Choice of Entity at the Environmental Enterprise Frontier: Limiting Liabilities While Furthering the Charitable Purposes of a Public Purpose

Energy Services Company

Brian D. Buckley1

Brian D. Buckley is a 2013 Vermont Law School Juris Doctor, Master of Environmental Law Policy, and Energy Certificate candidate. This paper is dedicated to the memory of Mr. Alan Pannebaker. The author would like to acknowledge those who aided in the writing and editing process including Kurt Janson, and (______), but recognizes any faults existing within the finished product as his responsibility alone.

TABLE OF CONTENTS
I. TABLE OF CONTENTS............................................................................................................................. 2 I. EXECUTIVE SUMMARY.......................................................................................................................... 3 II. CONTEXT.......................................................................................................................................................4 A. The Vermont Energy Investment Corporation.................................................................................. 4 B. The PPESCO Model.......................................................................................................................... 5 C. Organizational Requirements of the PPESCO..................................................................................5 D. Preliminary Entity Analysis............................................................................................................... 7 III. ANALYSIS OF SELECTED LEGAL STRUCTURES............................................................................. 8 III.A. MUTUAL BENEFIT ENTERPRISE OVERVIEW.................................................................... 9 A.1. Mutual Benefit Enterprise Capitalization...................................................................... 10 A.2. Mutual Benefit Enterprise Taxation............................................................................... 10 i. Traditional Cooperative Taxation...................................................................... 11 ii. Check the Box Regulations................................................................................ 12 iii. Limited Cooperative Association Taxation.......................................................13 A.3. Mutual Benefit Enterprise Governance..........................................................................12 A.4. Mutual Benefit Enterprise Summary.............................................................................. 13 III.B. BENEFIT CORPORATION OVERVIEW.................................................................................. 15 B.1. Benefit Corporation Capitalization................................................................................ 17 i. Conventional Corporate Capitalization............................................................. 17 ii. Federal Securities Regulation........................................................................... 18 iii. State blue sky laws....................................................................................... 19 B.2 Benefit Corporation Taxation......................................................................................... 20 i. Conventional Corporate Taxation...................................................................... 20 ii. Incentives Contingent upon Taxable Status....................................................... 21 B.3 Benefit Corporation Governance.................................................................................... 23 B.4 Benefit Corporation Summary........................................................................................ 24 III.C. 501(c)(3) NONPROFIT CORPORATION OVERVIEW........................................................... 25 C.1. 501(c)(3) Nonprofit Corporation Capitalization........................................................... 26 C.2. 501(c)(3) Nonprofit Corporation Taxation .................................................................... 27 i Organized and Operated Constraint................................................................... 28 ii. Non-Distribution Constraint.............................................................................. 29 iii. Prohibition on Political Activities.................................................................... 30 iv. Unrelated Business Income Taxation............................................................... 31 v. 501(c)(3) Nonprofit Corporation Taxation Summary....................................... 32 C.3 501(c)(3) Nonprofit Corporation Governance................................................................ 32 C.4 501(c)(3) Nonprofit Corporation Summary.................................................................... 33 III.D. LIMITED LIABILITY COMPANY OVERVIEW..................................................................... 33 D.1. Limited Liability Company Capitalization..................................................................... 35 i. Private Foundations............................................................................................36 ii. Program Related Investments............................................................................ 37 D.2. Limited Liability Company Taxation............................................................................. 39 D.3. Limited Liability Company Governance........................................................................ 42 D.4. Limited Liability Company Summary............................................................................ 43 IV. POSSIBLE CONNECTION TO AN ESTABLISHED ENTIITY............................................................ 44 IV.A. Stand-Alone Entity Overview......................................................................................................44 IV.B. Subsidiary Overview and Initial Considerations..........................................................................45 B.1. Avoiding Corporate Veil Piercing..................................................................................46 B.2. Parenting and Control of Specific Entities Overview.................................................... 47 B.2.i. Parenting and Control of a Mutual Benefit Enterprise................................48 B.2.ii Parenting and Control of a Benefit Corporation......................................... 48 B.2.iii. Parenting and Control of a 501(c)(3) Nonprofit....................................... 49 B.2.iv. Parenting and Control an L3C Based B-Corp certified LLC.................... 50 V. CONCLUSION AND RECOMMENDATIONS.......................................................................................... 51 APPENDIX 1 (PPESCO Legal Structure Summary Chart).......................................................................... 53 APPENDIX 2 (Simplified PPESCO Finance Decision Tree).......................................................................... 54 APPENDIX 3 (L3C Based C-Corp Certified LLC Articles of Organization).............................................. 55 APPENDIX 4 (L3C Based C-Corp Certified LLC Operating Agreement).................................................. 58 APPENDIX 5 (2012 Private Letter Ruling Template).................................................................................... 94 APPENDIX 6 (2012 Private Letter Ruling Checklist).................................................................................... 97

I. EXECUTIVE SUMMARY The Public Purpose Energy Services Company (PPESCO) is a replicable pilot project of the Vermont Energy Investment Corporation (VEIC) meant to provide deep energy savings to buildings serving a public purpose. Such a purpose dictates three organizational characteristics: (1) the ability to raise significant up-front capital; (2) a mandate to prioritize mission over profit; and (3) a plan for limiting liabilities arising from the enterprise. Some business models are better suited than others to fulfill such a function. This paper explores the best suited models and highlights the characteristics that differentiate them from one another. These models include the tax exempt 501(c)(3) nonprofit, the LLC, the benefit corporation, and the mutual benefit enterprise. The 501(c)(3) PPESCO is the best choice if the majority of funding comes from governmental entities. The B-Corp certified LLC PPESCO is the best choice for blending public and private sources of funding from long term investors. The benefit corporation PPESCO is the best choice for blending public and private sources of funding when public trading of secured interests is worth a higher tax burden. The mutual benefit enterprise PPESCO is the best choice for those who believe in the democratic principles native to the cooperative business model, but prefer to attract equity investment by utilizing the LLC business models inherent flexibility. The likely sources of funding are the most important factor when deciding between the four selected entity choices. Part I of this paper provides a succinct overview of the papers conclusions and offers an outline to aid in subsequent navigation. Part II of this paper provides context for the analysis, identifies certain organizational needs of the PPESCO, and explains why some legal

structures do not meet those needs. These structures include the sole proprietorship, the
partnership, the S-corporation, and the C-corporation. Part III examines the primary characteristics of legal structures which could serve the needs of the PPESCO. These

structures include the mutual benefit enterprise, the benefit corporation, the tax exempt 501(c)(3)

nonprofit, and the B-Corp Certified Limited Liability Company.

Part IV explores how such an

entity might be connected to an existing organization. Part V draws final recommendations from the analysis. Ultimately, the paper concludes that form follows function, and function follows circumstance-specific funding sources.

II. CONTEXT While these goals may vary from one Micro-ESCO to another, they are assumed to be, for a given set of buildings, or within a certain area, some combination of: (1) Reducing energy use and/or carbon emissions, and (2) Creating local jobs and/or community economic development. -Blair Hamilton, A Purposeful Entity2 This examination begins with a discussion of context, so that readers may best understand the facets of the subsequent PPESCO choice of entity analysis. The discussion of context revolves around 4 main points: (1) an introduction to VEIC, the organization managing early PPESCO pilot program development; (2) a basic description of the PPESCOs goals; (3) the PPESCOs legal requirements according to the mission first test and the limited liability test; and (4) a preliminary entity analysis, applying to above mentioned tests to eliminate various unfavorable PPESCO entity choices. This discussion of context will prepare readers for the subsequent entity choice analysis. A. The Vermont Energy Investment Corporation VEIC is a mission-driven 501(c)(3) nonprofit corporation, dedicated to reducing the economic and environmental costs of energy consumption through cost-effective energy efficiency and renewable technologies.3 Their articles of association identify the corporation as organized andoperated exclusively to further charitable, educational, and scientific purposes as may qualify it for tax exemption under Section [501(c)(3)].4 VEIC is currently developing a

2 3

Blair Hamilton, A Purposeful Entity, Vermont Energy Investment Corporation, (2012), page 1 Available at: http://www.veic.org/index.aspx 4 Note: There is a typo in VEICs articles of association. They actually say as may qualify it for tax exemption under Section 503(c)(3). Though the operational test employed by the IRS to determine

project which would aim its application of energy efficiency and renewable technologies toward public purpose buildings in an attempt to create deep energy savings, beyond those provided by traditional energy service companies. This project is known as the Public Purpose Energy Services Company, or the PPESCO. B. The PPESCO Model Traditional energy service companies (ESCOs) are organizations that develop, install, and arrange financing for projects designed to lower building operating costs through energy and water efficiency improvements, peak demand reduction, and combined heat and power projects.5 Conventionally for-profit entities, most ESCOs focus on servicing commercial and industrial customers because their profit motives dictate seeking the highest return on investment available. This drive to maximize profits while minimizing risk has lead to a lack of deep energy retrofits in the energy service industry. The PPESCO model aims to correct this market failure. The PPESCO differs from the typical ESCO according to its narrow focus on public purpose buildings and deep energy retrofits. As a result, the business model of the PPESCO will diverge from traditional ESCOs, which are generally organized as corporations or corporate subsidiaries. Instead, the PPESCO must be organized according to its mission, and therefore, possesses unique requirements in the areas of governance, capitalization, and liability. C. Organizational Requirements of the PPESCO The PPESCO will have unique organizational requirements in several areas including: (1) liability concerns; (2) governance placing mission first; and (3) the need for a large amount of upfront capital.

exemption status hinges upon the characteristics described in the articles of association rather than the section identified, it may be prudent to amend the articles to correct this error. Also, amendment will be required in order to insert language allowing VEIC to establish a taxable subsidiary so long as it is operated exclusively for the furtherance of VEICs exempt purposes. 5 Vermont Energy Investment Corporation, An ESCO for Underserved Markets: Developing the Roadmap for Public Purpose Energy Service Companies. (2010).

Liability concerns will appear as a result of the low-profit entrepreneurial nature of the endeavor. Only careful planning can limit liabilities to those resources which have been contributed to the entity. While the PPESCO could begin as project or division within some parent organization,6 permanence of such a practice entails substantial risks to the parent. In order to limit an individual or organizations liability for the debts and obligations of the project, it is recommended that the PPESCO be established as an entity legally distinct from its founders. The governance structure of the organization must emphasize mission over profits in order to avoid the constraints of the profit motive and its accompanying legal duties. Directors of a typical energy services company have a fiduciary duty to maximize shareholder value and can face suit for failure to do so. This practice limits efficiency retrofits to those which will provide the highest, cheapest return on investment. This cannot be the case for the PPESCO, which focuses on deep energy retrofits and must instead stress a triple bottom line based on economic, environmental, and social impacts.7 The profit motive can only be valid insofar as it is used to incentivize investment and achieve the organizations goal of enhancing environmental and societal goods. It may not control the decision-making or governance of the organization. Capital needs will require that the PPESCO utilize innovative investment incentives beyond those offered by traditional markets and legal structures. Conventional ESCOs earn a rate of return as high as 25-40% annually.8 This is not the case for the PPESCO, as its projects will be planned according to their environmental and societal benefits rather than their potential profit margin. Innovative incentives will be needed to attract the correct mix of parties and resources for such an investment.

Such an organizational legal arrangement is analogous to the sole proprietorship model utilized by a single entrepreneur; it does not limit the liabilities of the enterprise. 7 See John Elkington, Cannibals with Forks: The Triple Bottom Line of 21 st Century Business (1999) (coining the phrase triple bottom line and presenting the underlying idea of evaluating a companys economic performance by taking into consideration its social and environmental impacts). 8 Vermont Energy Investment Corporation. Supra. at note 5, page 3

D. Preliminary Entity Analysis According to the unique requirements listed above, this paper utilizes two separate tests to eliminate certain forms of organization as incompatible with the functions on the PPESCO: (1) the limited liability test and (2) the mission first test. Only those forms of organization which are legal entities separate and apart from their owners will pass the limited liability test. Only those forms of organization which can be organized to prioritize mission over profit motive will pass the mission first test. After performing the preliminary tests of the entity analysis, the sole proprietorship, the partnership, the S-Corporation, and the C-Corporation emerge as unacceptable PPESCO legal structures. The sole proprietorship and the partnership are unacceptable PPESCO structures because they fail the limited liability test. The sole proprietorship is the simplest form of enterprise and involves an individual who does business without any form of organization. The sole proprietorship is not a separate legal entity apart from its sole proprietor.9 Therefore, creditors of the venture can claim right to the personal assets of the proprietor in order to satisfy any debts of the business. In terms of liability, the development of the PPESCO within an existing organization is analogous to establishing it as a sole proprietorship. Such action is imprudent because the assets of the existing organizations could be sought to satisfy any debts and obligations of the PPESCO.10 A partnership is an association of two or more persons to carry on as co-owners a business for profit.11 Much like the sole proprietor, partners to a partnership also generally face unlimited liability for the debts and obligations of their venture.12 The sole proprietorship and the partnership are unacceptable PPESCO structures because they do not limit liabilities of the project to those assets which have been invested in the project.
9

Choice of Business Entity, SC 65 ALI-ABA 19 , 50 See Generally In re Cent.Vermont Pub. Serv. Corp., 6460, 2001 WL 1002730 (June 26, 2001) (describing the liability of a regulated utility for the debts and obligations of an affiliated organization) 11 Uniform Partnership Act 1914 6 12 It must be noted that there is a form of partnership that limits the liability of all partners. Known as the limited liability limited partnership (LLLP), this form of partnership is substantially similar to the more flexible LLC, but must be organized for a business purpose.
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The Limited Liability Limited Partnership (LLLP), the C-corporation (C-corp),13 and the S-corporation (s-corp),14 are unacceptable PPESCO legal structures because they fail the mission first test. The LLLP is a unique form of partnership where all partners are entitled to limited liability.15 However, treasury regulations dictate that all forms of partnership must be entered into for a substantial business purpose.16 Such characterization of purpose throws into question whether the mission of the entity can be prioritized over profit motive. Likewise, statutory construction and established precedent of the c-corp and s-corp limit the ability of those organizations to prioritize mission over profits.17 When faced with a judgment call regarding actions of the organization, directors of these entities generally have a fiduciary duty to maximize shareholder value rather than considering the external effects of their decisions. Accordingly, the LLLP, c-corp, and s-corp are unacceptable PPESCO structures because they cannot prioritize mission over profits.

III. ANALYSIS OF SELECTED LEGAL STRUCTURES18 As to the structure of the business, it could be any form of business entity... There are a number of organizational forms which could pass both the limited liability and mission first tests as provided in the preliminary analysis, possibly housing the functions of the PPESCO. These forms include the Mutual Benefit Enterprise19, the Benefit Corporation20, the

13

See Generally, Business Entities, S vs. C- Tax Considerations in Corporate Choice of Entity, 2000 WL 1891751, 2 (describing the C-corp as a legal entity, organized for a business purpose, which has few limits on who may buy stock but must face taxation at the both entity level and at the shareholder level) 14 Id. (describing the S-corp as similar to a C-corp but with various limits on who may hold its shares and facing only pass through taxation) 15 Daniel S. Kleinberger, A User's Guide to the New Uniform Limited Partnership Act , 37 Suffolk U. L. Rev. 583, 619 (2004) 16 26 C.F.R. 1.7012 17 Dodge v. Ford Motor Co., 204 Mich. 459, 509, 170 N.W. 668, 685 (1919) (describing what is perhaps the best known case of a boards duty to prioritize shareholder value over the concerns of outside constituencies) 18 For a single page summary of selected legal structures, see Appendix 1. 19 11C V.S.A. 101, 102(15) 20 11A V.S.A. 21.01, 21.03(a)(1)

501(c)(3) Nonprofit Corporation21, and the Limited Liability Corporation22. To best understand which of these entities best serves the interests of the PPESCO, a more vigorous analysis is required. This analysis will focus on the capitalization, taxation, and organizational governance characteristics of the aforementioned business models. Ultimately however, the types of funding sought by each entitys organizers will determine each models PPESCO context utility.23 III.A. Mutual Benefit Enterprise Overview From a partnership to a corporation or a cooperative The mutual benefit enterprise is the first PPESCO applicable legal structure examined in this paper. The mutual benefit enterprise is a new form of business based on the Uniform Cooperative Limited Association Act (UCLAA). This form of business, a variation of the cooperative24, attempts to attract equity investment to a structure traditionally funded through debt or patronage. It also provides a governance structure where both patron members and investor members vote democratically on decisions of the enterprise. However, the mutual benefit corporations lack of tax based precedent would provide a high degree of uncertainty for the enterprise. Therefore, only equity seeking organizations deeply committed to the cooperative principles25 ought to organize their PPESCO as a mutual benefit enterprise. To best understand

21 22

26 U.S.C. 501(c)(3); 11B V.S.A. 1.01, 1.40(6); 11 V.S.A. 3001, 3001(11) 23 Wexler, Robert A., Effective Social Enterprise- A Menu of Legal Structures. Exempt Org. Tax. Rev. (2009). Social Enterprise Scholar Robert Wexler lists seven factors to be considered in a choice of entity analysis as: 1. Business plan; 2. Activity nature; 3. Funding sources; 4. Bifurcation of exempt and nonexempt activities; 5. Personal benefit ambitions; 6. Importance of control; and 7. Branding effects. Of these considerations, funding is the only category likely to vary with organizational form in this context. 24 11 V.S.A. 981; See also, Christopher R. Kelley, "New Generation" Farmer Cooperatives: The Problem of the "Just Investing" Farmer, 77 N.D. L. Rev. 185, 187 (2001) (defining the cooperative as a business owned and democratically controlled by the people who use its services and whose benefits are derived and distributed equitably on the basis of use.) 25 Kreis, Donald M., The Next Greatest Thing: An Electric Cooperative Manifesto. Vermont Law School Research Paper No. 11-18. (Describing the cooperative principles as: (1) Voluntary and open membership; (2) Democratic member control; (3) Member Economic Participation; (4) Autonomy and Independence; (5) Education, training and information; (6) Cooperation among cooperatives; and (7) Concern for Community. These principles potentially impose numerous constraints in the context of the PPESCO.

the mutual benefit enterprises legal structure, one must examine its capitalization, taxation, and governance in greater detail.
A.1. Mutual Benefit Enterprise Capitalization Capitalization of the mutual benefit enterprise loosely resembles that of the traditional cooperative. The traditional cooperative attracts member equity in three ways: (1) retained patronage refunds26, (2) per unit capital retains27, and (3) member purchases of capital stock.28 The mutual benefit enterprise relies on members and patronage for much of its capital, but differs from the traditional cooperative in that it also allows investor-only members to participate in the organization. These investors provide equity in exchange for a return on their investment, coupled with limited organizational voting rights.29 Said differently, the primary difference between the cooperative and the mutual benefit enterprise is whether non-patron investors can be granted membership status.30 This mixture of equity investment and cooperative principles has led to the mutual benefit enterprises informal designation as bastard child of the cooperative and the LLC.31 In an attempt to placate cooperative purists and reinforce the mutual benefit enterprise cooperative principles, statutes provide that if a mutual benefit enterprise has investor members, the organic rules may not reduce the allocation to patron members to less than 50 percent of profits.32 The patron-members must receive at least as much return on investment as investor-members. This is a potentially significant restraint on the mutual benefit enterprises

26

See Kelley, Supra. at note 24 (describing retained patronage funds as sums withheld by the cooperate from its net earnings distributions to its members) 27 See Kelley, Supra. at note 24 (describing per-unit capital retains as user investments in a cooperative that are based on the value or volume of the commodity handled by the cooperative) 28 See Kelley, Supra. at note 24 (describing these purchases as only available to members, rather than outside investors) 29 Uniform Limited Cooperative Association Act, pg 8 30 Though, there is much uncertainty as to whether the investor members would be considered bona -fide members of the cooperative, and therefore exempt from Vermonts securities registration requirement. See (8) Vt. Stat. Ann. tit. 9, 5201(8) 31 Gutkneckt, Dave. More on New Coop Laws. Quoting Don Kreis, Available at: http://www.cooperativegrocer.coop/articles/2011-03-24/more-new-co-op-laws 32 11C VSA 1004(c);

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business model because it limits PPESCO investor compensation according to member compensation, not market forces. A.2. Mutual Benefit Enterprise Taxation Uncertain tax consequences are the greatest impediment to a potential PPESCO mutual benefit enterprise model.33 There is little precedent to follow in this area because mutual benefit enterprise statutes are relatively new. For example, Vermonts mutual benefit enterprise law only took effect on April 20th 2012.34 A substantially similar entity known as the limited cooperative association has existed in some states for roughly a decade, but its tax consequences also remain unclear.35 Prudence dictates that any parties planning to organize a PPESCO as a mutual benefit enterprise should seek a private letter ruling from the IRS to verify the applicable taxation status. To best understand the taxation of the mutual benefit enterprise, one must examine three substantive areas of tax law: (1) traditional cooperative taxation; (2) check-the box regulations; and (3) taxation of the limited cooperative association. A.2.i. Traditional Cooperative Taxation Traditionally, the tax regime for cooperatives was based on a variation of the corporate tax code and could be found under subchapter T of the internal revenue code.36 It assumes that all income flows through the cooperative and on to patrons, leaving no margins to be retained as profit by the cooperative. Thus, margins are taxed only once at the entity level.37 However, subchapter T also provides that non-patron derived income is subject to double taxation in a manner similar to the corporate taxation scheme.38 It is possible that the mutual benefit enterprise

33

Jimmy Kroger, The New Frontier: Tax Implications of Limited Cooperative Associations , Fed. B.A. Sec. Tax'n Rep., Summer 2009, at 4 34 11C V.S.A. 101 35 Kroger, Supra at note 33, page 6 36 26 U.S.C.A. 1381; (But see also 26 U.S.C.A. 501(c)(12) for those cooperatives organized and operated for exempt purposes) 37 Donald A. Fredrick, Income Tax Treatment of Cooperatives: Background. Cooperative Information Report 44, Part I, page 28 (2005) 38 Id.

