1. 1 ©2010 Readable Holdings, Inc. All rights reserved. THE WAR ON SERVICE PARTNERS Note: The following slides are excerpted from a presentation on June 5, 2010, and summarize the carried interest provisions of H.R. 4213, The Tax Extenders Act of 2009, as they existed on December 9, 2009. Several alternate versions of carried interest legislation have since been introduced in Congress. Glenn L. Madere, J.D., LL.M. Readable Holdings, Inc. 510 Township Line Rd., Suite 150 Blue Bell, PA 19422 (610)-574-3296 Delaware County Attorney CPA Forum May 5, 2010 Any tax advice contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding federal, state or local tax penalties, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication. This presentation is provided solely for the personal use of attending tax professionals as continuing education materials and is distributed with the understanding that the publisher is not engaged in rendering legal or accounting services and is not hereby providing advice for specific clients, transactions, or returns. READABLE PRESS®

2. "Here’s something else we're going to do. We’re going to end the tax breaks that enable a Wall Street money manager to pay a lower percentage of his income in taxes than a teacher, a nurse or a truck driver right here in Anderson." Sen. Hillary Clinton Anderson, Indiana March 20, 2008 ©2010 Readable Holdings, Inc. All rights reserved. 2 READABLE PRESS®

4. Outside gain from an ISPI—e.g., from sale of the interest—would also be ordinary. Outside losses would also be ordinary, subject to a limitation.

5. Net K-1 losses from a given ISPI would be allowed only to the extent of cumulative net income from prior years (excluding years before the effective date), with a carryover for unused losses.

6. An individual with an ISPI who is engaged in the investment services business (as defined) would be subject to self-employment tax on all above ordinary income, even where the underlying partnership income was LTCG. Top marginal federal tax rate on such income would go to 42.5%.

7. A limited exemption exists for the portion of the service partner’s interest acquired for invested capital.3 ©2010 Readable Holdings, Inc. All rights reserved. READABLE PRESS®

8. 4 ©2010 Readable Holdings, Inc. All rights reserved. READABLE PRESS®

10. Most recent passage was in December 2009 as part of H.R. 4213, Tax Extenders Act of 2009.

11. Carried interest provision similar to the most recent House-passed bill is in the Obama administration budget proposal for FY 2011.

12. Joint Committee on Taxation has scored the proposal as raising $10.5 billion of revenue over five years.

13. Although Senate Democrats have in prior rounds held back the proposal—primarily because of the fundamental change to partnership taxation without a comprehensive policy study—a need for $27 billion to “pay for” revenue losers in the pending tax extenders bill has led some to reconsider.

14. As recently as the week of April 11, Sen. Schumer has said carried interests are “on the table”. 5 ©2010 Readable Holdings, Inc. All rights reserved. READABLE PRESS®

16. Managing, acquiring or disposing of any specified asset

17. Arranging financing with respect to the acquisition of specified assets

19. Real estate held for rental or investment

20. Interests in partnerships

21. Commodities

22. Options or derivative contracts with respect to the above©2010 Readable Holdings, Inc. All rights reserved. 6 READABLE PRESS®

24. Money or property contributed to the partnership in exchange for such interest. Constructive contributions under Sec. 752, relating to allocation or assumption of partnership debt, do not count.

25. The amount included in income under Sec. 83 with respect to the interest

26. The excess of K-1 items of income and gain over items of deduction and loss with respect to the interest for taxable years to which the new legislation applies

27. QCI is reduced by distributions for years to which the new legislation applies, and by allocated net losses for such years.

28. In general, income or gain attributable to a QCI is exempt from carried interest treatment providedthat: (i) allocations of items to the QCI are made “in the same manner” as allocations to other QCIs held by partners who do not provide tainted services and are not related to the service partner whose QCI is being tested; and (ii) the allocations to such other QCIs are significant compared to the allocations to QCI being tested.

29. IRS may adopt regulations that extend the exemption from carried interest treatment to situations where there are no (or insignificant) allocations to nonservice partners.©2010 Readable Holdings, Inc. All rights reserved. 7 READABLE PRESS®

31. For purposes of the QCI exception, if a non-service partner (or a related party) (NSP) makes or guarantees a loan or advance to the partnership, that amount is treated as capital.

