

Ropes & Gray

Mr. Marcellino is co-head of the firm’s mergers and acquisitions group, and is based in the New York office. He...  |  Read More

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