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or limited cooperative association would not be eligible to file under subchapter T since their inclusion of non-patron investors is beyond what the IRC precedent has defined as a cooperative.39 A.2.ii. Check-the-Box Regulations Under what is known as check-the-box taxation, most business entities not classified as corporations can elect their own classification for federal taxation purposes via Form 8832.40 Generally, eligible entities can choose to be treated as either a corporation or a partnership.41 The key tax distinction between these elections is that the partnership faces only pass through taxation while the corporation faces double taxation. The actual rate of taxation will vary according to the total income of the taxable entity or its partners. Under pass through taxation, the gains and losses of an enterprise are passed through to the partners and taxed only once according to each partners proportional ownership interest. Those organizations electing pass through taxation must still file Form 106542 with the service and issue Schedule K-1s43 to all partners. Each partner uses the information from Form K-1 to adjust their own income on their Form 104044 according to the partnerships income and losses. In contrast, if electing corporate taxation an enterprise is taxed twice, once at the entity level, then again at the shareholder. If electing corporate taxation, the entity must file Form

39

Puget Sound Plywood, Inc. v. C. I. R., 44 T.C. 305, 307-08 (1965) acq., 1966-2 C.B. 3 (1966) (defining operating on a cooperative basis for the purposes of subchapter T through a three factor a nalysis: 1. subordination of capital; 2. democratic control; and 3. Proportionate allocation of profits based on patronage.) 40 IRS Form 8832. Entity Classification Election. Available at: http://www.irs.gov/pub/irs-pdf/f8832.pdf 41 Treas. Reg. 301.7701-3(a); 42 IRS Form 1065. US Return of Partnership Income. Available at: http://www.irs.gov/pub/irs-pdf/f1065.pdf 43 IRS Schedule K-1. Partners Share of Income, Deductions, Credits, etc. Available at: http://www.irs.gov/pub/irs-pdf/f1065sk1.pdf 44 IRS Form 1040. US Individual Income Tax Return. Available at: http://www.irs.gov/pub/irs-pdf/f1040.pdf

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112045 with the Service. Individuals holding interests in an organization electing corporate taxation report income or loss resulting from that interest on their Form 1040. A.2.iii. Limited Cooperative Association Taxation Unincorporated associations, such as the limited cooperative association, can elect to exercise check the box taxation. In a 2001 private letter ruling, the IRS stated that a Wyoming limited cooperative association could elect via check the box regulations to be taxed as a corporation under subchapter T or a partnership under subchapter K.46 This means that if electing to be taxed as a corporation, the limited cooperative association might be eligible to file like a traditional cooperative under subchapter T.47 If electing to be taxed as a partnership, income derived from the limited cooperative association would face federal taxation only once, regardless of its source.48 However, since the discussion above is based on a private letter ruling, it cannot be cited as precedent. Furthermore, while the limited cooperative association is substantially similar to the mutual benefit enterprise, there are no guarantees that the two will face the same taxation scheme. In summary, a mutual benefit enterprise electing to be taxed as a corporation faces uncertainty as to whether it might file under subchapter T since it has outside investors. That being said, an unincorporated association such as a mutual benefit enterprise could potentially elect to be taxed as a partnership and therefore avoid any double taxation regardless of its outside investors. Any PPESCO entity wishing to organize as a limited cooperative association or mutual

45

IRS Form 1120 US Corporation Income Tax Return. Available at: http://www.irs.gov/pub/irs-pdf/f1120.pdf 46 Priv. Ltr. Rul. 200139020 (June 29, 2001). (The description of check the box taxation is a recurring theme in this paper as several of the proposed entities can elect to check the box, thereby choosing whether to be taxed as a corporation or a partnership.) 47 26 USCA 1381 48 Treas. Reg. 301.7701-3(a);

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benefit enterprise should obtain a private letter ruling from the IRS before engaging in any business.49 A.3. Mutual Benefit Enterprise Governance The governing documents of a mutual benefit enterprise, referred to as its organic rules, are its articles of organization and bylaws.50 A foundational characteristic of all cooperatives which carries over to the mutual benefit enterprises organic rules is the requirement that the organization be democratically controlled. In a traditional cooperative, control over the organization is vested in the members--as opposed to the stockholders--by allowing them to elect the trustees and officers.51 In the mutual benefit enterprise, both the investor-members and the patron-members are allowed to vote. The voting interests are generally based on patronage rather than proportional of equity invested, but some statute provides for either.52 However, most do provide that the total voting power of all patron members may not be less than a majority of the entire voting power entitled to vote.53 Such a provision reserves control of the organization for patron members, rather than investors. While democratic control of the PPESCO could have its advantages, this paper recommends against such a structure due to its potential for drastic inefficiencies.54 A.4. Mutual Benefit Enterprise Summary After reviewing the capitalization, taxation, and governance characteristics of the cooperative-based mutual benefit corporation, it becomes clear that this form of entity is still in its nascence. Its innovative financing allows for limited outside investment while maintaining democratic governance. However, its lack of tax related precedent makes it an imperfect
49 50

This can sometimes be a year-long undertaking which can cost almost $8,700. 11C V.S.A. 102(20); James B. Dean & Thomas Earl Geu, The Uniform Limited Cooperative Association Act: An Introduction, 13 Drake J. Agric. L. 63, 81 (2008) 51 Kroger, Supra at note 33, page 10 52 Id. 53 11C VSA 514(1) 54 See Generally, S.A. Baba, Democracies and Inefficiency. Economics & Politics, 9: 99114 (1997)

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candidate for the PPESCO business model. If electing corporate taxation, it is unclear whether it would be eligible for subchapter T treatment. Its dedication to democratic governance also raises efficiency concerns. Therefore, only those start-ups firmly committed to the cooperative principles should consider utilizing the mutual benefit enterprise as their PPESCO structure. III.B. Benefit Corporation Overview The charter of an organization, such as the Articles of Association for the establishment of a corporation, allows for as narrow a definition of purposes and mission of the organization as the incorporators choose to specify. This offers the opportunity to build-in a public purpose mission that can limit the activities of the entity The benefit corporation is the second PPESCO applicable legal structure examined in this paper. A variation on the traditional corporate form, the benefit corporations unique articles of association specify that it has been formed in accordance with a public benefit purpose.55 This is why the benefit corporation passes the mission first test described in the preliminary analysis , while normal corporations do not.56 The public benefit purpose provides the benefit corporations board of directors with a duty to consider factors beyond shareholder value when contemplating actions within their business judgment.57 Eleven states currently have statutes explicitly describing this form of incorporation.58 According to the internal affairs doctrine however, an entity wishing to organize as a benefit corporation could organize under any of the eleven statutes and retain the statutorily provided protection, regardless of where they do business in the United States.59 One well-known example of a benefit corporation is Patagonia.60

55 56

11A VSA 21.08(a) But, see Barnali Choudhury, Serving Two Masters: Incorporating Social Responsibility into the Corporate Paradigm, 11 U. PA. J. BUS. L. 631(2009) (arguing that traditional for-profit governance measures can serve both masters) 57 Alissa Mickels, Beyond Corporate Social Responsibility: Reconciling the Ideals of A for-Benefit Corporation with Director Fiduciary Duties in the U.S. and Europe, 32 Hastings Int'l & Comp. L. Rev. 271, 283 (2009) (discussing the business judgment rule as applied to benefit corporations 58 Benefit Corp Information Center. State by State Legislative Status. Available at: http://www.benefitcorp.net/state-by-state-legislative-status 59 CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 90, 107 S. Ct. 1637, 1650, 95 L. Ed. 2d 67 (1987) (stating that the internal affairs of a corporation are governed by the corporate law of the State of its incorporation) This conclusion is valid for any of the entities mentioned throughout this papers analysis.

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Aside from its public benefit purpose, the benefit corporation varies little beyond the normal corporate form. Its capitalization and taxation mirror the options available to traditional corporations, and likewise, its interests can be securitized and publicly traded. Benefit corporations are governed in the same manner as traditional corporations, save for inclusion of a benefit director. The benefit director is responsible for ensuring and recording the organizations benefit purpose achievements. The benefit corporation is the best option for those PPESCO models planning to attract a large number of diverse investors, or those instances where the ability to publicly trade interests is a necessary investment incentive. Benefit corporations are different than b-corps.61 Benefit corporations are statutorily defined corporations whose articles of association include a publicly beneficial purpose.62 In contrast, b-corp is a third party certification applicable to most types of for-profit business organizations meeting certain publicly beneficial criteria.63 This certification is provided by BLabs. B-Labs is a non-profit organization which: (1) promotes benefit corporation legislation; (2) certifies the societal benefits associated with benefit corporations; and (3) has organized an investment community interested in financing organizations who qualify for B-Corp status.64 Therefore, an organization may elect to seek B-Corp certification for branding purposes, or for want of inclusion in a certain community, but is not statutorily required to do so.65 Ben and Jerrys is an example of a normal corporation which recently gained B-labs certification.66 Conversely, King Arthur flour is an example of a benefit corporation also maintaining B-Corp

60

Joh Tozzi, Bloomberg, Patagonia Road Test New Sustainability Legal Status. Available at: http://www.bloomberg.com/news/2012-01-04/patagonia-road-tests-new-sustainability-legal-status.html 61 Benefit Corp Information Center. Benefit Corp v. Certified B-Corp. Available at: http://www.benefitcorp.net/what-makes-benefit-corp-different/benefit-corp-vs-certified-b-corp 62 Id. 63 Id. (B-Labs certifies a wide range of entities including the Corporations, LLCs, and Partnerships) 64 GIIRS Ratings and Analytics for Impact Investing. Pioneer Investors. Available at: http://www.giirs.org./for-investors/pioneer-investors 65 Many benefit corporation statutes require third part certification, but they dont require the certification be done by B-Labs. 66 Joe Confino, The Guardian, Ben and Jerrys: Parent Companies Dont Always Know Best. (recognizing Ben and Jerrys as the first wholly owned subsidiary to qualify for B-Corp status) Available at: http://www.guardian.co.uk/sustainable-business/ben-jerrys-b-corporation-social-responsibilities

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certification.67 To best understand the benefit corporations legal structure, one must examine its

capitalization, taxation, and governance in greater detail.

B.1. Benefit Corporation Capitalization The strongest argument in favor of establishing a benefit corporation PPESCO is its ability to attract investment. If it is important that the PPESCO be publicly traded on regulated security exchanges, then the benefit corporation PPESCO may be the best choice. To best understand the capitalization of the benefit corporation one must examine three factors: (1) conventional corporate capitalization; (2) federal securities regulation; and (3) state blue sky laws. B.1.i. Conventional Corporate Capitalization As a variation of the traditional corporate form, the benefit corporation is primarily capitalized through the issuance of stock and bonds.68 Stocks are an equity-based form of investment and bonds are a debt based form of investment. An investor who buys stocks contributes capital to an organization and receives an ownership interest, along with any dividends it provides, as consideration for his capital.69 In contrast, an investor who buys bonds temporarily contributes capital to an organization, and in return, receives an interest payment from the company for the use of their capital.70 In addition to the normal corporate capitalization avenues, the public purpose of the benefit corporation might also draw the appeal of private foundations considering program related investments.71

67

Terri Rosenstock, King Arthur Flour Becomes a Vermont Benefit Corporation. Available at: http://www.kingarthurflour.com/press/Vermont-Benefit-Corporation.html 68 See Generally, Philip R. Fink. Practical Tax Strategies, Tax Differences Offset Bond and Stock Fund Similarities. 2001 WL 473762, 1 69 18 C.J.S. Corporations 172 70 19 C.J.S. Corporations 751 71 Though, it must be noted that a foundation may be weary of investing in a publicly traded company who might lose sight of its mission as a result of unforeseen shareholder needs (e.g. the hostile takeover). A more detailed discussion of program related investments occurs below in Section III.D.1.

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If a corporation decides to raise capital through the issuance of stock, known as shares, there are several options available. Shareholder contributions are generally divided into two categories: (1) common stock (classified by class) and (2) preferred stock (classified by series). Common stock is the ordinary stock of a corporation. Common stock can in some cases allow an owner to participate in management of the corporation but doesnt have priority or preference over other stock when the corporation distributes dividends.72 On the other hand, preferred stock isnt normally associated with governance rights and is typically granted preference over common stock when the corporation distributes dividends.73 A PPESCO aspiring to a grand scale could begin as a closely held corporation,74 later access larger capital markets by offering their stock to the public in manner prescribed above. However, any PPESCO issuing interests beyond the provided exemptions must comply with the Security and Exchange Commissions (SEC) registration and reporting requirements, starting with form S-1.75 B.1.ii. Federal Securities Regulation The issuance of securities, such as stocks or bonds, is regulated at both the state and federal levels. Stocks and bonds are both treated as securities for federal purposes under the Securities Act of 1933 and the Securities and Exchange Act of 1934.76 These acts mandate that most businesses issuing stock, bonds, or other investment interests are subject to special reporting and registration requirements.77 There are three exemptions commonly utilized to skirt federal security registration requirements: (1) the private offering exemption; (2) the intrastate

72 73

18 C.J.S. Corporations 206 18 C.J.S. Corporations 207 74 A closely held corporation is not publicly traded. This term receives further treatment below in section III.B.3. 75 Form S-1, Registration Statement under the Securities Act of 1933. Available at: http://www.sec.gov/about/forms/forms-1.pdf (used to register securities which fall beyond the typical registration exemptions offered by Regulation A and Regulation D.) 76 15 U.S.C.A. 77b; See also S.E.C. v. W.J. Howey Co., 328 U.S. 293, 300, 66 S. Ct. 1100, 1104, 90 L. Ed. 1244 (1946) (defining the test of whether an investment is a security as: (1) An investment of money; (2) Existence of a common enterprise; and (3) An expectation of profits from the work of others) 77 Id. At 77b

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exemption; and (3) the small offering exemption.78 The private offering exemption allows an issuer to assemble as much as $5,000,000 from up to 35 non-accredited investors and an unlimited amount from accredited investors. 79 The intrastate exemption allows an issuer to raise an unlimited amount of capital from person-residents, so long as all parties to the transaction are located in the same state and the transaction satisfies state security registration laws.80 The small offering exemption allows an issuer to raise no more than $5 million within a 12 month period.81 At least one of these exceptions would likely apply to the PPESCO context. B.1.iii. State Blue Sky Laws Known as blue sky laws, most states also have their own reporting requirements supplementing federal securities regulation. Any startup PPESCO should check their relevant state law before issuing equity interests.82 For example, Vermont has its own security reporting requirements,83 but also provides several exemptions including: (1) an exemption for securities sold to no more than 25 people in Vermont during a consecutive 12 month period;84 and (2) an exemption for securities sold to only institutional investors.85 The definition of institutional investors in this case is quite broad, but generally, any institution or individual with more than $10,000,000 worth of assets qualifies as an institutional investor.86 The cacophony of available capitalization methods are the strongest argument in favor of the benefit corporation PPESCO structure. On the other hand, it is important for any PPESCO potentially issuing security interests to examine the relevant state/federal securities reporting laws and their respective exceptions. If nothing else, such analysis requires a diligent weighing of the

78 79

2 Venture Cap. & Bus. Fin. 11:2 17 C.F.R. 230.506 80 17 C.F.R. 230.147 81 17 C.F.R. 230.505 82 A 50 state survey of blue sky laws is available at: http://www.seclinks.com/id16.html 83 9 VSA 5301 84 9 VSA 5202(14) 85 9 VSA 5202(13) 86 9 VSA 5102(11)

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reporting requirements administrative burden against the possible benefits of accessing public capital markets. B.2. Benefit Corporation Taxation Taxation of the benefit corporation directly mirrors the taxation of the conventional corporation. The benefit corporations choice of taxable structure will depend largely upon the foreseeable funding sources. To best understand the benefit corporation taxation, one must examine two specific areas of tax law: (1) conventional corporate taxation; and (2) incentives contingent upon taxable status. B.2.i Conventional Corporate Taxation Taxation of the benefit corporation is determined by what form of incorporation the benefit corporation chooses. The benefit corporation could take the form of either the SCorporation (s-corp), or the C-Corporation (c-corp).87 The most important distinction between the two is that the s-corp is eligible for pass through taxation while the c-corp faces taxation of income at both the entity level and the shareholder level.88 To be eligible for S-Corp status, a corporation must: (1) be a domestic corporation; (2) have shareholders who are individuals, estates, or certain trusts; (3) have shareholders who are citizens or resident aliens; (4) have only one class of stock; (5) have no more than 100 shareholders; and (6) must not be an ineligible corporation.89 While S-Corp status would allow the PPESCO to avoid double taxation, it would also prevent the PPESCO from raising capital by selling shares to any organization or local commercial bank. Therefore, any benefit corporation PPESCO looking to secure investment via banks or other organizations would have to file taxes as a C-Corp and face the accompanying double taxation.

87

See Generally, Courtney Sparks White, S Corporations: A Taxing Analysis of Proper Valuation, 37 Cap. U. L. Rev. 1117, 1118-22 (2009) 88 Id. 89 Id.

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B.2.ii.Incentives Contingent upon Taxable Status There are several advantages available to the benefit corporation PPESCO that result from its taxable status. These advantages mostly stem from the special tax credits available for investment in renewable resources and include as chief among them the investment tax credit.90 By utilizing the investment tax credit, a PPESCO established as a taxable entity could take advantage of a 30% tax liability reduction for some types of renewable generation hardware it purchases. Such an arrangement might make on-site renewable electric generation a cost effective piece of most PPESCO projects. Or, consider for a moment another Micro-ESCO which differs from the PPESCO in that its narrowly focused mission is to produce clean energy associated with solar generation; some call it the solar energy utility.91 Vermont is a feasible location for such an entity. If one measures Vermonts current $0.271/kwh solar feed in tariff92 against the 25-year guaranteed lifetime of sun tracking solar panels manufactured in Vermont by All Earth Renewables, solar is at grid parity.93 The state of Vermont also offers a unique advantage for the solar utility model in that they have streamlined their residential solar net metering application process.94 Furthermore, if you factor in the 30% investment tax credit95 (which is guaranteed upon the outset of the investment and

90

See Generally, Jenna Goodward, World Resources Institute, Bottom Line on Renewable Energy Tax Credits. Available at: http://www.wri.org/publication/bottom-line-series-renewable-energy-tax-credits 91 See Generally, Joel B. Eisen, Residential Renewable Energy: By Whom?, 42 Envtl. L. Rep. News & Analysis 10755, 10759-60 (2012) (describing the advent of the solar energy utility and how that entitys requirements mirror the skills, capabilities, and experience of various VEIC staff members who might build a for profit taxable subsidiary of VEIC known as a RenGen ESCO. 92 Vermont Small Solar Feed in Tariff, aka the Standard Offer. Available at: http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=VT36F 93 According to, http://www.docstoc.com/docs/6343740/Should-I-lease-or-buy-the-AllSun-Tracker# (a third party) Average Allsun Solar Tracker kWh/year=5760; 5760 x 25 year lifecycle= 144,000 kwh; Installed tracker price of $32,800/144,000= $0.227/kWh lifecycle solar cost 94 See Generally 30 VSA 219(a)(c) (allowing for expedited certificate of public good approval of roughly ten days) 95 http://www.seia.org/policy/finance-tax/solar-investment-tax-credit

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valid through at least 2016) theres a return on investment that should be drawing venture capital from ten states away.96 There are several companies already taking advantage of this solar utility market including Suncommon (VT) and Sungevity (CA).97 As the cost of fossil fuels rise,98 this business

model only becomes more profitable. This distributed generation model, colloquially known as
the democratization of the power grid, is the future of power generation. A move toward such a grid would leave our power supply less vulnerable to storms and cascading outages such as the Northeast blackout of 2003.99 Regardless of the numbers and impacts, equity investment provides for the utilization of tax credits and investment incentives unavailable to the tax exempt entity. In summary, taxation of the benefit corporation PPESCO could take a variety of forms depending upon which form of corporation the benefit corporation chooses. The s-corp benefit corporation allows for pass through taxation, but limits the type of investors available. The ccorp benefit corporation allows for a diverse variety of investors but invokes taxation at both the entity level and the shareholder level. Tax credits exist which might weigh against any exceedingly heavy tax burden. Situation-specific facts and circumstances, such as who the investors will be and what tax credits are available, will be a determining factor how the benefit corporation would be taxed.
96

These numbers dont even consider the sale of renewable energy credits which, under current Vermont law, belong to the utility who accepts the power. 97 Jeff Himmelman. The Secret to Solar Power. New York Times. Published: 9/09/2012. Available at: http://www.nytimes.com/2012/08/12/magazine/the-secret-to-solar-power.html?pagewanted=all 98 Natural gas is the fuel that much of the energy industry is now resetting its clock to. This is for three reasons: (1) GEs newest combined cycle natural gas combustion turbi nes; (2) the predisposition of natural gas to determine the price at the margin due to its ability to ramp up and down quickly; and (3) an artificially low price due to a supply glut resulting from a recent hydraulic fracturing boom. Considered by many to be the transition between traditional fossil fuels and renewables, it presents a good picture of where energy markets are headed. Most analysts predict natural gas will at least double in price over the next five years as plans for liquefied natural gas (LNG) import terminals have been transformed to plans for export terminals in an effort to satisfy the supply glut by bringing in world markets. When that happens, renewables will be the most competitive energy source according to lifecycle costs and the solar utility energy model will go from green to golden. 99 JR Minkel. The Northeast Blackout: Five Years Later. Scientific American. Published:10/13/2008 Available at: http://www.scientificamerican.com/article.cfm?id=2003-blackout-five-years-later

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B.3 Benefit Corporation Governance Generally, corporations are governed by the terms set out in their organizing documents, which include their bylaws and articles of incorporation.100 These documents assign a corporations day-to-day affair management to a group of officers,101 whose actions are overseen by a board of directors, whose actions are in turn overseen by the corporations shareholders.102 The directors have a number of fiduciary duties to the stockholders, including the duty of loyalty and the duty of care, and face shareholder suit for violation of those duties.103 Governance of the benefit corporation differs from the conventional corporation because one of its directors has a duty to consider the public good protected within the organizing documents. This benefit director has a duty to record and report net societal benefits the company produces.104 The main disadvantage of the benefit corporation PPESCO model is the theoretical susceptibility of the publicly traded corporate model to a stock driven buyout of the board, known as a hostile takeover.105 The acquiring party in such a hostile takeover would potentially make decisions which place shareholder value above mission.106 While benefit corporation statutes have been written with the intention preventing such an abandonment of purpose, there has been little judicial testing of the concept. Comparatively, the judicial roots of the directors fiduciary duty to maximize shareholder value run deep. That being said, the closely held benefit corporation might provide a definitive answer to the hostile takeover threat in the corporate context. 107

100 101

1 Treatise on the Law of Corporations 3:3 (3d) 1 Treatise on the Law of Corporations 8:2 (3d) 102 2 Treatise on the Law of Corporations 9:1 (3d) 103 2 Treatise on the Law of Corporations 10:4 (3d) (stating that Stone v. Ritter holds there are only two fiduciary duties: the duty of loyalty and the duty of care, so that good faith is subsumed within the director's duty of loyalty) 104 11A VSA 21.10 105 4 Treatise on the Law of Corporations 23:6 (3d) (discussing the use of defensive measures in the face of hostile takeover) 106 Violating the above preliminary analysis mission first test. 107 Vt. Stat. Ann. tit. 11A, 20.02

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The benefit corporation could be organized as a closely held corporation in order to limit the influence of outside parties. The corporation could either be organized in this manner from the outset, or shareholders could subsequently vote to organize in this manner. Closely held corporations are ones which generally require no board of directors, have few shareholders, place a limit on transferability of shares (such as a right of first refusal), and often have no ready market for their interests.108 Such a corporation would have the ability to safeguard mission primacy against any sort of hostile takeovers. In Vermont, a close corporation may have no more than thirty-five shareholders, may operate without a board of directors, may not need to adopt bylaws, and can operate with less formality, than a normal corporation.109 If one were only looking to raise capital from a small number of select shareholders, the closely held corporation represents the best governance option available in the context of the PPESCO benefit corporation. B.4. Benefit Corporation Summary In summary, the benefit corporation offers a great range of flexibility when raising capital, but faces taxation at both the entity and shareholder level if seeking capital from banks or organizations. However, there are numerous advantages available in the taxable context, such as the investment tax credit, which might balance against this tax burden. The explicit ability to prioritize corporate mission over shareholder value is a characteristic of the benefit corporation which separates it from the typical corporation. It is recommended that the PPESCO be organized as a closely held benefit corporation in order to safeguard against any hostile takeovers, if such a recommendation matches available funding. If funding needs require that the PPESCO be publicly traded, then the c-corp benefit corporation PPESCO would be the best choice. However, it is important to note that the publicly traded benefit corporation would face a

108 109

18 C.J.S. Corporations 9 Paul H. Ode, Jr., Esq., Ten Questions Regarding Choice of Business Entity, Vt. B.J., DECEMBER 2001, at 29

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somewhat higher likelihood of shareholder suit than other types of benefit corporations due to its diversity of shareholders. III.C. 501(c)(3) Nonprofit Corporation Overview A non-profit Micro ESCO may also be a more attractive partner for other public-interest entities that could offer support for the establishment and ongoing operation of a new entity The tax exempt 501(c)(3) nonprofit corporation is the third PPESCO applicable legal structure examined in this paper. The 501(c)(3) designation is derived from a tax code section allowing charitable organizations exempt status, while nonprofit corporation designation is a creature of state-specific enabling statutes. Such an entity is organizationally similar to the conventional corporation discussed above, but is organized and operated for exempt purposes under section 501(c)(3) of the internal revenue code. VEIC is one example of a 501(c)(3) nonprofit corporation.110 It has numerous avenues through which to pursue capital, but is forbidden from utilizing equity investment. The 501(c)(3) nonprofit corporation has no taxable income, unless it conducts business unrelated to exempt purposes. It must however, file Form 990 with the IRS annually to retain its exempt status.111 It is governed by a board of directors charged with furthering the exempt purposes of the corporation. Upon dissolution, the directors must ensure that all assets remain in the public sphere.112 It is conceivable that some organizations, such as government entities, would only contract with a nonprofit. Such a situation would be a determinative factor of whether the 501(c)(3) nonprofit corporation is an appropriate PPESCO legal structure. To best understand the 501(c)(3) nonprofit corporations legal structure, one must examine its capitalization, taxation, and governance in greater

detail.

