10.1.13: Distributions

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Abstract

Since partners are taxed on their allocable shares of partnership profits, whether distributed or not, the possibility arises that a partner may incur state and federal tax liability without receiving the cash with which to pay the same. Accordingly, most agreements provide that the GPGP must distribute each year a given percentage, say 35%, of realized profits, in order to yield to the partners approximately what they will owe in taxes. The GPGP usually has discretion to make additional distributions even if it is not required to do so.[1] An increasing percentage of limited partners are wary of lodging discretion in the GPGP with respect to distributions.[2] Indeed, it is fashionable for the investors to insist that the GPGP distribute shares of each portfolio company once it has gone public, even though the profits have not been technically realized prior to the distribution. The theory