32. For example, if SP and NSP each contribute $100, but NSP also loans the partnership $200, then for this purpose total capital is $400, and the SP is considered to have only a 25% interest in partnership capital exempt from carried interest treatment.

33. The loan from NSP is not treated as capital, however, for purposes of testing whether the allocations to SP and NSP are made “in the same manner”. For example, if the capital contributions of SP and NSP each earn a preferred return of 9%, but NSP’s loan to the partnership earns interest of 8%, that difference in return doesn’t violate the “same manner” requirement provided that the 8% rate is not below market.©2010 Readable Holdings, Inc. All rights reserved. 8 READABLE PRESS®

35. Managing, acquiring or disposing of any specified asset

36. Arranging financing with respect to the acquisition of specified assets

37. Any activity in support of the above services©2010 Readable Holdings, Inc. All rights reserved. 9 READABLE PRESS®

39. Except to the extent attributable to the partner’s qualified capital interest (QCI).

40. Loss is ordinary, but can only be deducted to the extent of aggregate net positive income from the same interest for prior partnership years (excluding years before the effective date). Unused losses carry forward and do not reduce outside basis until used.

41. Gain from disposition of an ISPI is also ordinary income.

42. Gain is recognized on disposition, even where a nonrecognition rule would otherwise apply—e.g., contribution of the interest to a corporation or another partnership.

43. Loss from disposition is ordinary, but only to the extent of aggregate net positive income previously treated as ordinary under the carried interest rules.

44. Any amount treated as ordinary income under these rules is also self employment income.

45. Anti-abuse regulations are authorized to stop the use of notional contracts and similar workarounds designed to avoid the new rules. ©2010 Readable Holdings, Inc. All rights reserved. 10 READABLE PRESS®

47. Excluded from this treatment is appreciation already taxed as ordinary income under the “hot asset” rules of Sec. 751(b). For purposes of the Section 751 rules, an ISPI is treated as an inventory item.

48. To the extent FMV of distributed property exceeds partner’s outside basis (as adjusted to reflect the above income inclusion), partner has ordinary income.

49. If partner later sells the partnership interest at a gain that is also ordinary.

50. No adjustment to the basis of remaining partnership property under Sec. 734(b) to reflect the above income inclusion.

51. Contrast the above to normal treatment of an in-kind distribution under Secs. 731 and 732.©2010 Readable Holdings, Inc. All rights reserved. 11 READABLE PRESS®

53. Example: An option to acquire a partnership interest, where the option holder manages assets of the issuing partnership.

54. Another example (from legislative history): Stock in a Cayman Islands corporation that owns an interest in a hedge fund managed by the holder of such stock.

55. Another example: Participating debt in a partnership whose assets are managed by the holder of such debt.

56. Essentially this is an anti-abuse rule designed to prevent the use of property or contract rights other than a partnership interest to avoid the carried interest rules.©2010 Readable Holdings, Inc. All rights reserved. 12 READABLE PRESS®

58. Relevant facts are adequately disclosed;

59. Position is (or was) supported by substantial authority; and

60. Taxpayer reasonably believed that the reported treatment was more likely than not proper.

61. Publicly-Traded Partnerships. Ordinary income under the carried interest rules is not qualifying income for a PTP.

62. Exception for certain PTPs controlled by a publicly-traded REIT

63. Application of the PTP rule is delayed 10 years for existing PTPs.

64. Deemed Section 83(b) election. Where a partnership interest is transferred in connection with providing services to the partnership (or for its benefit), the SP is deemed to have made a section 83(b) election absent an election out.

65. Applies to all services, not just investment management services (i.e., is not limited to carried interests).

66. Values the SP’s interest at liquidation value on date of grant.©2010 Readable Holdings, Inc. All rights reserved. 13 READABLE PRESS®

68. Favors institutional development and ownership of investment real estate over closely-held entrepreneurial ownership.

69. Disfavors commercial and multifamily real estate as an industry vis-à-vis other industries.In other industries, “sweat equity” continues to be favorably treated through, for example:

70. Treatment of qualified small business stock.

71. Treatment of preferred stock.

72. Where entrepreneurial development does survive this legislation, will eventually lower returns for pension plans and other institutional investors because SP will demand more compensation in light of higher tax burden. ©2010 Readable Holdings, Inc. All rights reserved. 14 READABLE PRESS®