110 111

Supra. at note 3 IRS Form 990. Return of Organization Exempt From Income Tax. Available at: http://www.irs.gov/pub/irs-pdf/f990.pdf 112 2B Am. Jur. Legal Forms 2d 27:261.1

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III.C.1. 501(c)(3) Nonprofit Corporation Capitalization The 501(c)(3) organization derives its funding primarily from grants, charitable contributions, service fees, program related investments, sponsorships, and bonding.113 Grants are normally given to charitable organizations by governments or private foundations in consideration of a specific action by the 501(c)(3).114 Charitable contributions reduce income tax liability of the donor and are given to charitable organizations with the expectation that it be used in furtherance of charitable purposes.115 Service fees fund a growing sector of entrepreneurial nonprofit organizations.116 Program related investments are temporary contributions meant to further exempt purposes of a contributing private foundation.117 Finally, 501(c)(3)s can also accept charitable contributions from corporate sponsors118 so long as any acknowledgement119 of that corporate sponsor is not an advertisement,120 which would be considered unrelated business

113

Public bonding in support of 501(c)(3)s is available on a limited basis from governmental authorities. See Generally, James P. Monacell, Bond Practice: Overview of Bond Financing for 501(c)(3) Organizations (describing the limited circumstances during which public bond financing is available to 501(c)(3) organizations); and Michael S. Knoll, The UBIT: Leveling an Uneven Playing Field or Tilting a Level One?, 76 Fordham L. Rev. 857, 888 (2007). (Stating that state and local governments can issue taxexempt private activity bonds on their behalf of 501(c)(3)s. Private activity bonds are bonds issued by state and local governments where the proceeds are directed toward a trade or business carried on by a nongovernmental person. However, in the context of a PPESCO that might receive a return on its investment, anti-arbitrage rules in IRC 148 might require limitation of that return to the amount yielded by the bond. Such a circumstance would be a great opportunity to utilize the Minnesota Flip Model, to limit the energy retrofits return on investment to the amount which would normally be provided by the bond yield.) 114 Office of Research, Grants, and Contracts. Northern Kentucky University. Available at: http://www.nku.edu/~researchgc/policies/gift.php 115 26 U.S.C.A. 170(c)(2)(b) 116 See Generally, Edward L. Glaeser, Andrei Shleifer, Non-Profit Entrepreneurs. Available at: http://www.economics.harvard.edu/files/faculty/56_not-for-profit_entrepreneurs.pdf 117 26 U.S.C.A. 509 (describing the characteristics of a private foundation); the Program related investment is discussed in depth later in this paper. 118 26 U.S.C.A. 513(i)(2) (describing qualified sponsorship payments as exempt from classification as unrelated business taxable income) 119 26 C.F.R 1.513-4(c)(2)(iv) (describing acknowledgment as exclusive sponsorship arrangements; logos and slogans that do not contain qualitative or comparative descriptions of the payor's products, services, facilities or company; a list of the payor's locations, telephone numbers, or Internet address; valueneutral descriptions, including displays or visual depictions, of the payor's product-line or services; and the payor's brand or trade names and product or service listings. Logos or slogans that are an established part of a payor's identity are not considered to contain qualitative or comparative descriptions. 120 26 C.F.R 1.513-4(c)(2)(iv) (describing advertisement as any message or other programming material which is broadcast or otherwise transmitted, published, displayed or distributed, and which promotes or

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taxable income (for example, NPR can mention their corporate sponsors website and slogans on air, but little else).121 C.2. 501(c)(3) Nonprofit Corporation Taxation Regulatory constraints related to the taxation of the 501(c)(3) corporation PPESCO are its largest drawback. The 501(c)(3) is granted exemption from federal income taxes under the reasoning that the government should subsidize certain activities which benefit the public. Accordingly, the government places numerous limitations on the tax exempt organization to ensure that it acts in a manner which truly benefits the public. This description of the 501(c)(3) as defined by its tax exempt status requires a detailed analysis of how a such an organization retains that status, including a discussion of the three basic constraints placed upon it: (1) the organized and operation constraint; (2) the nondistribution constraint; and (3) the prohibition of various political activities.122 Be forewarned: the following body of discussion is complex, conflicting, and full of gray areas.

C.2.i 501(c)(3) Nonprofit Corporation Taxation: Organized and Operated Constraint

markets any trade or business, or any service, facility or product. Advertising includes messages containing qualitative or comparative language, price information or other indications of savings or value, an endorsement, or an inducement to purchase, sell, or use any company, service, facilit y or product.) 121 Gioia Ligos and Russlyn Guritz. Corporate Sponsorship Income. 1994 EO CPE Text page 14. Available at: http://www.irs.gov/pub/irs-tege/eotopico94.pdf 122 For analysis of a fourth, judicially created but unevenly applied constraint, known as the commerciality doctrine, see W. Marshall Sanders. The Commerciality Doctrine is Alive and Well, 16 TXNEXEMPT 209. (stating an organization that carries on activities of a type, and in a manner, similar to those of forprofit enterprises as too large a part of its overall activities does not meet the requirements for exemption under Section 501(c)(3) because it has a substantial nonexempt (i.e., commercial) purpose) But see also 26 C.F.R. 1.501(c)(3)1(e) (stating An organization may meet the requirements of section 501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of such trade or business is in furtherance of the organization's exempt purpose or purposes and if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or business)

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The first limitation of the 501(c)(3) nonprofit corporation is the organized and operated constraint. This constraint is derived from the tax codes language stating that any organization organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes,123 is excluded from the payment of federal income taxes. Regulators have interpreted this language as providing for two separate tests comprising the backbone of the tax exempt corporation: (1) the organizational test; and (2) the operational test. A detailed examination of the relevant statutory language is required to assure the validity of a PPESCOs 501(c)(3) status as organized and operated for exempt purposes. An organization will satisfy the organizational test only if: [I]ts articles of organizationlimit the purposes of such organization to one or more exempt purposes . . . [and] . . . do not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.124 Likewise, an organization will satisfy the operational test only if: [I]t engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.125 Since both of these tests seem to hinge so importantly on the definition of exempt purposes, it is vital to the cause of the PPESCO that one examines that definition with a fine degree of detail. After all, construed broadly and without precedent, anything could be considered a religious, charitable, scientific, testing for public safety, literary, or educational purpose.126 For the purposes of the PPESCO, the terms charitable, scientific, and educational are likely to apply and therefore deserve a deeper analysis. The Service defines charitable as constituting: Relief of the poor and distressed or of the underprivileged; advancement of religion; advancement of education or science; erection or maintenance of public buildings, monuments, or works; lessening of the burdens of Government; and
123 124

26 U.S.C.A. 501(c)(3) 26 C.F.R 1.501(c)(3)-1(b)(1)(i) 125 26 C.F.R 1.501(c)(3)-1(c) 126 Supra at note 26

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promotion of social welfare by organizations designed to accomplish any of the above purposes, or (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency.127 The Service defines educational as constituting: The instruction or training of the individual for the purpose of improving or developing his capabilities or the instruction of the public on subjects useful to the individual and beneficial to the community.128 The Service defines scientific as constituting: carrying on of scientific research in the public interestin furtherance of a scientific purposeif the results of such research are made available to the public on a nondiscriminatory basis and elaborates that scientific research carried on for the purpose of aiding a community or geographical area by attracting new industry to the community or area or by encouraging the development of, or retention of, an industry in the community or area will be regarded as carried on in the public interest.129 Accordingly, it appears that the PPESCO would satisfy the first constraint and qualify for 501(c)(3) status since it would be organized and operated in furtherance of exempt purposes. These specific purposes likely include: (1) charitable maintenance of public buildings and/or lessening governments burdens;130 (2) educational instruction of the public on subjects beneficial to the community; and (3) scientific research meant to attract a new industry to a geographic area or community. C.2.ii. 501(c)(3) Nonprofit Corporation Taxation: Non-Distribution Constraint The second constraint placed upon 501(c)(3) organizations in return for their tax exempt status is a prohibition on the distribution of income, commonly known as the non-distribution constraint. The non-distribution constraint is an evolution of the exempt purposes language

127 128

26 C.F.R 1.501(c)(3)-1(d)(2) 26 C.F.R 1.501(c)(3)-1(d)(3) 129 26 C.F.R 1.501(c)(3)-1(d)(5) 130 For arguments justifying the environmental costs of energy consumption as a governmental burden and therefore protecting a PPESCOs 501(c)(3 ) status from UBIT during retrofit of buildings not owned by the government, see generally, Presidents Council of Advisors on Science and Technology, Sustaining Environmental Capital: Protecting Society and the Economy (describing governmental burdens resultant of environmental deterioration as

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mentioned above131. Prohibited distributions are divided into two specific categories: (1) private inurement and (2) private benefit. Private inurement occurs when a transaction between a taxexempt organization and an insideri.e., someone with a close relationship with, or an ability to exert substantial influence over, the tax-exempt organizationresults in a benefit to the insider that is greater than fair market value.132 Private benefit is an evolution of the non-distribution constraint that occurs during joint ventures or transactions with outside parties.133 Private benefit doesnt jeopardize a 501(c)(3)s tax exempt status if it remains quantitatively and qualitatively incidental to the accomplishment of an exempt purpose.134 A private benefit is quantitatively incidental if the benefit is insubstantial when compared to the overall tax-exempt benefit generated by the activity.135 To be qualitatively incidental, the private benefit must be inextricable from the exempt activity, in that the exempt objectives could not be achieved without necessarily benefitting certain individuals privately.136 C.2.iii. 501(c)(3) Nonprofit Corporation Taxation: Prohibition on Political Activities The third constraint placed upon 501(c)(3) organizations in return for their tax exempt status is a prohibition on substantial political activities. IRC section 501(c)(3) states explicitly that no substantial part of[a 501(c)(3)s]activities[may be]carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and [it may] not participate in any political campaign on behalf of. . .any candidate for public office.137 A 501(c)(3) wishing to engage in political activities may only do so if such activities

131

26 C.F.R 1.501(c)(3)-1(c)(2); See also,Henry Hansmann, The Role of Nonprofit Enterprise, 89 YALE L.J. 835, 838 (1980) (coining the nondistribution constraint as an essential characteristic of nonprofit organization). 132 Jeffrey S. Tenenbaum. Nonprofit partnerships: A Key guide to Legal Issues and Pitfalls (2011) Available at: http://www.venable.com/nonprofit-partnerships--a-guide-to-the-key-legal-issues-and-pitfalls08-16-2011/ 133 31 Wm. Mitchell L. Rev. 1, 46 134 Tenenbaum, Supra at note 132 135 Tenenbaum, Supra at note 132 136 Tenenbaum, Supra at note 132 137 26 U.S.C.A. 501(c)(3)

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are an insubstantial part of their overall activities. Any political activities must also be recorded and reported on a 501(c)(3)s Form 990. 138 C.2.iv. 501(c)(3) Nonprofit Corporation Taxation: Unrelated Business Income Taxation A subset of the organized and operated exclusively for exempt purposes constraint faced by 501(c)(3)s is the unrelated business income tax (UBIT). This is a tax placed upon noncharitable activities of a charitable organization. If found to be substantial, in relation to charitable activities, unrelated business taxable income (UBTI) might jeopardize the 501(c)(3)s exempt status. The UBIT is an attempt by Congress to eliminate a source of unfair competition by placing the unrelated business activities of certain exempt organizations upon the same tax basis as the non-exempt business endeavors with which they compete.139 Some types of passive income, such as dividends on stock from an uncontrolled company, are exempt from UBTI. However, dividends from shares in a partnership or corporation where the 501(c)(3) has a controlling share are not exempt from UBIT, but rather are subject to the same three part test as all other unrelated business income. The Service utilizes a three part test to determine whether income is classified as UBTI and therefore warrants imposition of an excise tax.140 The income must result from: (1) a trade or business;141 (2) regularly carried on by the organization;142 and (3) not be substantially related to the organizations performance of its exempt function.143 If all three parts of this test are satisfied in the affirmative, then income from such activities is classified as unrelated business taxable income and faces taxation at the normal corporate tax rate.144 If an exempt organization carries on unrelated business activities to such an extent that its primary purpose is no longer the

138 139

Supra at note 111 Treas. Reg. 1.513-1(b) 140 26 U.S.C.A. 511 141 26 U.S.C.A. 513 142 Treas. Reg. 1.513-1(c) 143 Treas. Reg. 1.513-1(d)(1) 144 Supra at note 140

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exempt purpose, then those activities may jeopardize the 501(c)(3)s exemption. In addition to the federal constraints associated with tax exemption, one must make sure to review all relevant state laws. In many cases, 501(c)(3)s must file separately for state income tax exemption, and are required to pay state employment taxes, sales taxes, and property taxes.145 C.2.v. 501(c)(3) Nonprofit Corporation Taxation Summary In return for its tax exempt status, the 501(c)(3) corporation faces a number of constraints. It must be organized and operated exclusively for exempt purpose, cannot substantially distribute its income from the public sphere to the private sphere, cannot engage in a substantial amount of political activities, faces taxation on any incomes unrelated to its exempt purposes. Additionally, any potential 501(c)(3) PPESCO entrepreneurs should review their state requirements for exemption status because at times those requirements vary from the federal statutory requirements. While justified, this plethora of exemption related constraints is the largest hurdle that a PPESCO might face when organized as a nonprofit 501(c)(3) corporation. C.3. 501(c)(3) Nonprofit Corporation Governance The governance of the nonprofit 501(c)(3) corporation largely mirrors that of the forprofit corporation described above, with a few key differences. First, a nonprofit corporations board directors are sometimes called trustees, rather than directors.146 Second, unlike the for profit corporation, these trustees do not have to answer to shareholders because in a nonprofit corporation, there are no shareholders.147 They instead must answer to regulators and the IRS according to the rules upon which their tax exemption is based under IRC 501. This includes the responsibility to avoid the private inurement/benefit issues listed in the above section on taxation.
145

Mark J. Cowan, Nonprofits and the Sales and Use Tax, 9 Fla. Tax Rev. 1077, 1096 (2010) (stating While some states piggyback on the federal section 501(c)(3) definitions, others states have their own unique definitions of charitable, religious, and educational which may or may not overlap with the federal definitions of such terms that have grown up around section 501(c)(3).) 146 29 West's Legal Forms, Specialized Forms 25.6 (4th ed.) 147 Henry Hannsman, Two Systems of Law for Corporate Governance: Nonprofit versus For Profit. Yale Law School. October 2006. Page 3.

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Finally, most state nonprofit laws prescribe that trustees must be independent and disinterested, having a duty to further exempt purposes rather than maximize shareholder value.148 In contrast with the for-profit corporation, where directors are subject to shareholder suit for violation of their obligations, the nonprofit trustee is subject to suit from state officials or revocation of exempt status for failure to fulfill their given obligations.149 In short, the 501(c)(3) nonprofit corporations governance is similar to that of the for-profit corporation, but without the drive for profit. C.4. 501(c)(3) Nonprofit Corporation Summary The capitalization, taxation, and governance of the nonprofit corporation PPESCO make it an ideal vehicle except for various restrictions on that type of organization. The capitalization presents many options, but denies the use of equity investment due to the non-distribution constraint. The tax exempt status of the 501(c)(3) nonprofit corporation PPESCO significantly lowers operating costs, but also imposes numerous constraints against private inurement and excess benefit transactions. The governance of the 501(c)(3) nonprofit corporation is substantially similar to that of the regular corporation, except that the 501(c)(3) nonprofit corporations directors have a duty to safeguard the organizations exempt purposes. The capitalization, taxation, and governance of the nonprofit corporation PPESCO make it an ideal vehicle for attracting non-equity funding to the PPESCO context. III.D. Limited Liability Company Overview While this could equally be accomplished through the formation of a conventional profit-making business or program, the likelihood of success will be greater if the entity formed to accomplish these goals is a special-purpose entity, with the sole purpose of achieving these goals The limited liability company (LLC) is the fourth and final PPESCO applicable structure examined in this paper. The limited liability company is a highly flexible form of business
148 149

11B V.S.A. 8.13 Katherine R. Lofft, Purvi B. Maniar, Tamar R. Rosenberg. Are Hybrids Really More Efficient? 2012SEP Bus. L. Today 1.

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organization endorsed by every state. Its flexibility is based upon the freedom of contracts supremacy over most judicial precedents.150 Capitalization of the LLC is dependent upon member contributions, debt, and possibly program related investments. Program related investments are debt/equity contributions from private foundations which have unique advantage but also their own special set of IRC constraints as discussed below. The LLC can elect to receive pass through taxation or corporate taxation as discussed above. Governed according to its operating agreement, the organization can be tailored toward member management, manager management, or any other form of governance its creators can imagine. The LLC is an ideal vehicle for attracting long term investment partners toward a mission based upon exempt purposes, while also attracting equity investment by allowing for a return. The low-profit limited liability company (L3C) is a variation of the LLC statutorily designed to attract program related investments.151 The L3C form of organization currently exists in 9 states.152 One example of an L3C operating in Vermont today is the Vermont Sustainable Job Funds Flexible Capital Fund.153 The L3C is simply a version of the LLC with a few extra bells and whistles meant to attract private foundations program related investments by mirroring their regulatory requirements. Its structure can be emulated even in states where only and LLC statute exists.154 The definitive bells and whistles in this context include three requirements of the L3C: (1) it must significantly further a charitable purpose as defined under the tax law and would not have been formed but for its relationship to such a purpose; (2) its significant purposes may
150 151

Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 295 (Del. 1999) 11 VSA 3001(27) 152 Intersector Partners L3C, Latest Tally: October 31, 2012, Available at: http://www.intersectorl3c.com/l3c_tally.html (stating that as of this date there are 10 states recognizing the L3C as an entity unique from the LLC: Vermont Michigan, Wyoming, Utah, Illinois, North Carolina, Louisiana, Maine, and Rhode Island. A total of 670 of these organizations exist in the United States.) 153 See Generally, Vermont Sustainable Jobs Fund: About the Flexible Capital Fund Available at: http://www.vsjf.org/what-we-do/flexible-capital-fund/about-flexible-capital 154 However, some states require that an LLC be formed for a business purpose. It is not clear whether these LLC statutes would require the same type of fiduciary duty to maximize shareholder value as other entities formed for a business purpose, such as traditional corporations. If this is the case in your state, it is suggested that you obtain b-corp certification and outline explicitly in your operating agreement that maintaining such certification is an important component of any managers busi ness judgment.

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not include producing income or appreciating property; and (3) it may not conduct significant lobbying or political campaign activities.155 L3C statutes are meant to mirror PRI requirements, but the fatal flaw of most L3C statutes is that they attribute the no significant purpose requirement to the PRI recipient organization (the L3C) rather than the private foundation; a mistake that might unnecessarily discourage any equity investment.156 For purposes of branding and signaling, it would be wise to have the LLC obtain B-Corp certification rather than incorporate as an L3C. To best understand the L3C based B-Corp certified LLCs legal structure, one must examine its capitalization, taxation, and governance in greater detail.

III.D.1. Limited Liability Company Capitalization According to the default provisions of most state LLC statutes, capitalization of the LLC mirrors that of the benefit corporation as discussed above.157 That being said, the capitalization structure suggested by the L3C statutes (though available under any states LLC statute thanks to their flexibility) adds a layer of complexity known as the tranched investment structure.158 This structure allows for the several classes of investors, enabling assignment of distinct economic and voting rights to each class. It also provides an ideal vehicle for leveraging equity from private
155 156

11 V.S.A. 3001(27) J. William Callison & Allan W. Vestal, The L3C Illusion: Why the Low-Profit Limited Liability Companies Will Not Stimulate Socially Optimal Private Foundation Investments in Entrepreneurial Ventures. Page 285 (stating that the PRI provisions which the L3C statute attempts to mimic focus only on the private foundations investment purpose. A PRI can be made in a profit motivated business entity as long as no significant purpose of the foundations investment is income production or property appreciation. Other owners of, and investors in, the business entity can seek profit and appreciation, and the PRI regulations specifically contemplate this objective. Indeed, by focusing on the LLCs profit motivation, the Vermont statute arguably eviscerates L3Cs as a method for attracting capital and encouraging beneficial economic growth.) Available at: http://lawreview.vermontlaw.edu/files/2012/02/22-Callison-Book-1-Vol.-35.pdf 157 Downs, Rachlin, Martin PLLC, Law for Change, Vermont Forms of Organization, January 2010. Page 13 Available at: http://www.lawforchange.org/images/lfc/VermontFormsofOrganization.pdf 158 Daniel S. Kleinberger, A Myth Deconstructed: The "Emperor's New Clothes" on the Low-Profit Limited Liability Company, 35 Del. J. Corp. L. 879, 895-96 (2010)(describing one L3C tranched investment structure: At the lowest level or tranch, a foundation will make a low-return, high-risk investment in a venture with modest financial prospects, but the possibility of major social impact. At the next level, the venture will draw investments from socially conscious investors willing to take a below-market return for the sake of participating in a progressive form of free enterprise that will help make a better world. At the top level, the venture will be able to attract regular, profit-maximizing investors whose participation at market rates is made possible by the subsidization of the lower two tranches. )

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investors through the use of capital contributed by private foundations.159 In order to best comprehend the tranched investment structure of the L3C/LLC, one must first understand two substantive legal concepts: (1) the private foundation; and (2) program related investments in the tranched LLC context. D.1.i. The Private Foundation A private foundation is a tax exempt entity defined as any 501(c)(3) organization not having the characteristics of a public charity.160 To retain tax exemption, a private foundation must abide by a number of rules. The four rules most relevant to our discussion in this context are the requirements to: (1) meet minimum distribution requirements; (2) abstain from excess business holdings; (3) not make jeopardizing investments; and (4) exercise expenditure oversight when making a grant to a private business.161 Minimum distribution requirements dictate that a foundation faces tax penalties if it fails to distribute at least 5% of its assets annually toward charitable purposes.162 Excess business holdings requirements dictate that a private foundation faces tax penalties if it holds more than 20-35% of a corporation, with the latter number being applicable if a third party retains control of the organization.163 Jeopardizing investment requirement dictate that a private foundation and its managers are subject to penalties for any investment which jeopardizes the carrying out of its exempt purpose.164 Expenditure oversight requirements dictate that if a private foundation makes a grant to a non-charitable institution165 it

159

Robert Lang and Elizabeth Carrot Minnigh, The L3C History, Basic Construct, and Legal Framework. Vermont Law Review, Vol. 35:015, page 18 160 26 U.S.C.A. 509 (Yes, believe it or not, as a testimony to the unique style of the IRC, the Service chose to define a private foundation by what it is not, rather than by what it is. ) 161 Virginia G. Richardson and John Francis Reilly, Public Charity or Private Foundation Status: Issues under IRC 509(a)(1)-(4), 4942(j)(3), and 507. 2003 EO CPE Text. Available at: http://www.irs.gov/pub/irs-tege/eotopicb03.pdf 162 I.R.C. 4942 163 id. at 4943. 164 id. at 4944. 165 For a more detailed analysis of when expenditure responsibility is required, see Robert A. Wexler, Expenditure Responsibility- A Primer and Ten Puzzling Problems- Sections IV &V. September 2010. Available at: http://www.adlercolvin.com/pdf/Expenditure_Responsibility_and_10_puzzling_questions_(00305037).pdf

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must: (1) ensure the grant is spent solely for the purposes which it is made; (2) obtain complete reports from the grantee on how the funds are spent; and (3) make full reports on such expenditure to the secretary.166 Program related investments are a tool that allows private foundations to contribute to an organization and avoid three of the four rules mentioned in this paragraph. D.1.ii. Program Related Investments A program related investment (PRI) is an investment by a private foundation with its own unique-and more favorable-set of rules derived from its furtherance of exempt purposes. Federal regulations state that PRIs are not jeopardizing investments,167 are qualifying distributions,168 and are not business holdings subject to taxation.169 They can take the form of a debt, equity, or even a credit enhancement arrangement.170 A recent rulemaking has explicitly identified the prevention of environmental deterioration as an acceptable purpose for a PRI.171 While several comments on this proposed rulemaking focused on the legality of utilizing PRIs in a tranched investment structure, the Service has yet to finalize a response to any of these comments.172 The IRC and its regulatory supplement describe a program related investment according to three components: (1) the primary purpose of the investment is to accomplish one or more charitable, educational, scientific, or otherwise exempt purposes as described in section 170(c)(2)(B);173 (2) no significant purpose of the investment is the production of income or the

166

id. at 4945; but see also Wexler Supra at note 165, Section VI (page 4-7) for a necessary and detailed analysis of regulatory guidance on how to exercise expenditure responsibility. 167 Treas. Reg. 53.4944-3(a) 168 Treas. Reg. 53.4942(a)-3(a)(2) 169 Treas. Reg. 53.4943-10(b) 170 Examples of Program-Related Investments, 77 FR 23429-01 (April 2012) 171 Id. 172 If the service responds to these comments in an affirmative manner, private foundations would no longer be required to obtain a private letter ruling from the IRS when making a PRI in the context of the tranched investment structure. 173 Treas Reg. 53.49443(a)(1)(i)

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appreciation of property;174 and (iii) no purpose of the investment is to accomplish political activities, such as lobbying, as described in section 170(c)(2)(D).175 Within the same statutory section, regulators continue to outline how each component above is satisfied. An investment satisfies the first component if it significantly furthers the accomplishment of the private foundation's exempt activities and if the investment would not have been made but for such relationship between the investment and the accomplishment of the foundation's exempt activities.176 Said differently, the PRI must dovetail specifically with the private foundations exempt purpose.177 An investment satisfies the second component if normal for-profit investors would [not] be likely to make the investment on the same terms as the private foundation. Said differently, the investment must be made on below-market terms. It further states that the fact that an investment produces significant income or capital appreciation shall not be conclusive evidence of a significant purpose involving the production of income or the appreciation of property.178 Furthermore, regulations give numerous examples where a PRI results in the production of income for third parties but still satisfies the second component.179 An investment satisfies the third component if language requiring that no part of the investment or its proceeds be used by the recipient for political purposes is inserted into the loan document.180 Though program related investments hold many advantages, they also hold many disadvantages according to their enhanced administrative burden. It is often recommended that a

174 175

Treas Reg. 53.49443(a)(1)(ii) Treas Reg. 53.49443(a)(1)(iii) 176 Treas Reg. 53.49443(a)(2)(i) 177 Emphasis added. 178 Treas Reg. 53.49443(a)(2)(iii) 179 Treas Reg. 53.49443 (See examples 1-10; clarifying that the no significant purpose of the investment be the production of income requirement applies only to the foundation and possibly any disqualified persons) 180 David Chernoff (General Counsel to the MacArthur Foundation, Program related Investments: A User Friendly Guide, Page 2 Available at: http://www.community-wealth.org/_pdfs/tools/pris/tool-macarthur-pri.pdf

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private foundation seek the advice of outside counsel181 and an $8,700 private letter ruling from the Service182 in order to conduct the due diligence required by the foundation directors fiduciary duties. Additionally, both the recipient and the donor of program related investments must exercise extensive expenditure responsibility requirements.183 These requirements include a logging of pre-grant inquiry requirements,184 term constraints,185 grantee accounting and reporting requirements,186 and grantor record keeping and annual reporting requirements.187 In order to streamline this reporting process in a way that incentivizes program related investments, it is recommended that a member of the LLC manage expenditure responsibility requirements, reporting not only to a third party certification organization (such as B-labs), but also to the private foundation making any program related investment. These rules should provide a satisfactory amount of certainty for any private foundation contemplating a program related investment.188 The vast flexibility and capitalization possibilities associated with the LLC are the strongest arguments in favor of establishing the PPESCO as an LLC. III.D.2. Limited Liability Company Taxation Taxation of the limited liability company occurs in one of two ways. First, if the LLC has only one member, it is viewed by the Service as a disregarded entity and any income is

181

Victoria B. Bjorklund and Carolyn O. Ward. Investments: Some Thorny Questions from Private Foundations and Public Charities CU020 ALI-ABA 89 , 100-01 (stating that Prior to making a PRI investment, private foundation managers should obtain a written memorandum from inside or outside legal counsel explaining how the proposed PRI complies with the charitability, no significant profit purpose, and no lobbying purpose requirements.) 182 Americans For Community Development: Is federal legislation necessary? http://www.americansforcommunitydevelopment.org/faqs/faqs-fedregulationnecessary.html 183 Treas Reg. 53.4945-5(a)(2) 184 Id. at 53.4945-5(b)(2) 185 Id. at 53.4945-5(b)(3) 186 Id. at 53.4945-5(c) 187 Id. at 53.4945-5(d) 188 Even if these rules dont provide enough stability for foundational program related investments, foundations should take comfort in the fact that they have 30 days to exit any partnership which has become a jeopardizing investment before facing any sanction.

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itemized on the applicable forms of its parent organization.189 Second, if the LLC has more than one member, taxation is based upon the check-the-box taxation discussed above.190 Check-thebox of taxation allows for the LLC to choose whether is wishes to be taxed as a corporation or as a pass through entity. Those LLCs electing pass through treatment would file form 1045,191 and face taxation only at the member level. This means that any taxable equity investment partners would face taxation for their share of interests, while any tax exempt partners would not face taxation for their share of interests, so long as the business conducted significantly contributes to exempt purposes (and is therefore exempt from UBTI treatment).192 Those LLCs electing corporate treatment would file IRS form 1120 and face taxation twice: once at the entity level and once at the shareholder/dividend level.193 Generally, the IRS treats any LLC publicly trading its interests as a corporation for taxation purposes.194 However, the Services private placement

exemption is an exception to this rule for those LLCs having both: (1) less than 100 partners
during a year; and (2) exemption from reporting requirements under the Securities Act of 1933.195 While one might assume that an exempt organizations participation in a partnership where taxable partners will profit might have negative tax implications, precedent states that incidental private benefit during a joint venture does not preclude an exempt organizations tax exempt status.196 The exempt status of any tax exempt partners would be safeguarded against the

189

Treasury Reg. 301.7701-3(b); see also Marc J. Lane, The Low-profit Limited Liability Company (L3C). (2010) Page 4 (stating that if an exempt organization wholly owns the LLC and the income related to the LLC is not significantly related to exempt purposes, then it may be wise elect corporate taxation as a method of avoiding disregarded entity status and therefore isolating the parents UBTI only to that which the parent actually receives from the controlled entity) Available at: http://www.marcjlane.com/clientuploads/Articles/Marc-Lane-basic_l3c_primer.pdf 190 Treas. Reg. 301.7701-3(a) 191 And issue a schedule K form to each partner to file with their returns. 192 See Generally Rev. Rul. 2004-51, 2004-1 C.B. 974 (stating that a trade or business that is substantially related to the exercise and performance of. . . exempt purposes and functions is not subject to UBIT ) 193 Supra. at note 190 194 26 U.S.C.A. 7704(b) (defining publicly traded as a partnership whose interests: (a) are traded on an established securities market; or (b) are readily tradable on a secondary market (or the substantial equivalent thereof). 195 26 C.F.R. 1.77041(h) 196 Plumstead Theatre Soc'y, Inc. v. Comm'r of Internal Revenue , 74 T.C. 1324, 1334 (1980) aff'd sub nom. Plumstead Theatre Soc., Inc. v. C. I. R., 675 F.2d 244 (9th Cir. 1982)

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above mentioned private benefit constraint so long as the LLCs actions satisfy a three part test laid out by an IRS revenue ruling197 and solidified by tax courts.198 This three part test says that a 501(c)(3) may be a member of a taxable LLC so long as the LLCs actions: (1) further the 501(c)(3)s exempt purposes; (2) permit the 501(c)(3) to act exclusively in furtherance of those purposes; and (3) result only in incidental private benefit.199 It is probable that the proposed PPESCO would satisfy such a test since exempt organizations would likely have effective control of the LLC. Most examples of such an arrangement come in the form of hospitals with both exempt and nonexempt affiliates. Even though it is taxed as a partnership, the LLC itself would still face some types of taxation at the state level.200 Steps should be taken to allocate these expenses equitably amongst LLC members.201 Like the benefit corporation, the taxable LLC could also incorporate tax deductions like the investment tax credit or business expenses into their tax calculations. Accordingly, care must be taken to provide equity in the apportionment of these deductions and expenses within the operating agreement, and in practice, these terms would likely be subject the negotiations of the parties. In the unique situation where all partners to the LLC are 501(c)(3)s or other instrumentalities of government, then the LLC itself could also obtain tax exempt status-at the entity level-beyond that provided through the disregarded entity designation. However, this is

197

Rev. Rul. 98-15, 1998-1 C.B. 718 (1998) (describing the three requirements for protection of an organizations exempt status while participating in an LLC partnership as a venture as: (1) furthers an exempt purpose; (2) permits the exempt organization to act exclusively in furtherance of its exempt purpose; and (3) results only in incidental private benefit) 198 Redlands Surgical Services v. C.I.R., 113 T.C. 47, 48 (1999) review denied, decision aff'd, 242 F.3d 904 (9th Cir. 2001) 199 Id. 200 Dana Brakman Reiser, Governing and Financing Blended Enterprise, 85 Chi.-Kent L. Rev. 619, 624 (2010) (stating [I]n an L3C hybrid with some exempt and some taxable membersproperty ta x will be payable at the entity level but will not reduce the exempt entities' income tax burdens when translated into losses--because these entities are not liable for income tax in the first place.) Equitable allocation of such taxes would be an important part of any operating agreement. 201 Id.

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only advisable if the LLC complies with 12 specific restrictions detailed by the IRS202. In general, these restrictions include measures meant to ensure the constraints on traditional 501(c)(3)s are applicable to the tax exempt LLC. It is important to note that such an arrangement would also limit the LLCs ability to attract equity financing. Such a designation would be applicable in the PPESCO context if partners find equity financing unnecessary, but would still like to directly posses a controlling interest in the entity. In summary, understanding the taxation of the LLC can be a complex endeavor; especially if it utilizes a tranched investment structure to bring together parties and funding from both the nonprofit and for-profit spheres. That being said, it is legally possible to organize such a structure without negative implications for any tax exempt partners of the LLC, so long as the mission of the LLC, as practiced by its managers, furthers exempt purposes. Such a taxation scheme, while complicated, represents the primary advantage for the LLC PPESCO business model over the benefit corporation PPESCO business model.203 III.D.3. Limited Liability Company Governance Governance of the LLC is highly flexible and subject to only a few statutorily provided requirements which cant be subverted by the operating agreement.204 In the PPESO context, it seems only prudent that governance of the LLC ought to include an independent benefit manager, similar to that of the benefit corporations benefit director. The benefit manager would be responsible for overseeing all expenditure responsibility requirements, including that of program related investments, as well as any grants whose scope of work a 501(c)(3) member might contract to the LLC. To catch two birds with one worm, the benefit manager should also be
202

See Generally, Richard A. McCray and Ward L. Thomas. Limited Liability Companies as Exempt Organizations Update. 2001 EO CPE Text. Available at: http://www.irs.gov/pub/irs-tege/eotopicb01.pdf 203 The benefit corporation would face double taxation if looking to utilize investors beyond those designated by the S-corp. The LLC would retain the pass through taxation similar to that offered by S-corp designation, but would be able to court non-individuals (e.g. organizations such as banks) as investors. 204 Downs, Rachlin, Martin PLLC, Supra at note 157 (stating that [U]nder statute, an operating agreement may not: restrict member rights of access to records, eliminate the duty of loyalty, eliminate the duty of care, eliminate the obligation of good faith and fair dealing, vary the power to withdraw as a member, vary the right to expel a member, or restrict rights of third parties who are not managers or members.)

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responsible for any third party reporting requirements resulting from B-corp certification maintenance. Additionally, this paper recommends two safeguards be written into the LLCs operating agreement as assurances to private foundations looking to further exempt purposes: (1) the benefit manager be provided a veto power over any major actions, including transfers of voting interests, only overridden by 66% of the members; and (2) a member right of first refusal205 for any interests looking to exit the organization. While shares of most LLCs are meant to be long term and have minimal transferability, an operating agreement could be written to make them highly transferable. If so, then such interests would be subject to the same security reporting requirements described above the benefit corporation section. Regardless, the high degree of flexibility available in the LLC governance context would likely be an asset for any PPESCO model. It would allow for a benefit manager who would not only exercise powers ensuring the organizations benefit to other constituencies, but could also provide assurance that a foundations PRIs further exempt purposes. III.D.4. Limited Liability Company Summary After exploring the capitalization, taxation, and governance options available to the LLC PPESCO model, it becomes obvious that if one is looking to acquire equity funding to finance the PPESCO while remaining privately held, the L3C based B-Corp certified LLC is the best choice. Vast capitalization options allow the LLC to acquire funding from both public and private investors. Complex but established taxation precedent can ensure that both public and private organizations can be partner to the LLC PPESCO. The flexibility of the operating agreement ensures that the LLC PPESCOs governance options are limited only by the imagination of its creators. Finally, the L3C based B-Corp certified LLC shares with the benefit corporation
205

Bernard Daskal, Rights of First Refusal and the Package Deal, 22 Fordham Urb. L.J. 461 (1995) (defining a right of first refusal as a privilege to preempt a contract's execution by matching the price and terms of a third party's acceptable offer.)

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another investment incentive that has yet to be discussed: progress. Many of todays most progressive thinkers see these hybrid synergies of nonprofit and for-profit enterprise, known colloquially as the fourth sector, as the next evolution of capitalism. While such an enterprise might inspire doubt in the mind of some traditional investors, it might also attract a certain type of investor aspiring to catalyze such an evolution. For reasons related to capitalization, taxation, governance, and capital evolution, the L3C based B-Corp certified LLC is the best option for a PPESCO requiring privately held equity investment.

IV. POSSIBLE CONNECTION TO AN ESTABLISHED ENTITY It is also important to consider how an existing organization could serve as the foundation for the establishment of a Micro ESCO. Whether it takes the form of a 501(c)(3), a B-Corp Certified LLC, a benefit corporation, or a mutual benefit enterprise, the PPESCO will be up against considerable odds in the profit driven ESCO world. Some environmental entrepreneurs might want to brave this perilous sea alone, establishing a PPESCO startup from scratch. Others however, might have the welcome convenience of incubating the PPESCO within an existing organization. Section IV examines each of these possibilities. IV.A. Stand-Alone Entity Overview Growing a Micro ESCO function within or affiliated with an existing organization could certainly have substantial benefits, but it is not essential and there are certainly also advantages to starting a new, independent Micro ESCO as a stand-alone entity. Establishing the PPESCO as a stand alone entity is not advisable due to the resource constraints and inexperience typically associated with a start up entity. By its very nature the energy services company requires a sizable amount of up front investment which is only recouped to investors over an extended period of time through energy savings. Attracting such investors to a startup company would require a rock solid business model to say the least. Add to that mix the

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narrow focus and deep energy savings associated with the PPESCO business model, and you are facing considerable odds. Such a stand alone pursuit could work, but would start off very slow in the beginning. It would require a limited number of highly dedicated employees with diverse skill sets. Chief among them would be the ability to identify requests for proposals and successfully obtain grant funding for the startup. While it might take months to receive federal tax exemption, a large majority of exemption applicants are declared tax exempt.206 Furthermore, there exists glut of highly educated individuals, shouldering the burden of immense student debt, who would love to work at a bargain rate for such an organization thanks to the Public Service Loan Forgiveness Program enacted by Congress in late 2007.207 This act allows for the elimination of an individuals entire student loan debt after 120 monthly payments at roughly 15% of the individuals disposable income so long as they work in the public service (e.g. for a 501(c)(3)).208 Such a stand alone startup PPESCO might be up against considerable odds, but it would at least be able to recruit valuable employees at a low cost. IV.B.1 Subsidiary Overview and Initial Considerations An existing organization that would see benefits in the establishment of a Micro ESCO could establish this function within its current organizational structure or establish it as a subsidiary. Establishing the PPESCO as an existing organizations subsidiary would be an excellent

route for its organizational development. This is because such an entity requires a high
amount of up front investment and investors would likely see the credibility of a parent as a signal of reliability. Any parent organizations board of directors would likely have to amend

206

Table 24. Closures of Applications for Tax-Exempt Status, by Organization Type and Internal Revenue Code Section, Fiscal Year 2010 (Stating that more than 81% of those organizations seeking exempt status in 2010 received IRS approval.) Available at: http://www.irs.gov/pub/irs-soi/10db24eo.xls 207 See Generally, Federal Student Aid: Loan forgiveness for Public Service Employees. (March 2012) Available at: http://studentaid.ed.gov/sites/default/files/public-service-loan-forgiveness.pdf 208 Id.

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their organizational documents to allow for the establishment of a subsidiary organization.209 In the case of a non-profit parent, language stating that the mission of any exempt subsidiary must be established in furtherance of the parents exempt purposes would be ideal for avoiding any negative tax implications. Additionally, if the entity attempting to establish the subsidiary is regulated by a state utility commission, then the regulated entity may also need the consent of its regulators before in establishes such a subsidiary.210 Those regulators might institute a requirement known as ring fencing in order to ensure that the funds for the unregulated subsidiary do not commingle with the funds of the regulated parent company.211 Such detailed accounting would placate regulators, but would also be beneficial in the context of corporate veil piercing. IV.B.2. Avoiding Corporate Veil Piercing If the composition and activities of a subsidiary are too closely related to that of its parent organization, then it faces the danger or being declared a mere instrumentality of the parent. In such a case, the corporate veil is pierced and a parent organization can be held liable for any debts and obligations of its subsidiary. Additionally, if the parent is a nonprofit corporation, it might face serious tax consequences for such a declaration as well.212 In any case, piercing the corporate veil is a serious predicament and great care should be taken to avoid such a predicament. The prudent parent organization should ensure its subsidiary take a number of steps to avoid the mere instrumentality designation. While courts traditionally utilize various tests and
209

Jeffrey S. Tenenbaum. Establishing and Operating Taxable Subsidiaries. Published: November 2001 Available at: http://www.asaecenter.org/Resources/whitepaperdetail.cfm?ItemNumber=12175 210 Regulatory Assistance Project. Electricity Regulation in the U.S.: A Guide. Section 6.4 Affiliated Interests. Page 27. March 2011. Available at: www.raponline.org/document/download/id/645 211 See Generally, NARUC Staff Subcommittee on Accounting and Finance. Ring Fencing Mechanisms for Insulating a Utility in a Holding Company System. Available at: http://leg.mt.gov/content/committees/interim/2003_2004/energy_telecom/staff_reports/ringfencing.pdf 212 See Generally, Gen. Couns. Mem. 39, 326 (Jan. 17, 1985) (stating that business activities of a controlled subsidiary generally will not be attributed to the corporate parent (or to sibling corporations) in assessing the exempt status of that parent (or the siblings) ,unless the subsidiary is declared a mere instrumentality of the parent via corporate veil piercing.)

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factors in consideration of a veil piercing, there are four factors most applicable in the PPESCO subsidiary context: (1) undercapitalization; (2) observation of corporate formalities; (3)

commingling of funds; and (4) duplication of management, facilities, administrative services, or

personnel.213 Rarely are any of these factors taken alone as an indication toward likelihood of corporate veil piercing. First, a subsidiary can avoid undercapitalization by ensuring that the debt-to-equity ratio expressed in its quarterly budget never reaches an overly leveraged amount. For example, a subsidiary with $100,000 worth of debt but only $1,000 worth of equity on its books might be seen as undercapitalized. Next, a subsidiary could avoid failure to observe corporate formalities by having board meetings on a regular basis and recording the notes of those board meetings for viewing by any subsequent inquirers. Additionally, a subsidiary can avoid commingling of funds by keeping track of all funding in account completely separate from its parent organization. Finally, a subsidiary can avoid duplication of management, facilities, administrative services, or personal by having a majority of directors and officers who are not employees of the parent organization, and ensuring that all employees keep meticulous track of their working hours objectives; keeping all inter-organization transactions at arms length. By complying with the aforementioned examples, a parent can ensure that it avoids liabilities and tax implications associated with corporate veil piercing. IV.B.3. Parenting and Control of Specific Entities Overview When an organization owns more than a 50% interest in a separate organization, a parent/subsidiary relationship exists. Typically, the parent organization has the ability to control the major actions of the subsidiary organization through exercising the power of its voting shares via decisions made by the subsidiarys board of directors. However, the degree and manner of

213

Seong J. Kim, Hiding Behind the Corporate Veil: A Guide for Non-Profit Corporations with for-Profit Subsidiaries, 5 Hastings Bus. L.J. 189, 200-01 (2009)

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control varies with organizational form. This section aims to provide analysis of selected entities and how they might be controlled by a parent organization. B.3.i. Parenting and Control of a Mutual Benefit Enterprise Parenting and control of the mutual benefit enterprise is dependent upon its primary characteristics: democratic governance and the high degree of flexibility written into its operating agreement.214 While traditional cooperative governance principles provide that such organizations are normally stand alone entities, the mutual benefit enterprise flavor of the cooperative offers much more flexibility. The parent corporation of a mutual benefit enterprise could become an investor-only member of the enterprise in exchange for a near majority voting share in the subsidiary. However, since investor members of a mutual benefit enterprise are statutorily limited to less than a majority of the organizations voting shares, some imaginative measures would have to be written into its organizational documents to assure effective parental control. This could be accomplished through granting a veto power for the parent organization, but precedent in this area is rare and there are few indicators of how this would affect the tax status of the mutual benefit corporation. B.3.ii Parenting and Control of a Benefit Corporation Parenting and control of a benefit corporation is dependent upon its primary characteristics: purposeful consideration of public benefits, and shares which could be easily transferable.215 If a parent wished to maintain control of the benefit corporation in perpetuity and minimize the likelihood that a foundations PRI would turn into a jeopardizing investment via a hostile takeover, the organization should be assembled as a closely held benefit corporation subsidiary. Dependent upon the bylaws, a parent organization would likely need to retain a majority of the benefit corporations stock to ensure that no major actions are taken which might

214 215

Supra. at Section III A Supra. at Section III B

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lead to abandonment of purpose. The statutorily prescribed benefit director position is meant to eliminate this possibility, but many statutes allow for elimination of this position through a supermajority shareholder vote. Such a circumstance spells insecurity for the benefit corporations exempt purposes. However, this could be remedied through bylaws which provide for dissolution of the company and disbursal of its assets into the public realm, should its shareholders ever elect to remove the benefit director position or alter the public benefit provisions of its articles of organization. B.3.iii. Parenting and Control of a 501(c)(3) Nonprofit Corporation Parenting and control of a 501(c)(3) nonprofit corporation is a little more complicated that the other organizations examined in this section. The 501(c)(3) doesnt issue stock and is supposed to have directors who are independent and disinterested from any influence other than furthering the organizations exempt purposes.216 This seems to imply that the organization cannot be controlled by any sort of parent. However, the 501(c)(3) can in fact be controlled by whatever individual or entity happens to organize it through the appointment of a singular voting member. This voting member could be an employee of the parent organization who while not directly conveying the influence of the parent organization, could still maintain effective control by drafting the organizing documents and maintaining a veto power over any major decisions made by the board of directors.217 If the parent organization should find it in their interest to eliminate this effective control, then parent and subsidiary could proceed via an independence agreement to transfer effective control from the parents employee to the board of directors of the newly formed 501(c)(3).218

216 217

Supra. at Section III C Wexler Supra. At note 16 (Menu) 218 For an exemplary independence agreement and spin-off recommendations, see Vera Institute of Justice Spin-Off Tool Kit. Available at: http://www.vera.org/download?file=1469/Vera_Tool_Kit_Final.pdf

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B.3.iv. Parenting and Control of the L3C Based B-Corp Certified LLC Parenting and control of the LLC is dependent upon its primary characteristic: a highly flexible operating agreement.219 While I suggest that an LLC PPESCO should incorporate some version of the benefit corporations benefit director as an immutable management characteristic, there are an infinite number of governance variations-beyond the influence of the directorthrough which a parent might control its LLC subsidiary. This paper suggests five possible avenues to accomplish this goal below. First, the parent could simply write its own veto power over any business decisions into the operating agreement, letting membership fall as it may according to financial interests. This method is not optimal because such absolute power would instill hesitance in any prospective investors. Second, a parent could ensure that regardless of financial interest in the organization, the operating agreement requires the parent maintain a majority of the voting rights. This, like a veto power, would also cause concern to foundations and private investors. Third, the operating agreement could allocate each investment class one voting share for any major decisions of the organization. This might do the job of attracting each investor, but isnt optimal because the parent organization wouldnt retain effective control over the subsidiary entity. Fourth, each investment class could receive one voting share, where the benefit director would serve as both a fourth share, and a fifth share in the event of a tie. This potential structure holds some promise, giving the pivotal firm role to the benefit director. Fifth, each investment class could get one voting share, providing the benefit director with a veto power that is contingent upon the consent of the foundational investor. This option is more attractive because it provides every member with a meaningful voting power, while still ensuring the PRI of the foundation doesnt become a jeopardizing investment through loss of exempt purposes. The options discussed here are not by any means exhaustive, but rather only meant to spur the imagination of those wishing to catalyze both foundational and private equity investment through the use of unique LLC governance
219

Supra. at Section III D

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structures. It is likely that the actual governance structure of the LLC would be a product of negotiations between the initial parties to the endeavor.

V. CONCLUSION AND RECOMMENDATIONS Ultimately, the available sources of capital will determine which entity is optimal for each context. Form follows function. Function follows funding. Within the unique context of VEIC, the subsidiary is the best option for retaining control while limiting liability in a way that ensures protection of VEICs ratepayer provided capital. However, the organizational form taken by that subsidiary will be a function of available funding sources. The 501(c)(3) PPESCO is the best choice if the majority of funding comes from governmental entities. The B-Corp certified LLC PPESCO is the best choice for blending public and private sources of funding while limiting interest transferability. The benefit corporation PPESCO is the best choice for blending public and private sources of funding while accommodating a larger number of investors. The mutual benefit enterprise PPESCO is the best choice for those who believe in the democratic principles native to the cooperative business model, but prefer to utilize the LLC business models inherent flexibility. As applicable to VEIC and within a more general context, the validity of each organizational model will vary with surrounding circumstances. A cooperative committed to democratic governance might find the mutual benefit corporation to be their ideal PPESCO subsidiary. A well connected entrepreneur, able to rally investors in the public and private spheres, might find that the benefit corporation is their ideal PPESCO model. A small startup with little access to equity financing might find the stand-alone 501(c)(3) nonprofit corporation their best PPESCO option. An established nonprofit organization looking to limit liabilities while combining capital from foundational partners with private equity investment on a long term basis might find the L3C based B-Corp certified LLC subsidiary PPESCO their best option.

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This paper bases its conclusion on an age-old legal truism known as the it depends doctrine. The it depends doctrine guides every young law student in their issue analysis of the complex and multi-faceted hypothetical of the law school exam, teaching them the ability to argue all aspects of an issue while eventually settling on a conclusion for that particular

situation.
Choice of entity is a complex and multi-faceted question dictating that one must take into account a proposed organizations foreseeable capitalization, taxation, and governance needs when it exists only in the world of forms.220 However, all these factors can be summarized in a singular statement which this paper proposes as a corollary to the it depends doctrine in the choice of entity context: It depends, on the foreseeable financing.

Rev. Proc. 2012-3, Section 3, (.02)(4) states that the Service will not issue a letter

ruling on a matter involving alternate plans of proposed transactions or involving hypothetical situations. no blanket private letter rulings...?

220

For an explanation of Platos Theory of Forms, See generally Ian Bruce, Platos Theory of Forms (1998) Available at: http://www.ccs.neu.edu/course/com3118/Plato.html

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Appendix 1:

Potential PPESCO Entity Characteristic Summary

Limited Liability Company(LLC)/ (L3C) Highly flexible organizational form. L3C is a LLC variation meant to spur investment from both nonprofit and for profit sectors. VSJFs Flexible Capital Fund Member contributions, (stock, bonds, loans possible too), program related investments Benefit Corporation Corporation allowing for consideration of social and environmental factors in business judgment of directors Mutual Benefit Enterprise Cooperative which allows for both patron members and investor-only members.

501(c)(3) Tax Exempt Nonprofit Overview Corporation exempt from taxation but facing constraints since all assets must serve the public good.

Example

VEIC Grants, charitable donations, fee-forservice, debt based program related investment, sponsorships, private activity bonds No federal income taxation unless conducting unrelated business

King Arthur Flour

None Retained patronage refunds, per unit capital retains, member purchases of capital stock Likely taxed as a check the box entity (pass through taxation of members) Democratically governed, but subject to amendment in bylaws (like LLC)

Capitalization

Investor contributions, stocks, bonds, loans

Taxation

Governance

Board of directors appoints officers to manage affairs. Directors have duty to safeguard exempt purposes. No Taxation, easily eligible for grant funding and program related investments Constraints associated with tax exempt status (nondistribution constraint, no equity financing, parental control is indirect only)

Likely taxed as a check the box entity (pass through taxation of members available) but taxed as a corp if publicly traded. Member managed or manager managed (should have benefit manager). High degree of control available for exempt partners.
Highly flexible, organized for exempt purpose, pass through taxation, not subject to mission creep, allows public and private investment combination

Likely taxed as a check the box entity, but faces double taxation if non-person investors
Board of directors appoints officers to manage affairs (unique benefit director with reporting subject to 3rd party monitoring)

Main Advantages

High transferability of interests encourages diverse equity investors

High transferability of interests means possibly subject to hostile takeover. Faces double taxation if nonindividual

Democratically controlled form of organization

Main Disadvantages

Interests not designed to be publicly traded on a registered security exchange (if publicly traded, face double taxation).

Little to no precedent or case law, Democratically controlled

investors.

Two charts similar to this but more detailed/diverse available at:

1) http://www.lawforchange.org/images/lfc/VermontFormsofOrganization.pdf (page 2) 2) http://www.adlercolvin.com/pdf/grantmaking/63eo0565.pdf (page 2-4)

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PPESCO FINANCE DECISION TREE

Key PPESCO Finance Considerations:

1. Is equity financing worth facing entity level/equity partner income taxation?

NO.
Then 501(c)(3) PPESCO is ideal.

YES.
2. Is public trading of PPESCO interests (beyond SEC provided exemptions, or more than 99 interests) worth roughly 15% more taxation and slight possibility of shareholder suit?

Yes.
Then Benefit Corporation is ideal

No.
Then L3C based B-Corp Certified LLC is ideal.

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APPENDIX 3 L3C Based B-Corp Certified LLC Articles of Organization Template

THIS DOCUMENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. THE CONTRIBUTING AUTHORS TO THIS DOCUMENT EXPRESSLY DISCLAIM ANY RESPONSIBILITY WHATSOEVER FOR THE ACCURACY AND SUITABILITY OF THIS DOCUMENT FOR ANY PURPOSE. BEFORE USING ALL OR ANY PORTION OF THIS DOCUMENT, YOU SHOULD CONSULT COMPETENT LEGAL COUNSELTO ENSURE THAT IT MEETS YOUR SPECIFIC NEEDS AND COMPLIES WITH APPLICABLE LAW. THIS DOCUMENT HAS BEEN DRAFTED TO COMPLY WITH VERMONT LAW. THIS TEMPLATE HAS BEEN ADAPTED FOR PPESCO PURPOSES FROM AN EARLIER L3C TEMPLATE COMPOSED BY AUTHORS UNDER COMMISSION OF AMERICANS FOR COMMUNITY DEVELOPMENT, L3C. THEIR ORIGINAL DOCUMENT IS PUBLICLY AVAILABLE AT: http://americansforcommunitydevelopment.org/

ARTICLES OF ORGANIZATION OF [NAME OF COMPANY], LLC A VERMONT LIMITED LIABILITY COMPANY (LLC) 1. NAME. The name of the low-profit limited liability company is: [NAME OF L3C], L3C (hereinafter the Company). 2. DESIGNATED OFFICE. The address of the Companys initial designated office is: [Street Address of Office] [City, State, Zip Code of Office] 3. REGISTERED AGENT. The name, street address, and county of the Companys initial registered agent is: [Name of Registered Agent] [Street Address of Registered Agent] [City, State, Zip Code of Registered Agent] [County of Registered Agent] 4. MANAGEMENT. The Company shall be managed by one or more managers. 5. PURPOSE. The purpose of the Company is to engage in the following activities: [Generally and briefly describe Company purpose(s)] 6. L3C REQUIREMENTS. Notwithstanding anything to the contrary in Article 5 above or elsewhere in these Articles of Organization, the Company shall at all times be organized and operated in a manner that satisfies the requirements of Section 3005(a)5 of

55

the Vermont Limited Liability Company Act (the Act), including but not limited to the following requirements: a. The Company will significantly further the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Internal Revenue Code of 1986, as amended (the Code).6 b. The Company would not have been formed but for the relationship between the Company and the accomplishment of the purposes set forth in Article 5 above, consistent with the restrictions contained in this Article 6.7 c. No significant purpose of the Company is the production of income or the appreciation of property;8 provided, however, that the fact that the Company produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property.9 d. The Company will not engage in any political or legislative activities within the meaning of Section 170(c)(2)(D) of the Code.
e. The Company will not carry on propaganda, or otherwise attempt to influence

legislation, within the meaning of Section 4945(d)(1) of the Code. f. If the Company at any time ceases to qualify under Section 3001(27) of the Act or ceases to satisfy any of the foregoing requirements of this Article 6 (hereinafter an LLC Conversion Event), then the Company immediately shall cease to be a low-profit limited liability company, but by continuing to meet all the other requirements of the Act, the Company will continue to exist as a limited liability company; provided further, however, that notwithstanding anything to the contrary in Article 7 below, [ALTERNATIVE: subject to Article 6(g) below,] upon the occurrence of an LLC Conversion Event, the manager or managers shall be authorized to amend these Articles of Organization to change the name of the Company to conform to the requirements of Section 3005 of the Act and to eliminate this Article 6.10 g. [OPTIONAL:11 The manager or managers have a duty to notify all of the members of the Company in writing immediately upon determining either (i) that an LLC Conversion Event is reasonably foreseeable or (ii) that an LLC Conversion Event has occurred. Furthermore, upon such determination, the manager or managers shall, in accordance with the Companys written operating agreement (if any) or the Act (if the Company has no written operating agreement or applicable provision thereof), as soon as practical call a special meeting of the members of the Company. At such special meeting, the members shall determine, in accordance with the Companys written operating agreement (if any) or the Act (if the Company has no written operating agreement or applicable provision thereof), whether (i) to continue the Companys existence as a limited liability company; (ii) to liquidate and dissolve the Company in accordance with the Companys written operating agreement or applicable provision thereof (if any) or 56

the Act (if the Company has no written operating agreement or applicable provision thereof); or (iii) to take such other and further action as the members shall determine.] h. [OPTIONAL: Language requiring the Company to register under applicable charitable trust provisions, if any. Illinois requires L3Cs to so register and thus subjects L3Cs to the supervision of the Illinois Attorney General. See 805 ILCS 180/1-26(d).]12 7. TERM. The Company is not an at-will company but is a term company within the meaning of Section 3023 of the Act. The Companys term shall be perpetual unless and until the Company is dissolved in accordance with the Companys written operating agreement or nonwaivable provisions of the Act.13 8. MEMBER LIABILITY. The members and managers of the Company shall not be liable for the debts, obligations, and liabilities of the Company, although pursuant to express provisions of the Companys written operating agreement the members or their assignees may be required to make certain capital contributions to the Company.14 9. [OPTIONAL: AMENDMENT. These Articles of Organization may not be amended or modified without the unanimous vote or consent of the members of the Company.15 [OR: without the vote or consent of the _________________ Foundation.] IN WITNESS WHEREOF, the undersigned has executed these Articles of Organization, this ______ day of _______________, 20_____.

___________________________________ Name of Organizer/ Attorney for Organizer

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APPENDIX 4 L3C Based B-Corp Certified LLC Operating Agreement Template

OPERATING AGREEMENT OF [NAME], L3C a Vermont low-profit limited liability company Dated as of [Date]

THE COMPANY INTERESTS REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. SUCH INTERESTS MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR OTHERWISE DISPOSED OF AT ANY TIME WITHOUT EFFECTIVE REGISTRATION UNDER SUCH ACT AND LAWS OR EXEMPTION THEREFROM, AND COMPLIANCE WITH THE OTHER RESTRICTIONS ON TRANSFERABILITY SET FORTH IN THIS AGREEMENT. [Note: Depending on the number and sophistication of the investors securities registration may be necessary. In particular, the Company may need to register under the Investment Company Act of 1940 and failure to do so could have severe adverse consequences for the Company. Competent legal counsel must be consulted with respect to these matters.] [Note: Although not required, it may be advisable to include a preamble section before the substantive text of the operating agreement stating the concept underlying your L3C and providing a brief explanation of your expectations with respect to the operation of your L3C. In a preamble, generally each statement begins with "WHEREAS and the preamble is concluded with a statement such as: "NOW, THEREFORE, in consideration of the above Preamble, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:"]

OPERATING AGREEMENT TERMS POSSIBLY REQUIRING NEGOTIATION BY THE PARTIES: 1. Section 5.1 (Distribution Priority) 2. Section 6.1 (Management and Operation) 3. Section 6.4 (Actions requiring super-majority vote; meeting of members) 4. Section 11.1 (Private Foundation Special Indemnification) 5. Section 8.3 (PF Member Redemption Election Terms)

58

AGREEMENT This LIMITED LIABILITY COMPANY OPERATING AGREEMENT of [NAME] (the "Company") is made and entered into effective as of [Date] (as it may be amended from time to time in accordance with its terms, the "Agreement"), by and among its Class A Members and Class PF Members (as defined below and collectively referred to herein as the "Members"). ARTICLE 1 FORMATION; QUALIFICATION; DEFINITIONS
Section 1.1 Formation. The Company shall constitute an L3C formed pursuant to Chapter 21: Limited Liability Companies, of Title 11: Corporations, Partnerships and Associations of the Vermont Statutes Annotated (the "LLC Act"). The Articles of Organization for the Company were filed on behalf of the Company with the Secretary of State of the State of Vermont on [Date].

Qualification to do Business. The Manager shall cause the Company to qualify to do business, or to register under an assumed or fictitious name, in any jurisdiction in which the Company transacts business in which such qualification or registration is necessary or desirable.
Section 1.2

Definitions. Capitalized terms used but not otherwise defined herein shall have the meanings set forth on Exhibit 1.
Section 1.3

ARTICLE 2 NAME; BUSINESS; TERM

Section 2.1 Name. The name of the Company is "[NAME]." Business shall be conducted by the Company under that name or such other name or names as its Members may from time to time approve. Section 2.2

Purposes of the Company.1 The proposed purposes of the Company are

as follows: (a) To [__________]; (b) To [__________]; and (c) To engage in any lawful activities necessary or advisable in connection with the foregoing purposes that are not inconsistent with the LLC Act or Section 2.3 of this Agreement.
Section 2.3 Business to Operate as an L3C. Notwithstanding anything to the contrary in Section 2.2, the Company shall at all times be organized for one or more business purposes that satisfies, and is at all times operated to satisfy, each of the following requirements applicable to low-profit limited liability companies as defined in the Act:

59

(a) The Company's purposes significantly further the accomplishment of one or more charitable or educational purposes within the meaning of Section 170(c)(2)(B) of the Code. (b) The Company would not have been formed but for the Company's desire to accomplish its purposes as set forth in Section 2.2. (c) No significant purpose of the Company is the production of income or the appreciation of property; provided, however, that the fact that the Company produces significant income or capital appreciation shall not, in the absence of other factors, be conclusive evidence of a significant purpose involving the production of income or the appreciation of property. (d) The Company will not participate or intervene in (including the publishing or distributing of statements on political campaign on behalf of (or in opposition to) any candidate for public office within the meaning of Section 170(c)(2)(D) of the Code) or otherwise influence the outcome of any specific public election, or carry on, directly or indirectly, a voter registration drive (within the meaning of Section 4945(d)(2) of the Code). (e) The Company will not carry on propaganda, or otherwise attempt to influence legislation (within the meaning of Section 4945(d)(1) of the Code).
Section 2.4 Term. The Members acknowledge and agree that the Company is not an at-will company (within the meaning of the LLC Act), that the term of the Company shall be perpetual, and that the Company shall continue indefinitely until dissolved pursuant to this Agreement. Accordingly, except as otherwise mandated pursuant to Section 3101(4) or (5) or other nonwaivable provisions of the LLC Act, neither the Bankruptcy of a Member, nor the separation of a Member, whether by reason of death, disability, expulsion, withdrawal, or retirement (or any other event specified in Section 3081 of the LLC Act as an event of dissociation), shall terminate or dissolve the Company. Section 2.5 Principal Office. The Company's designated principal office shall be located at [address]. The Manager may change the designated principal office of the Company. The Company may have such other offices, either within or without the State of Vermont as the Manager designates or as the business of the Company requires. Section 2.6 Registered Agent; Registered Office. The registered agent for the service of process shall be [registered agent] The registered office shall be [registered agent], [address]. The registered agent and registered office may be changed from time to time by the Manager and by the filing of the prescribed forms with, and the payment of any prescribed fees to, the Secretary of State of the State of Vermont.

Fiscal Year. Unless otherwise determined by the Managers, the Companys Fiscal Year shall be the calendar year (or portion thereof ending December 31 during the Companys first Fiscal Year.
Section 2.7

ARTICLE 3 MEMBERS; MEMBERSHIP

Section 3.1

Membership Classes. The Company shall have the following two classes

of Members: 60

(a) "Class A Members," which shall be composed of all Members other than Class PF Members; and (b) "Class PF Members," which shall be composed solely of PF Members making a "PRI" in the Company. Membership Interests. Each Member shall own a Membership Interest in the Company, which may be expressed as a percentage, as shall be set forth on the Company Schedule hereto.
Section 3.2 Section 3.3 Company Schedule. The name, address, Membership Interest, Initial Capital Contribution, and Capital Account of each Member shall be set forth on Schedule A attached hereto (the "Company Schedule"). The Manager shall update the Company Schedule from time to time as it deems necessary to reflect accurately the information to be contained therein. Any reference in this Agreement to the Company Schedule shall be a reference to the Company Schedule as amended and in effect from time to time and maintained in accordance with this Agreement.

New Members. The Manager may admit additional Members (a "New Member") of any class to the Company only upon [(i) the affirmative vote of Sixty-Six and Two Thirds Percent (66-2/3%) of all of the Members voting together as if a single class, and the simultaneous vote or consent of all of the Class PF Members, and (ii)] the execution by the New Member of a joinder to this Agreement in the form of Schedule B, which shall be counter-signed by each New Member and the Manager, on behalf of the Company. Unless otherwise determined by all of the Members acting unanimously, the Manager shall assign such New Member a Membership Interest in the Company in proportion to the amount of such New Member's Capital Contribution in relation to the then Book Value of the Company.
Section 3.4 Section 3.5 List of Members. Upon written request of any Member, the Company shall provide a list showing the names, addresses and Membership Interests of all Members and the other information required by the Act.

ARTICLE 4 CONTRIBUTIONS; CAPITAL ACCOUNTS

Section 4.1 Contributions by Members. Within ten (10) days of the date of this Agreement, each Member shall make the Capital Contributions to the Company in the amount set forth on the Company Schedule ("Initial Capital Contributions").

Additional Contributions. Except as set forth in Section 4.1, no Member is obligated to make any further Capital Contributions to the Company.
Section 4.2 Section 4.3 No Interest on Contributions or Capital Account. No Member shall have the right to receive interest on Capital Contributions to the Company or on such Member's Capital Account. Section 4.4 Loans. Any Person may, with the consent of the Manager, lend or advance money to the Company. If any Member shall make any loan or loans to the Company or

61

advance money on his, her or its behalf, the amount of any such loan or advance shall not be treated as a Capital Contribution but shall be a debt due from the Company. The amount of any such loan or advance by a lending Member shall be repayable out of the Company's cash and shall bear interest at such rate as the Manager and the lending Member shall agree taking into consideration, without limitation, prevailing interest rates and the interest rates the lender is required to pay in the event such lender has himself, herself or itself borrowed funds to loan or advance to the Company and the terms and conditions of such loan, including the rate of interest, shall be no less favorable to the Company than if the lender had been an independent third party. None of the Members shall be obligated to make any loan or advance to the Company.
Section 4.5

Capital Accounts.

(a) The Company shall establish and maintain a separate Capital Account for each Member according to the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). For this purpose, the Company may (in the discretion of the Manager), upon the occurrence of the events specified in Treasury Regulation Section 1.704-1(b)(2)(iv)(f), increase or decrease the Capital Accounts in accordance with the rules of such regulation and Treasury Regulation Section 1.7041(b)(2)(iv)(g) to reflect a revaluation of Company property. (b) For purposes of computing the amount of any item of Company income, gain, loss or deduction to be allocated pursuant to Article 5 and to be reflected in the Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for U.S. federal income tax purposes (including any method of depreciation, cost recovery or amortization used for this purpose), provided that: (i) The computation of all items of income, gain, loss and deduction shall include those items described in Code Section 705(a)(l)(B), Code Section 705(a)(2)(B), and Treasury Regulation Section 1.704-1(b)(2)(iv)(i), without regard to the fact that such items are not includable in gross income or are not deductible for federal income tax purposes. (ii) If the Book Value of any Company property is adjusted pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(e) or (f), the amount of such adjustment shall be taken into account as gain or loss from the disposition of such property. (iii) Items of income, gain, loss or deduction attributable to the disposition of Company property having a Book Value that differs from its adjusted basis for tax purposes shall be computed by reference to the Book Value of such property. (iv) Items of depreciation, amortization and other cost recovery deductions with respect to Company property having a Book Value that differs from its adjusted basis for tax purposes shall be computed by reference to the property's Book Value in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(g). (v) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Sections 732(d), 734(b) or 743(b) is required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of 62

gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis). (vi) Items of income, gain, loss and deduction of the Company with respect to any property distributed to a Member shall be computed as if the Company had sold such property on the date of such distribution at a price equal to its Fair Market Value at that date. (c) The Members' Capital Accounts normally will be adjusted in accordance with this Agreement on an annual or other periodic basis as determined by the Manager, but the Capital Accounts may be adjusted more often if a New Member is admitted to the Company of if circumstances otherwise make it advisable in the judgment of the Manager. Negative Capital Accounts. No Member shall be required to pay to any other Member or the Company any deficit or negative balance which may exist from time to time in such Member's Capital Account (including upon and after dissolution of the Company).
Section 4.6 Section 4.7 No Withdrawal. No Person shall be entitled to withdraw any part of such Person's Capital Contributions or Capital Account or to receive any Distribution from the Company, except as expressly provided in this Agreement or as required by Section 3081(1) or (5) of the LLC Act.

ARTICLE 5 DISTRIBUTIONS AND ALLOCATIONS OF INCOME AND LOSS

Section 5.1

Distributions.

(a) Except as expressly provided otherwise in Articles 8 and 12 of this Agreement, the Company shall make Distributions to the Members in respect of their Membership Interests at any time and from time to time as determined by the Manager in the Managers sole discretion; provided that such Distributions are permitted under any lending agreements to which the Company or any of its Subsidiaries is a party and under applicable law. Subject to the foregoing and Section 5.1(b), Distributions shall be made in the following order and priority: [Note: The priority of distributions is entirely subject to the negotiation of the parties and this section should be customized accordingly. The distribution priority set forth below is for illustration purposes only.] 2 (i) First, to the Class A Members in proportion to and to the extent of the Unreturned Capital with respect to each such Class A Members Membership Interest held by each such Member immediately prior to such Distribution; (ii) Second, to the Class PF Members in proportion to and to the extent of the Unreturned Capital with respect to each such Class PF Members Membership Interest held by each such Member immediately prior to such Distribution; and (iii) Third, to all Members ratably among such Members based upon their respective Membership Interests.

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(b) Notwithstanding the priority of Distributions in Section 5.1(a), the Company will use reasonable efforts, consistent with any restrictions which may be imposed by any creditor of the Company or any of its Subsidiaries or applicable law, to make quarterly or more frequent Distributions of an amount of cash (a Tax Distribution) equal to the product of (i) the Company Income Amount for such calendar quarter or other period, multiplied by (ii) the Assumed Tax Rate for such Fiscal Year. The Company Income Amount for a Fiscal Year shall be an amount, if positive, equal to the estimated net taxable income of the Company for such Fiscal Year based upon the Companys estimated taxable income through such date, minus any net taxable loss of the Company for any prior Fiscal Year not previously taken into account for purposes of this Section 5.1(b). The Assumed Tax Rate for a Fiscal Year shall be the maximum federal, foreign, state, and local income tax rate that would be applicable to a Member if such Member were taxed for such Fiscal Year (and the calendar quarters or other periods in such Fiscal Year) as a corporation or individual resident or domiciled in either the State of Vermont or the state where the Company is then domiciled (i.e., the highest of the rates, regardless of whether such Member is a corporation, an individual, or another entity and regardless of whether such Member is domiciled in Vermont or the state where the Company is then domiciled ) in respect of income recognized during each such Fiscal Year. The Company will use reasonable efforts to cause such Distributions to be made in a manner which permits such Members to use the proceeds of such Distributions to make on a timely basis all required estimated payments of income taxes in respect of the taxable income so allocated to them. The Company will use reasonable best efforts to have Tax Distributions be permitted distributions pursuant to any credit and/or lending agreement or similar document with any creditor of the Company. (c) The Tax Distributions for each Fiscal Year shall be distributed to the Members in the same proportions that taxable income was or is anticipated to be allocated to the Members during such Fiscal Year. Each Distribution pursuant to this Section 5.1(c) shall be made to the Persons shown on the Company's books and records as a Member as of the date of such Distribution and shall be treated as an advance to such Persons of amounts to which they are otherwise entitled under Section 5.1(a). Each Distribution pursuant to this Section 5.1(c), to the extent attributable to Profits in excess of Losses (and Losses of any prior Fiscal Year not previously taken into account for purposes of this Section 5.1(c)) allocated to such Persons by virtue of Section 5.1(a), shall not be treated as an advance to such Persons of amounts to which they are otherwise entitled under Section 5.1(a) and, for the avoidance of doubt, shall not reduce the amount of any Distributions to such Persons pursuant to Section 5.1(a)(1). (d) The Members shall look solely to the assets of the Company for any Distributions, whether liquidating Distributions or otherwise. If the assets of the Company remaining after the payment or discharge, or the provision for payment or discharge, of the debts, obligations, and other liabilities of the Company are insufficient to make any Distributions, no Member shall have any recourse against the separate assets of any other Member (except as otherwise expressly provided herein). (e) If the Company has, pursuant to any clear and manifest accounting or similar error, paid any Member an amount in excess of the amount to which it is entitled pursuant to this Article 5, such Member shall reimburse the Company to the extent of such excess, without interest, within 30 days after demand by the Company.

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Allocations. Except as otherwise provided in Section 5.3, Profits and Losses for any Fiscal Year shall be allocated among the Members such that, as of the end of such Fiscal Year, the Capital Account of each Member shall equal (a) the amount which would be distributed to them or for which they would be liable to the Company under the Act, determined as if the Company were to (i) liquidate the assets of the Company for an amount equal to their Book Value and (ii) distribute the proceeds of such liquidation pursuant to Section 5.1 minus (b) the sum of (i) such Member's share of Company Minimum Gain (as determined according to Treasury Regulation Sections 1.704 2(d) and (g)(3)) and such Member's partner minimum gain (as determined according to Treasury Regulation Section 1.704-2(i)) and (ii) the amount, if any, which such Member is obligated to contribute to the capital of the Company as of the last day of such Fiscal Year.
Section 5.2 Section 5.3

such Members based upon their respective Membership Interests. If there is a net decrease in Company Minimum Gain during any Taxable Year, each Member shall be specially allocated Profits for such Taxable Year (and, if necessary, subsequent Taxable Years) in an amount equal to such Member's share of the net decrease in Company Minimum Gain, determined in accordance with Treasury Regulation Section 1.704-2(g). The items to be so allocated shall be determined in accordance with Treasury Regulation Section 1.704-2(f)(6). This Section 5.3(a) is intended to comply with the minimum gain chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall be interpreted consistently therewith. (b) Losses attributable to partner nonrecourse debt (as defined in Treasury Regulation Section 1.704-2(b)(4)) shall be allocated in the manner required by Treasury Regulation Section 1.704-2(i). Except as otherwise provided in Treasury Regulation Section 1.704-2(i)(4), if there is a net decrease during any Taxable Year in partner nonrecourse debt minimum gain (as defined in Treasury Regulation Section 1.704-2(i)(3)), Profits for such Taxable Year (and, if necessary, subsequent Taxable Years) shall be allocated to the Members in the amounts and of such character as determined according to, and subject to the exceptions contained in Treasury Regulation Section 1.704-2(i)(4). This Section 5.3(b) is intended to be a minimum gain chargeback provision that complies with the requirements of Treasury Regulation Section 1.704-2(i)(4) and shall be interpreted in a manner consistent therewith. (c) If any Member that unexpectedly receives an adjustment, allocation or distribution described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6) has an Adjusted Capital Account Deficit as of the end of any Taxable Year, then Profits for such Taxable Year shall be allocated to such Member in proportion to, and to the extent of, such Adjusted Capital Account Deficit. This Section 5.3(c) is intended to be a qualified income offset provision as described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted in a manner consistent therewith. (d) The allocations set forth in Sections 5.3(a), (b) and (c) above (the Regulatory Allocations) are intended to comply with certain requirements of the Treasury Regulations under Code Section 704. Notwithstanding any other provisions of this Article 5 (other than the Regulatory Allocations), the Regulatory Allocations shall be taken into account in allocating Profits and Losses among Members so that, to the extent possible, the net amount of 65

(a)

Special Allocations. Nonrecourse deductions shall be allocated to the Members ratably among

such allocations of Profits and Losses and other items and the Regulatory Allocations (including Regulatory Allocations that, although not yet made, are expected to be made in the future) to each Member shall be equal to the net amount that would have been allocated to such Member if the Regulatory Allocations had not occurred. (e) Profits and Losses described in Section 4.5(b)(v) shall be allocated in a manner consistent with the manner that the adjustments to the Capital Accounts are required to be made pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(j), (k) and (m). (f) If, and to the extent that, any Member is deemed to recognize any item of income, gain, loss, deduction or credit as a result of any transaction between such Member and the Company pursuant to Code Sections 1272, 1274, 7872, 483, 482, 83 or any similar provision now or hereafter in effect, and the Manager determines that any corresponding Profit or Loss of the Company should be allocated to the Members who recognized such item in order to reflect the Members' economic interests in the Company, then the Company may so allocate such Profit or Loss.
Section 5.4

Tax Allocations.

(a) Except as provided in Sections 5.3(b), (c) and (d), the income, gains, losses, deductions and credits of the Company will be allocated, for federal, state and local income tax purposes, among the Members in accordance with the allocation of such income, gains, losses, deductions and credits among the Members for computing their Capital Accounts; provided that if any such allocation is not permitted by the Code or other applicable law, the Company's subsequent income, gains, losses, deductions and credits will be allocated among the Members so as to reflect as nearly as possible the allocation set forth herein in computing their Capital Accounts. (b) Subject to Section 5.6 hereof, items of Company taxable income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall be allocated among the Members in accordance with Code Section 704(c) so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its Book Value. (c) If the Book Value of any Company asset is adjusted pursuant to the requirements of Treasury Regulation Section 1.704-1(b)(2)(iv)(e) or (f), subsequent allocations of items of taxable income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Book Value in the same manner as under Code Section 704(c). (d) Allocations of tax credits, tax credit recapture, and any items related thereto shall be allocated to the Members according to their interests in such items as determined by the Manager taking into account the principles of Treasury Regulation Section 1.704-1(b)(4)(ii). (e) Allocations pursuant to this Section 5.4 are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, Distributions or other Company items pursuant to any provision of this Agreement. 66

(f) The Manager may, but shall not be obligated to, elect to adjust the basis of the assets of the Company for federal income tax purposes in accordance with Code Section 754. Withholding Taxes on Distributions. The Company may withhold from Distributions (or allocations of Company income, gain, loss, deduction, and credit) to any Member and pay over to any federal, state, local, or foreign government any amounts required to be so withheld by law and must allocate any such amount to the Member with respect to which such amounts were withheld. For all purposes of this Agreement, all amounts so withheld must be treated as amounts actually distributed to the Member with respect to which such amounts were withheld, and such amounts must be treated as actually distributed at the time paid to the relevant government agency.
Section 5.5

ARTICLE 6 MANAGEMENT
Section 6.1

Appointment of Manager; Intent of Members Regarding Management.

(a) The Members, by Majority Vote, and by the simultaneous vote or consent of all of the Class PF Members, shall appoint a manager (the "Manager") who shall consent to such appointment by executing a counterpart signature page to this Agreement. [Note: This Agreement contemplates a single manager. The Agreement may provide for multiple managers or management by the members.] (b) Company. (c) It is the intention of the Members that the Company be managed and operated by the Manager in accordance with the purposes set forth in the Articles of Organization of the Company and in Sections 2.2 of this Agreement, and so long as the Company qualifies as a low-profit limited liability company under the Act, in accordance with Section 2.3 of this Agreement. When acting in accordance with this Section 6.1 and other applicable provisions of this Agreement, a Manager is entitled to rely upon the Act and this Section 6.1 as a defense to any claim by a Member (other than a PF Member), a creditor of the Company, or any other person that the Manager breached his, her, or its duty of care (under Section 3059(c) of the LLC Act) or duty of loyalty (under Section 3059(b) of the LLC Act) to the Company and its Members. It is the intention of the Members that the Company be operated in a socially beneficial and responsible manner, with the highest regard for authenticity, integrity, and ethics, even where these principals conflict with the maximization of profit. The Members of the Company believe that this management approach ultimately will serve their best interests and those of the Company over the long-term, and is the most effective method to build the value (both monetarily and otherwise) of the Company. In discharging his or her duties, and in determining what is in the best interests of the Company and its Members, the Manager shall not be required to regard any interest, or the interests of any particular group affected by such action, as a dominant or controlling interest or factor. The Members hereby appoint [Manager] as the initial Manager of the

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(d) In determining what is in the best interests of the Company and the Members and in making business decisions, the Manager shall give due consideration to the following factors, including, but not limited to, the long-term prospects and interests of the Company and its Members; the social, economic, legal, or other effects of any action on the Companys current and retired employees, the suppliers and customers of the Company or its subsidiaries, and the general public (said employees, suppliers, customers, and public citizens, along with the Members, being collectively referred to hereinafter as the "Stakeholders"); together with the short-term, as well as long-term, interests of the Companys Members and the effect of the Company's operations (and its subsidiaries' operations) on the environment and the economy of the state, the region, and the nation. (e) The Manager is entitled to rely upon the definition of best interests as set forth above in enforcing his or her rights hereunder, and discharging his or her duties, under state law, and such reliance shall not, absent another breach, be construed as a breach of the Managers fiduciary duty of care and loyalty to the Members, even in the context of a Change in Control Transaction where, as a result of weighing other Stakeholders' interests, the Manager(s) determines to reject an offer or even to accept an offer, between two competing offers, with a lower price per unit, if doing so is consistent with the Companys best interest as expressed above and as determined by the Managers. (f) Notwithstanding the foregoing, nothing in this Section 6 or elsewhere in this Agreement, except as may exist at law without regard to this Section 6 or any other provisions of this Agreement, express or implied, is intended to create or shall create or grant any right in or for any person or any cause of action by or for any person against the Managers other than a Member. When acting in accordance with this Section 6.1 and other applicable provisions of this Agreement, a Manager is entitled to rely upon the Act and this Section 6.1 as a defense to any claim by a Member, a creditor of the Company, or any other person that the Manager breached his, her, or its duty of care (under Section 3059(c) of the LLC Act) or duty of loyalty (under Section 3059(b) of the LLC Act) to the Company and its Members.
Section 6.2 Management Authority of Manager. Subject to Section 6.4, the Manager shall have exclusive authority to manage the operations and affairs of the Company and to make all decisions regarding the business of the Company. Pursuant to the foregoing, it is understood and agreed that the Manager shall have all of the powers, authority and duties accorded to a "manager" by the LLC Act and as otherwise provided by law, and any action taken by the Manager in accordance with this Article 6 shall constitute the act of, and serve to bind the Company. A Manager shall not delegate or assign to any Person other than another Manager then acting any of his or her rights, duties, or powers exercisable under this Agreement in his or her capacity as a Manager; provided, however, that, as set forth in Section 6.3(c) below, this sentence shall not limit the Manager's right to employ other Persons and appoint officers (Officers) of the Company to assist the Manager in carrying out the Managers duties regarding the business of the Company. The Manager shall be authorized to execute, acknowledge, and file any and all documents necessary to undertake any action pursuant to this Article 6. Section 6.3 Specific Powers. Subject to Section 6.4 and in furtherance of Section 6.2 above, the Manager shall have all right, power and authority necessary, appropriate, desirable

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or incidental to carry out the conduct of the Company's business, including, but not limited to, the right, power and authority: (a) to incur and pay all reasonable costs, expenses and expenditures, including payments and reimbursements to affiliates of the Manager in accordance with this Agreement, incurred in good faith in the course of the conduct of the Company business; (b) to finance the operation of the Company's business by causing it to borrow funds from any available sources (including the Members or their affiliates) upon such terms and conditions as the Manager deems proper, which financing may be secured by one or more deeds of trust and other security interests on the property and assets of the Company, to take any and all actions and to execute, acknowledge and deliver all documents in connection therewith; (c) to employ and dismiss from employment any and all employees, agents, independent contractors, consultants, appraisers, attorneys and accountants; to appoint Officers of the Company with the authority to carry out the day-to-day business of the Company and, within the limitations of their appointment, to execute contracts and other instruments on behalf of the Company; and to pay such fees, expenses, salaries, wages or other compensation to such Persons, as the Manager determines to be reasonable; (d) to purchase, or contract to purchase, any property, real or personal, for any purposes connected with the Company's business at any time upon such terms as the Manager agrees; (e) to sell, exchange, transfer, contribute, mortgage, pledge, encumber, lease or otherwise dispose or transfer the property or assets of the Company, or any interest therein, at any time upon such terms as the Manager agrees; provided, however, that the sale, exchange, transfer, contribution, mortgage, pledge, encumbrance, lease or other disposition or transfer of all or substantially all of the assets of the Company shall require an affirmative vote of the Members pursuant to Section 6.4(a)(ii); (f) to pay, extend, renew, modify, submit to arbitration, prosecute, defend or compromise, upon such terms as the Manager deems proper and upon any evidence as the Manager may deem sufficient, any obligation, suit, liability, cause of action or claim, either in favor of or against the Company; (g) to pay or cause to be paid any and all taxes, charges or assessments that may be levied, assessed or imposed on any of the property or assets of the Company; (h) to invest funds which, in the judgment of the Manager, are not immediately required for the conduct of the Company's business, in such investments as may be selected by the Manager; and (i) to execute, acknowledge, and deliver any and all instruments to effectuate any and all of the foregoing.
Section 6.4

Actions Requiring Super-Majority Member Vote; Meetings of Members. 69

(a) Notwithstanding the foregoing, approval of any of the following actions by the Company shall require an affirmative vote of sixty-six and two-thirds percent (66-2/3%) of all of the Members, and the simultaneous vote or consent of all of the Class PF Members: (i) any merger or consolidation of the Company;

(ii) the sale, exchange, transfer, contribution, mortgage, pledge, encumbrance, lease or other disposition or transfer of all or substantially all of the assets of the Company; (iii) any amendment to the Company's Articles of Organization (other than ministerial changes) under Section 3024(c) of the LLC Act; (iv) any amendment of this Agreement (other than ministerial changes)[; provided, however, that any amendment of Section 2.2, Section 2.3 or Article 8 [(whether ministerial or otherwise)] shall require the affirmative vote or consent of all Class PF Members]; (v) the dissolution or winding up of the Company;

(vi) [except for sales or dispositions of property in the ordinary course of business, any acquisition or divestiture by the Company, regardless of size]; (vii) (viii) Section 3.4 hereof]; (ix) [the adoption of any compensation or benefit plan by the Company, or any material change or amendment thereto]; (x) (xi) [the appointment or change of auditors for the Company]; [any change in the Company's accounting policies]; and [the formation of any Subsidiary of the Company]; [the admission of New Members into the Company pursuant to

(xii) commencing or settling litigation involving the Company that would (or could) result in liability to the Company of more than $[50,000]. (b) A meeting of the Members may be called at any time by the Manager, or by Members holding not less than twenty-five percent (25%) of the Membership Interests, upon thirty (30) days' prior written notice (or such shorter period as all of the Members may agree in writing) to all of the Members specifying the time and place of, and agenda for, the meeting. (i) Members may participate in any meeting by attending in Person, by proxy or through the use of a conference telephone or similar communications equipment by means of which all Members participating in the meeting can hear each other. 70

(ii) A Member may vote by written proxy, which may be a power of attorney, signed by such Member. Such proxy shall be filed with the Manager before the applicable meeting begins. A proxy shall specify a specific meeting to which it relates and shall be valid only for such specified meeting. A proxy may be revoked at any time prior to the meeting for which it was intended. Attendance by a Member at a meeting for which a proxy has been given shall without any further action by such Member be deemed to revoke such proxy. (iii) The presence in Person, by proxy or as otherwise permitted by this Agreement, of Members holding a majority of the Membership Interests shall constitute a quorum for purposes of conducting business at any meeting of the Members. If a quorum is present at the beginning of any meeting, the Members may continue to conduct business at such meeting until such meeting is adjourned even if one or more of the Members depart from such meeting and such departure causes a quorum to no longer exist. (c) Except as expressly provided otherwise in this Agreement, the affirmative vote of Members holding a majority of the Membership Interests present at a duly called and held meeting of the Members (a Majority Vote) shall be the act of the Members. Notwithstanding Ver. Stat. Ann. 11-21-3059 or any other provisions of the Act, unless prohibited by non-waivable provisions of the Act, Members having an interest (economic or otherwise) in the outcome of any particular matter upon which the Members vote or consent may vote or consent upon any such matter and their Membership Interest, vote or consent, as the case may be, shall be counted in the determination of whether the requisite matter was approved by the Members. (d) Action required or permitted to be taken by the Members at a meeting may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by the Members entitled to vote and having the requisite Membership Interest required to approve such action. Action taken under this Section is effective when the Members required to approve such action have signed the consent, unless the consent specified a different effective date. The record date for determining Members entitled to take action without a meeting shall be the date the first Member signs a written consent. (e) In lieu of any procedures contained in Section 6.4(b) of this Agreement or the Act, when any notice is required to be given to any Member, a waiver thereof in writing signed by the Person entitled to such notice, whether before, at, or after the time stated therein, shall be equivalent to the giving of such notice. (f) In lieu of any procedures contained in Section 6.4(b) of this Agreement or the Act, Members also may meet by conference telephone call if all Members can hear one another on such call and the requisite notice is given or waived. Term. The Manager holds office for an indefinite term or until his or her earlier death, resignation, or removal.
Section 6.5 Section 6.6

Resignation. The Manager may resign at any time by giving written notice of his or her resignation to all Members, such resignation to be effective upon receipt or

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three (3) days after dispatch by the Manager (whichever is earlier) unless a later date is specified in the notice and to be without prejudice to the contract rights, if any, of any party. Removal. The Manager may be removed, with or without cause, by a Majority Vote, with the simultaneous vote or consent of all of the PF Members, such removal to be without prejudice to the contract rights, if any, of any party.
Section 6.7 Section 6.8 Other Business Interests and Activities. The Manager shall not be required to manage the Company as his or her sole and exclusive function, and a Manager or a Member may have other business interests and may engage in other activities in addition to those relating to the Company. Neither the Company nor any Member shall have any right in or to such other ventures by virtue of this Agreement or the relationship among the Members created hereby. Section 6.9

Conflict of Interest.

(a) A Member, a Manager or any affiliate thereof shall not be deemed to have breached a duty to the Company by entering into any transaction or agreement in which such Member, Manager or affiliate has a financial interest if either (i) the transaction is fair to the Company or (ii) a majority of the disinterested Members, knowing the material facts of the transaction and the interest of the Member, Manager or affiliate, have rejected the opportunity. (b) No Manager, Member or any affiliate thereof shall be obligated to present any opportunity to the Company, provided, however, that a Member, Manager or affiliate shall present to the Company and shall not take for himself, herself or itself, directly or indirectly, any such opportunity or recommend it to a third party if it would be within the purpose of the Company unless (i) the Company does not have the financial ability to pursue the opportunity or (ii) a majority of the disinterested Members, knowing the material facts of the transaction and the interest of the Member, Manager or affiliate, have rejected the opportunity.
Section 6.10 Exculpation. Except as otherwise expressly provided by the LLC Act or herein, no Manager or Member shall be liable, responsible or accountable in damages or otherwise to the Company, or to any Member for any acts or omissions performed or omitted in good faith and in a manner reasonably believed by the Manager or Member to be within the scope of the authority conferred upon him, her or it by this Agreement and in the best interests of the Company. Specifically, and without limiting the scope of the foregoing, no Member shall be liable, responsible or accountable in damages or otherwise to the Company or any other Member for any action taken by the Member, in good faith, as Tax Matters Partner in connection with the examination by the IRS of the Company's Federal partnership tax return or the determination, protest, adjustment or adjudication of any Federal or state income tax liability of any Member resulting from the Company. Section 6.11 Limitation on Members' Authority. No Member shall be an agent of the Company solely by virtue of being a Member. No Member shall have any authority to act for or on behalf of the Company solely by virtue of being a Member, except as may be approved by the Manager or by the Members, in each case as provided in this Agreement and under the LLC Act.

Record Date. For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment thereof, or Members entitled to
Section 6.12

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receive payment of any Distribution, or in order to make a determination of Members for any other purpose, the date on which notice of the meeting is mailed or the date on which such Distribution is made, as the case may be, shall be the record date for such determination of Members unless the Managers otherwise shall specify another record date. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this Section, such determination shall apply to any adjournment thereof. ARTICLE 7 TRANSFER OF INTERESTS
Section 7.1 Restrictions on Transfers. Except in accordance with the provisions of both Section 3.4, Section 8.2, or this Article 7, no Member may transfer, sell, assign, pledge, hypothecate, bequeath, give, create a security interest in or lien upon, place in trust (voting or otherwise), assign, or in any other way encumber or dispose of, directly or indirectly, and whether or not by operation of law or for value ("Transfer") its Membership Interest. Further, except as required pursuant to Section 3081(1) of the LLC Act, or as permitted otherwise herein (including but not limited to Article 8), no Member shall have the right to withdraw or resign from the Company, and any such withdrawal or resignation shall be deemed to be wrongful and in violation of this Agreement.

Transfer Notice. In the event a Member (the "Selling Member") desires to Transfer any or all of the Membership Interests held by such Selling Member (the "Transferring Interests") to a person (the "Offeree"), the Selling Member shall promptly deliver to each of the other Members (the "Non Selling Members") written notice of the intended Transfer (the "Transfer Notice"), which must set forth the material terms and conditions thereof, including the purchase price for the Transferring Interests and the identity of the Offeree and any beneficial owners thereof.
Section 7.2 Section 7.3

Exercise of Right by Non-Selling Members.

(a) The Non-Selling Members shall have a right (the "Option"), for a period of thirty (30) days following receipt of a Transfer Notice (the "Option Period"), to purchase the Transferring Interests upon the same terms and conditions specified in the Transfer Notice; provided, however, that the purchase price shall be an amount equal to the lesser of: (i) (ii) the Fair Market Value of the Transferring Interests; or the purchase price specified in the Transfer Notice.

(b) Such right is exercisable by written notice (the "Exercise Notice") delivered by the Non-Selling Members to the Selling Member prior to the expiration of the Option Period. (c) If more than one Non-Selling Member elects to exercise the Option, the Transferring Interests shall be allocated based on the ratio that each participating Non-Selling Member's Membership Interest in the Company bear to the total of all participating Non-Selling Members' Membership Interests in the Company. 73

Types of Exercise by the Non-Selling Members. If such right is exercised by the Non-Selling Members with respect to:
Section 7.4

(a) all of the Transferring Interests specified in the Transfer Notice, then the Non-Selling Members shall effect the purchase of such Transferring Interests, including payment of the purchase price therefor, not more than fifteen (15) business days after the delivery of the Exercise Notice and, at such time, the Selling Member shall deliver to the Non-Selling Members a duly endorsed assignment of the Transferring Interests to be purchased; or (b) only a portion of the Transferring Interests specified in the Transfer Notice, then: (i) the Non-Selling Members shall notify the Offeree of their intention to purchase only a portion of the Transferring Interests within the Exercise Period; and (ii) this right to purchase is contingent upon the Offeree's election to purchase the remaining balance of the Transferring Interests; and (iii) the Non-Selling Members' purchase of such Transferring Interests must be consummated, if at all, at the time of the Offeree's purchase; but (iv) in the event the Offeree elects not to purchase the remaining Transferring Interests, the Non-Selling Members are deemed to have waived their rights of first refusal. Non-Exercise of Right by Non-Selling Members. (a) In the event the Exercise Notice is not given by the Non-Selling Members to the Selling Member and the Offeree within the Exercise Period or the Offeree elects not to purchase the remaining Transferring Interests in accordance with Section 7.4(b)(iv), the NonSelling Members are deemed to have waived their rights of first refusal and the Selling Member has a period of thirty (30) days thereafter in which to sell all, but not less than all, of the Transferring Interests to the Offeree identified in, and upon terms and conditions (including the purchase price) no more favorable to the Offeree than those specified in the Transfer Notice.
Section 7.5

(b) In the event the Selling Member does not consummate the sale or disposition of the Transferring Interests within such thirty (30) day period, the Non-Selling Members' rights of first refusal are applicable to any subsequent disposition of the Transferring Interests by the Selling Member.
Section 7.6

Rights and Obligations of Transferee.

(a) Upon any Transfer of Membership Interests in accordance with the provisions of this Article 7, such Membership Interests remain subject to the restrictions of this Agreement. (b) Each purchaser of Transferring Interests succeeds to the rights of the Selling Member with regard to such Transferring Interests, except that: 74

(i) if the Non-Selling Members exercise their rights of first refusal and purchase any Transferring Interests, then any such Transferring Interests are automatically converted to the class of Membership Interests of the Non-Selling Member purchasing the Transferring Interests; or (ii) if the purchaser is a third party to this Agreement, such purchaser is subject to the terms of Section 3.4 concerning admission to the Company as a New Member and must take such other actions and execute such other documents as the Company reasonably requests.
Section 7.7 Expenses. The Selling Member shall pay all expenses incurred by the Company in connection with a Transfer in accordance with the provisions of this Article 7.

ARTICLE 8 SPECIAL RIGHTS OF CLASS PF MEMBERS

Section 8.1 Reports. In connection with any Class PF Member's requirement under Sections 4945(d)(4)(B) and 4945(h) of the Code to exercise expenditure responsibility over any PRIs and in addition to the quarterly financial statements provided for under Section 9.3, the Class PF Members shall have the right to obtain such full and complete reports or other documentation (and require the Company to take such other action as may be reasonably requested to enable any Class PF Member to comply with the requirements of Section 4945(h) of the Code) as such Class PF Member reasonably shall request in writing to confirm that its investment has been utilized by the Company for the purpose for which it is made and show how its investment was spent. The Company shall provide such reports or other documentation within thirty (30) days of its receipt of a written request from such Class PF Member.

Redemption Notice. If at any time or from time to time, as determined in the reasonable discretion of any PF Member by delivering written notice (the Redemption Notice) to the Members and the Manager, (i) the Company shall fail to timely provide any reports or other documentation requested in accordance with Section 8.1 or Section 9.3 or (ii) the Company violates any provision of Section 2.3, then any electing Class PF Member may compel the Company to purchase and redeem its Membership Interest in accordance with Section 8.3 below.
Section 8.2 Section 8.3

Redemption Election.

(a) Redemption Election. Upon receipt of a Redemption Notice, the Manager shall have thirty (30) days to cure any failure under Section 8.2 above. If the Manager is unable to cure such failure to the reasonable satisfaction of the PF Member providing the Redemption Notice within the thirty (30) day period following delivery of the Redemption Notice, then at the end of such thirty (30) day period the Class PF Member delivering the Redemption Notice immediately shall so notify in writing all other Class PF Members (the Failure to Cure Notice). Thereafter, each Class PF Member shall within thirty (30) days of the date of the Failure to Cure Notice elect by written notice to the Manager (the Redemption Election) whether to compel the Company to redeem each such Class PF Members Membership Interest in accordance with this Agreement. If the Manager is so notified by delivery of a Redemption Election, 75

then such redemption of all the electing Class PF Members shall take place on a date fixed by the Company, and announced in writing to the Members, which date shall be not more than sixty (60) calendar days after the date of the first timely delivered Redemption Notice, but such redemption shall be effective as of close of business immediately prior to the date of the first timely delivered Redemption Notice. If any Class PF Member fails to deliver a Redemption Election on a timely basis, then such Class PF Member shall be deemed not to have made an election to be redeemed for the Redemption Price under this Article 8, but shall have been deemed to have elected to convert such Class PF Members Membership Interest to a Class A Members Membership Interest in accordance with Section 8.3(b) below. Alternatively, in lieu of causing the Company to redeem the Membership Interest of any electing Class PF Member, the Manager may, notwithstanding anything to the contrary elsewhere in this Agreement, cause the Company to be liquidated and dissolved in accordance with Section 12 hereof. (b) Closing of Redemption. At the closing of any redemption hereunder (the Closing), the Company shall purchase and each Class PF Member to be redeemed hereunder shall sell all of the applicable Class PF Members Membership Interests, and each holder of Class PF Members Membership Interests, to be redeemed hereunder shall deliver to the Company duly executed instruments transferring title to the applicable Class PF Members Membership Interests to the Company, free and clear of all liens and encumbrances, against payment of the applicable Redemption Price. The Redemption Price shall be paid by the Company to each redeeming Class PF Member at the closing by cashiers certified check or by wire transfer of immediately available funds to an account designated by such Class PF Member. [Note: Negotiated terms could include payment via a promissory note. If payment via promissory note is permitted, then the terms of the note (i.e., amortization, interest, security, etc.) must be specified.] Alternatively, if so specified in a Class PF Members Redemption Election, of if such Class PF Member does not deliver a Redemption Election on a timely basis, then at the closing (but effective as of the close of business of the day immediately prior to the date of the Redemption Notice) the Company shall convert such Class PF Members Membership Interest into a Class A Membership Interest, and the Capital Contribution, Unreturned Capital Contribution, Capital Account, and other tax and economic attributes of such Members Class PF Membership Interest shall carryover and become a part of the converted Class A Membership Interest and from and after the effective date the Class PF Member shall be considered a Class A Member for all purposes under this Agreement. (c) Distribution of Funds Upon Redemption. If the funds of the Company available for payment of the Redemption Price for Class PF Membership Interests are insufficient, as determined by the Manager in its [his/her] sole discretion, then (i) those funds which are available, as determined by the Manager in its sole discretion, shall be used to redeem all so electing Class PF Membership Interests in accordance with Section 8.3(b), and (ii) when additional funds of the Company are legally available to pay the balance of the Redemption Price, as determined by the Manager in its [his/her] sole discretion, the Company immediately shall use such funds to pay all or such portion of the balance of the Redemption Price until such time as the entire Redemption Price has been paid to all so electing Class PF members. (d) Redeemed Units. Upon consummation of the Closing, all Class PF Membership Interests shall be considered redeemed for purposes of this Agreement effective immediately prior to the date of the Redemption Notice, notwithstanding the fact that the Company may have a continuing obligation under this Section 8.3 to pay the Redemption Price. Except for 76

any continuing right to be paid the Redemption Price, all rights of the holder of such Class PF Membership Interest shall cease (subject, however to such Members conversion to Class A Membership Interests, in which case such Member shall have the rights of a Class A Member), and such Class PF Membership Interest shall not be deemed to be outstanding after the Closing of any redemption hereunder. ARTICLE 9 BOOKS, RECORDS AND ACCOUNTING
Section 9.1 Books and Records. There shall be maintained and kept at all times during the continuation of the Company, proper and usual books of account that shall accurately reflect the condition of the Company and shall account for all matters concerning the management thereof, which books shall be maintained and kept at the principal office of the Company or at such other place or places as the Manager may from time to time determine. The Company's books and records shall be maintained using a method of accounting reasonably determined by the Manager. The Company's books and records, including any records providing the information specified in Section 3058 of the LLC Act, shall be open to inspection by any Member at any time during ordinary business hours upon reasonable notice and shall not be unreasonably restricted. Such books and records shall include separate income and capital accounts for each Member. Section 9.2 Fiscal Year. Unless otherwise determined by the Manager, the Company's fiscal year shall be the calendar year. Section 9.3 Financial Statements. The Manager shall provide full and complete financial statements to all Members concerning the financial condition and results of operation of the Company as promptly as practicable after the end of each fiscal quarter. Such quarterly financial statements shall be unaudited unless the Manager, in its sole discretion, determines that audited financial statements are necessary or appropriate. [In any quarter in which any Class PF Member has an investment in the Company that is treated by such Class PF Member as a PRI, each [quarterly] report shall be accompanied by a statement signed by the Manager to the effect that the Company has complied with the terms governing such PRI.] In addition, the Manager shall provide a short narrative explanation of how a PF Members funds have been used to further the purposes described in Section 2.2.

ARTICLE 10 TAXATION
Section 10.1 Status of the Company. The Members acknowledge that this Agreement creates a partnership for federal and state income tax purposes (and only for such purposes), and hereby agree not to elect to be excluded from the application of Subchapter K of Chapter 1 of Subtitle A of the Code or any similar state statute. Section 10.2 Tax Elections. The Manager shall cause the Company to file an election under Section 754 of the Code and the Treasury Regulations thereunder to adjust the basis of the Company assets under Section 734(b) or 743(b) of the Code and a corresponding election under the applicable sections of state and local law. The Manager shall have the authority to make all other Company elections permitted under the Code, including elections of methods of depreciation.

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Company Tax Returns. The Manager shall cause the necessary federal income and other tax returns and information returns for the Company to be prepared. Each Member shall provide such information, if any, as may be needed by the Company for purposes of preparing such tax returns and information returns. The Manager shall deliver to each Member within ninety (90) days after the end of each fiscal year a copy of the federal income tax returns for the Company as filed with the appropriate taxing authorities, and upon the written request of any Member, a copy of any state and local income tax return as filed.
Section 10.3 Section 10.4

Tax Audits.

(a) The Members, by majority vote of all Members, shall designate a Member to be responsible for dealing with the taxing authorities and tax related issues (the "Tax Matters Partner"). (b) The Tax Matters Partner, as an authorized representative of the Company, shall direct the defense of any claims made by the IRS to the extent that such claims relate to the adjustment of Company items at the Company level. The Tax Matters Partner shall promptly deliver to each Member a copy of any notice of beginning of administrative proceedings or any report explaining the reasons for a proposed adjustment received from the IRS relating to or potentially resulting in an adjustment of Company items. The Tax Matters Partner shall, unless the Manager decides otherwise, diligently and in good faith contest any proposed adjustment of a Company item that principally affects the Members at the administrative and judicial levels, including, if appropriate or if required by the Manager, appealing any adverse judicial decision, and shall consider in good faith any suggestions made by any Member or its counsel regarding the conduct of such administrative or judicial proceedings. The Tax Matters Partner shall keep each Member advised of all material developments with respect to any proposed adjustment that comes to its attention, including, without limitation, the scheduling of all conferences and substantive telephone calls with the IRS. Each Member shall be entitled, at its own expense, to attend all meetings with the IRS and to review in advance any material written information (including, without limitation, any pleadings, memoranda or similar items) to be submitted to the IRS. Without first obtaining the consent of the Manager, the Tax Matters Partner shall not, with respect to any proposed adjustment of a Member item that materially and adversely affects any Member, (A) enter into a settlement agreement that purports to bind Members other than the Tax Matters Partner (including, without limitation, any stipulation consenting to an entry of decision by any tax court), or (B) enter into an agreement or stipulation extending the statute of limitations. (c) The Tax Matters Partner shall promptly deliver to each Member a copy of all notices, communications, reports or writings of any kind with respect to income or similar taxes received from any state or local taxing authority relating to the Company that might materially and adversely affect each Member, and shall keep such Members advised of all material developments with respect to any proposed adjustment of Company items that come to its attention. (d) Each Member shall continue to have the rights described in this Section 13.4 with respect to tax matters relating to any period during which it was a Member, whether or not it is a Member at the time of the tax audit or contest. ARTICLE 11 78

INDEMNIFICATION Section 11.1 Indemnification. To the fullest extent permitted by law, the Company shall indemnify each present or former Manager or officer of the Company (an "Indemnified Party") against all legal and accounting expenses, amounts paid in settlement, judgments, fines and penalties actually and reasonably incurred by or levied against such Indemnified Party (such amounts, including legal and accounting expenses, collectively, "Costs," except to the extent that such Costs resulted from the Indemnified Party's fraud or willful misconduct (including willful breach of this Agreement) in connection with any action, suit, arbitration, alternative dispute resolution mechanism, investigation, administrative hearing or other proceeding, whether civil, criminal, administrative or investigative in nature, except a proceeding initiated by a Member to enforce such Member's rights under this Agreement (a "Proceeding"). The termination of any Proceeding, whether by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that an Indemnified Party did not meet the standard set forth in the preceding sentence. To the fullest extent permitted by applicable law, an Indemnified Party shall be conclusively presumed to have met the relevant standards of conduct for indemnification pursuant to this Section 11.1, unless and until a court of competent jurisdiction, after all appeals, finally determines to the contrary, and the Company shall bear the burden of proof of establishing by clear and convincing evidence that such Indemnified Party failed to meet such standards of conduct. Furthermore, the Company shall indemnify each present or former PF Member (a PF Indemnified Party) against any excise taxes imposed upon the PF Member under IRC 4942-4945, including legal and accounting expenses, amounts paid in settlement, assessments, fines and penalties actually and reasonably incurred by or assessed against and paid by such PF Indemnified Party (such amounts, including legal and accounting expenses, collectively, "Excise Tax Costs") as a result of the PF Members Membership Interest in the Company failing to qualify as a PRI due to the Companys or any Managers breach of any terms of this Agreement or the LLC Act, or due to any misrepresentation or material omission with respect to any report or other information required to be delivered by the Company or a Manager to the PF Member under the terms of this Operating Agreement or the LLC Act. For purposes of the remainder of this Article 11 and any other provisions of this Agreement or the LLC Act pertaining to indemnification of a Member, the term Indemnified Party shall include a PF Indemnified Party.
Section 11.2 Successful Defense. Notwithstanding any other provision of this Agreement, to the extent that an Indemnified Party has been successful on the merits or otherwise in defense of any Proceeding referred to in Section 11.1, or in defense of any claim, issue or matter therein, such Indemnified Party shall be indemnified against Costs actually and reasonably incurred in connection therewith to the fullest extent permitted by the laws of the State of Vermont, including, without limitation, any amendments thereto subsequent to the date of this Agreement that increase the protection of the Members and the officers of the Company allowable under such laws. Section 11.3 Payment of Costs in Advance. Costs incurred by an Indemnified Party in connection with a Proceeding shall be paid by the Company in advance of the final disposition of such Proceeding upon receipt of a written undertaking by or on behalf of such Indemnified Party to repay such amount if it shall ultimately be determined that such Indemnified Party is not entitled to be indemnified by the Company as set forth in this Article 11. Notwithstanding the foregoing, if the Manager reasonably determines, after consulting with counsel, that it is unlikely that an Indemnified Party's action met the standard for indemnification set forth in Section 11.1, then the Company

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shall not advance to such Indemnified Party any Costs that consist of amounts paid in settlement, judgments, fines or penalties.
Section 11.4 Indemnification of Other Agents. The Company may, but shall not be obligated to, indemnify any Person (other than an Indemnified Party) who was or is a party or is threatened to be made a party to, or otherwise becomes involved in, any Proceeding (including any Proceeding by or in the right of the Company) by reason of the fact that such Person is or was an agent of the Company, against all Costs actually and reasonably incurred by such Person in connection with such Proceeding under the same circumstances and to the same extent as is provided for or permitted in this Article 11 with respect to an Indemnified Party, or with respect to such circumstances and on such terms as the Manager may determine.

Indemnity Not Exclusive. The indemnification and advancement of Costs provided by or granted pursuant to the provisions of this Article 11 shall not be deemed exclusive of any other rights to which any Person seeking indemnification or advancement of Costs may be entitled under any agreement, determination of the Manager or otherwise, both as to action in such Person's capacity as an agent of the Company and as to action in another capacity while serving as an agent.
Section 11.5

Heirs, Executors and Administrators. The indemnification and advancement of Costs provided by, or granted pursuant to, this Article 11 shall, unless otherwise provided when authorized or ratified, continue as to an individual who has ceased to be an agent of the Company and shall inure to the benefit of such individual's heirs, executors and administrators.
Section 11.6 Section 11.7

Right to Indemnification Upon Application.

(a) Any indemnification or advance under this Article 11 shall be made promptly, and in no event later than sixty (60) days, after the Company's receipt of the written request of an Indemnified Party therefore, unless, in the case of an indemnification, a determination shall have been made as provided in Sections 11.1 or 11.6. (b) The right of a Person to indemnification or an advance of Costs as provided by this Article 11 shall be enforceable in any court of competent jurisdiction. The burden of proving by clear and convincing evidence that indemnification or advances are not appropriate shall be on the Company. Neither the failure by the Manager nor independent legal counsel to have made a determination that indemnification or an advance is proper in the circumstances, nor any actual determination by the Manager or independent legal counsel that indemnification or an advance is not proper, shall be a defense to the action or create a presumption that the relevant standard of conduct has not been met. In any such action, the Person seeking indemnification or advancement of Costs shall be entitled to recover from the Company any and all expenses of the types described in the definition of Costs in Section 11.1 actually and reasonably incurred by such Person in such action, but only if such Person prevails therein. A Person's Costs incurred in connection with any Proceeding concerning such Person's right to indemnification or advances in whole or in part pursuant to this Agreement shall also be indemnified by the Company regardless of the outcome of such a Proceeding, unless a court of competent jurisdiction finally determines that each of the material assertions made by such Person in the Proceeding was not made in good faith or was frivolous. 80

Limitations on Indemnification. No payments pursuant to this Agreement shall be made by the Company:
Section 11.8

(a) to indemnify or advance funds to any Person with respect to a Proceeding initiated or brought voluntarily by such Person and not by way of defense, except with respect to a Proceeding brought to establish or enforce a right to indemnification under this Agreement, otherwise than as required under the laws of the State of Vermont; provided, however, that indemnification or advancement of Costs may be provided by the Company in specific cases if a determination is made that such indemnification or advancement is appropriate, which determination shall be made by the Manager; (b) to indemnify or advance funds to any Person for any Costs resulting from such Person's conduct which is finally adjudged to have failed to have met the relevant standard of conduct set forth in Section 11.1; or (c) if a court of competent jurisdiction finally determines that any indemnification or advance of Costs hereunder is unlawful. Partial Indemnification. If a Person is entitled under any provision of this Article 11 to indemnification by the Company for a portion of Costs incurred by such Person in any Proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify such Person for the portion of such Costs to which such Person is entitled.
Section 11.9 Section 11.10 Insurance. The Company shall have the power to purchase and maintain insurance or other financial arrangement on behalf of any Person who is or was an agent of the Company against any liability asserted against such Person and incurred by such Person in any such capacity, or arising out of such Person's status as an agent, whether or not the Company would have the power to indemnify such Person against such liability under the provisions of this Article 11 or of Section 3062 or any other provision of the LLC Act. In the event a Person shall receive payment from any insurance carrier or from the plaintiff in any action against such Person with respect to indemnified amounts after payment on account of all or part of such indemnified amounts having been made by the Company pursuant to Section 11.1, such Person shall reimburse the Company for the amount, if any, by which the sum of such payment by such insurance carrier or such plaintiff and payments by the Company to such Person exceeds such indemnified amounts; provided, however, that such portions, if any, of such insurance proceeds that are required to be reimbursed to the insurance carrier under the terms of its insurance policy shall not be deemed to be payments to such Person hereunder. In addition, upon payment of indemnified amounts under the terms and conditions of this Agreement, the Company shall be subrogated to such Person's rights against any insurance carrier with respect to such indemnified amounts (to the extent permitted under such insurance policies). Such right of subrogation shall be terminated upon receipt by the Company of the amount to be reimbursed by such Person pursuant to the second sentence of this Section 11.10.

ARTICLE 12 DISSOLUTION; WINDING UP; DISTRIBUTION OF ASSETS

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Events of Dissolution. Except as provided in Section 8.3 and this Section 12.1, no act or event (including any event of dissociation specified in Section 3081 of the LLC Act) shall dissolve the Company. Only of the following acts or events shall dissolve the Company:
Section 12.1

(a) Subject to Section 6.4 hereof, the vote of Members holding sixty six and two-thirds percent (66 2/3%) of the Membership Interests in the Company. (b) The unanimous written consent or vote of all of the Class PF Members to dissolve the Company. (c) An event that makes it unlawful for all or substantially all of the business of the Company to be continued, unless the Company cures such event within ninety (90) days after notice to the company of the event as provided in Section 3101(4) of the LLC Act. (d) The entry of a decree of judicial dissolution under Section 3101(5) of the LLC Act. Winding Up. Upon dissolution of the Company by reason of any event described in Section 12.1 above, the Manager shall commence to wind up the affairs of the Company and to liquidate its business and assets. A reasonable time shall be allowed for the orderly liquidation of the assets of the Company in order to minimize to the extent possible the normal losses attendant upon such liquidation. The Manager shall have the full, complete and exclusive right and unlimited discretion to perform any and all acts and to take any and all actions which may be necessary, appropriate or incidental to operate and manage the business of the Company in the process of liquidating and winding up. The authority of the Manager shall continue as long as necessary, and the exercise of such authority shall be deemed a proper act in winding up the affairs of the Company. Further, the Manager is authorized to sell the property and assets of the Company in a bona fide sale or sales to any party or parties (including a Member) at such price and upon such terms as the Manager may deem advisable, having due regard for the interests of the Members. Any such sale or sales shall be deemed a proper act in winding up the affairs of the Company.
Section 12.2 Section 12.3 Continuing Validity and Authority. Any act or event (including the passage of time) causing dissolution of the Company shall not affect the validity of, or shorten the term of, any lease, deed of trust, mortgage, contract or other obligation entered into by or on behalf of the Company, or acquired by the Company as assignee. The full rights, powers and authorities of the Company and Manager shall continue so long as appropriate and necessary to complete the process of winding up the business and affairs of the Company. Section 12.4 Distribution of Assets. Upon the winding up of the Company, the Company shall make reasonable provision to pay all claims and obligations of the Company, including all costs and expenses of the liquidation and all contingent, conditional, or unmatured claims and obligations that are known to the Company but for which the identity of the claimant is unknown. If there are sufficient assets, such claims and obligations shall be paid in full and any such provision shall be made in full. If there are insufficient assets, such claims and obligations shall be paid or provided for according to their priority and, among claims and obligations of equal

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priority, ratably to the extent of assets available therefor. Any remaining assets shall be distributed as follows: (a) first, to creditors, including Members in their capacities as creditors, in the order of priority as provided by law; and (b) second, to Members in accordance with Section 5.1. Any non-cash assets distributed to the Members shall first be written up or written down to their Fair Market Value, thus creating Profit or Loss (if any) which shall be allocated in accordance with Section 5.2. Negative Capital Account Balances. If any Member has a deficit balance in such Member's Capital Account (after giving effect to all Contributions, Distributions and Allocations for all fiscal years, including the fiscal year during which such liquidation occurs), such Member shall have no obligation to make any contribution to the capital of the Company with respect to such deficit, and such deficit shall not be considered a debt owed to the Company or to any other Person for any purpose whatsoever.
Section 12.5

No Personal Liability. Except as required by law, no Member or officer of the Company shall be Personally liable for any debts, liabilities or obligations of the Company, whether to the Company, any Member or to the creditors of the Company, beyond, in the case of Members, the amount of any distribution (including the return of any capital contribution) made to such Member required to be returned to the Company under the LLC Act. Each Member shall look solely to the assets of the Company for all Distributions with respect to the Company and for the return of such Member's capital contributions and shall have no recourse therefor against any Member. The Members shall not have any right to demand or receive property other than cash upon dissolution and termination of the Company or to demand the return of their capital contributions to the Company prior to dissolution and termination of the Company.
Section 12.6

ARTICLE 13 MISCELLANEOUS Waiver of Right of Partition. Except as expressly provided in this Agreement, no Member may, either directly or indirectly, take any action to require partition of the Company or of any of the Company's assets or properties or cause the sale of any of the Company's assets or properties and, notwithstanding any provision of law to the contrary, each Member (and such Member's legal representative, successor or assign) hereby irrevocably waives any and all right to maintain any action for partition or to compel any sale with respect to such Member's ownership interest in the Company, or with respect to any assets or properties of the Company.
Section 13.1

Maintenance of Status. Each Member is hereby authorized to take such steps as such Member believes is necessary to (i) maintain the Company's status as an L3C formed under the laws of the State of Vermont and its qualification to conduct business in any jurisdiction where the Company does business and is required to be qualified, and (ii) cause the Company to continue to be treated as a partnership for federal and state income tax purposes.
Section 13.2

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Governing Law. This Agreement and any controversies, claims or arbitration hereunder shall be governed by and construed in accordance with the laws of the State of Vermont, without regard to its conflict of law rules.
Section 13.3 Section 13.4 Deadlock; Arbitration. All claims, disputes, controversies or other matters in question arising under or relating to this Agreement (collectively, "Disputes") shall, if not resolved by the Members, be resolved through binding arbitration in accordance with the commercial arbitration rules and practices of the American Arbitration Association. The site of such arbitration shall be in the State of Vermont, or such other place as is approved by the Members. The cost of each arbitration proceeding, including without limitation the arbitrator's compensation and expenses, hearing room charges, court report transcript charges, reasonable attorney fees and expenses, etc., shall be allocated among the parties to such Dispute based upon the percentage which the portion of the contested amount in such Dispute not awarded to each party bears to the amount actually contested by such party. The parties hereto agree that the remedies provided under this Section 13.4 shall be the sole and exclusive remedies for resolving and remedying all Disputes hereunder.

Binding Effect. Except as otherwise specifically provided herein, this Agreement shall be binding upon and inure to the benefit of the parties and their legal representatives, heirs, administrators and executors.
Section 13.5 Section 13.6 Pronouns and Number. Wherever from the context it appears appropriate, each term stated in either the singular or the plural shall include the singular and the plural, and pronouns stated in either the masculine, the feminine or the neuter gender shall include the masculine, feminine and neuter.

Capitalized Terms. All capitalized terms used in this Agreement shall have the meanings set forth in this Agreement.
Section 13.7 Section 13.8

Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.
Section 13.9 Notices. Any notices permitted or required under this Agreement shall be deemed to have been given when delivered in Person or by courier or three (3) days after being deposited in the U.S. mail, postage prepaid, and addressed to the Company at its principal place of business and to any Member at the address reflected on the books and records of the Company. Section 13.10 Entire Agreement; Amendment. This Agreement constitutes the entire agreement among the parties hereto with respect to the matters set forth herein and supersedes all prior understandings or agreements between the parties with respect to such matters. Except as expressly contemplated otherwise in this Agreement (including without limitation Section 6.4 hereof), or with respect to ministerial matters (including without limitation amendments to reflect duly authorized Transfers of Membership Interests, admission of new Members, and redemptions of PF Members) as the Manager shall determine in good faith, this Agreement may be amended only by the consent of the Members in accordance with Section 6.4[; provided, however, that whether considered ministerial or material, Section 2.2, Section 2.3 or Section 8.2 may be

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amended only upon the affirmative vote of each Class PF Member]. If an amendment is duly authorized in compliance with this Section 13.10, then the Manager shall take all necessary and appropriate action to implement such amendment and, as necessary, to modify this Agreement.
Section 13.11 Third Parties. Nothing in this Agreement, whether express or implied, shall be construed to give any Person other than a Member or the Company any legal or beneficial or other equitable right, remedy or claim under or in respect of this Agreement, any covenant, condition, provision or agreement contained herein or the property of Company. Section 13.12 Waiver. No failure by any Member to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition. Section 13.13 Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement, or the application of such provision to any Person or circumstances shall be held invalid, the remainder of this Agreement, or the application of such provision to Persons or circumstances other than those to which it is held invalid, shall not be affected hereby. Section 13.14 Interpretation. In the event any claim is made by any Member relating to any conflict, omission or ambiguity in this Agreement, no presumption or burden of proof or persuasion shall be implied by virtue of the fact that this Agreement was prepared by or at the request of a particular Member or such Member's counsel. Section 13.15 Investment Representation. ANY SECURITIES CREATED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION IN RELIANCE UPON AN EXEMPTION FROM SUCH REGISTRATION SET FORTH IN THE SECURITIES ACT OF 1933, AS AMENDED, NOR HAVE THEY BEEN REGISTERED UNDER THE SECURITIES OR BLUE SKY LAWS OF ANY OTHER JURISDICTION. THE INTERESTS CREATED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES ONLY AND MAY NOT BE OFFERED FOR SALE, PLEDGED, HYPOTHECATED, SOLD OR TRANSFERRED EXCEPT IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF THIS AGREEMENT AND IN A TRANSACTION WHICH IS EITHER EXEMPT FROM REGISTRATION UNDER SUCH ACTS OR PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACTS.

[signatures follow on next page]

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IN WITNESS WHEREOF, the undersigned Members have executed this Agreement as of the date first above set forth. MANAGER: [Manager] By: ____________________________________ Name: Title: CLASS A MEMBERS: [For-Profit Investors] By: ____________________________________ Name: Title: CLASS PF MEMBERS: [Private Foundation Investor] By: ____________________________________ Name: Title:

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SCHEDULE A COMPANY SCHEDULE (as of [Date]) NAME AND ADDRESS INITIAL CAPITAL CONTRIBUTION CAPITAL ACCOUNT MEMBERSHIP INTEREST

CLASS A MEMBERS

CLASS PF MEMBERS

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SCHEDULE B FORM OF JOINDER AGREEMENT This JOINDER AGREEMENT, dated as of the ____ day of ________, 20__ (this "Agreement"), is executed and delivered by ______________ (the "New Member") in connection with the admission of the New Member as a member of [NAME] (the "Company") pursuant to the terms of the Operating Agreement of [NAME], dated as of [date] (as it may be amended from time to time in accordance with its terms, the "Company Agreement"). 1. Effective as of the date first above written, the New Member hereby is admitted to the Company as a Member (as defined in the Company Agreement). The New Member hereby acknowledges and agrees that he/she/it is becoming a party to, and shall hereafter be bound by, all of the terms, obligations and other provisions of the Company Agreement as a result of his/her/its execution of this Agreement. Without limiting the generality of the foregoing, the New Member confirms that he/she/it hereby is making to the Company and to all of the other Members (as defined in the Company Agreement) the representations and warranties set forth in the Company Agreement. 2. The New Member hereby acknowledges that he/she/it has received a copy of the Company Agreement. 3. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Vermont. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above set forth. MANAGER: ______________________________________ Name: Title: NEW MEMBER: _______________________________________ Name: Title:

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EXHIBIT 1 DEFINITIONS Act or LLC Act means the Vermont Limited Liability Company Act, 11 V.S.A. 3001, et seq., as it may be amended from time to time, and any successor thereto. Adjusted Capital Account Deficit means with respect to any Capital Account as of the end of any Taxable Year, the amount by which the balance in such Capital Account is less than zero. For this purpose, such Person's Capital Account balance shall be determined in accordance with Treasury Regulation Section 1.704-1(b)(2)(ii)(d). Affiliate of any particular Person means any other Person controlling, controlled by or under common control with such particular Person, where control means the possession, directly or indirectly, of the power to direct the management and policies of a Person whether through the ownership of voting securities, by contract or otherwise. Agreement has the meaning set forth in the preamble. Assumed Tax Rate has the meaning given such term in Section 5.1(b) of the Agreement. Book Value means, with respect to any Company property, the Company's adjusted basis for federal income tax purposes, adjusted from time to time to reflect the adjustments required or permitted (in the case of permitted adjustments, to the extent the Company makes such permitted adjustments) by Treasury Regulation Section 1.704-1(b)(2)(iv)(d) (g). Capital Account has the meaning given such term in Section 4.5 of the Agreement. Capital Contributions means any cash, cash equivalents, promissory obligations, or the Fair Market Value of other property which a Member contributes or is deemed to have contributed to the Company pursuant to Section 4.1. Class A Members has the meaning set forth in the preamble and Section 3.1 of the Agreement. Class PF Members has the meaning set forth in the preamble and Section 3.1 of the Agreement. Closing has the meaning set forth in Section 8.3(a). Code means the United States Internal Revenue Code of 1986, as amended, including any future amendments to the Code and any corresponding provisions of succeeding Code provisions (whether or not such amendments and corresponding provisions are mandatory or discretionary). Company has the meaning set forth in the preamble.

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Company Income Account has the meaning given such term in Section 5.1(b) of the Agreement. Company Minimum Gain means the partnership minimum gain determined pursuant to Treasury Regulation Section 1.704-2(d). Company Schedule has the meaning given such term in Section 3.3 of the Agreement. Costs has the meaning set forth in Section 11.1 of this Agreement. Distribution means each distribution made by the Company to a Member with respect to such Person's Membership Interest, whether in cash, property or securities of the Company and whether by liquidating distribution, dividend or otherwise; provided that Distributions shall not include any recapitalization or exchange of securities of the Company (whether resulting from the conversion of the Company from a limited liability company to a corporation or otherwise), any subdivision (by Unit split or otherwise) or any combination (by reverse Unit split or otherwise) of any outstanding Units. Event of Withdrawal means the death, retirement, resignation, expulsion, bankrup tcy or dissolution of a Member or the occurrence of any other event that terminates the continued membership of a Member in the Company. Exercise Notice has the meaning set forth in Section 7.3 of the Agreement. Excise Tax Costs has the meaning set forth in Section 11.1 of this Agreement. Fair Market Value means, when used with reference to the Company, the net fair market value of the Company as of the date immediately prior to the relevant event requiring a determination of the fair market value of the Company, as determined in good faith by the Manager in the Managers commercially reasonable discretion. Furthermore, the Manager shall determine the Fair Market Value of any particular non-cash assets of the Company and any Membership Interests in the Company in the Managers commercially reasonable discretion by determining the amount that (i) in the case of any non-cash asset of the Company, would be paid for such asset or (ii) in the case of any Membership Interest, would distributed to the Member holding such Membership Interest (in such Persons capacity as a Member and not as a creditor) as if all the assets of the Company were sold for an amount of cash equal to the fair market value of the Company and the proceeds were distributed in liquidation of the Company in accordance with this Agreement. In making the determination of Fair Market Value, the Manager shall assume the following: (i) with respect to any non-cash asset of the Company, that the fair market of such asset is equal to the net amount that would be paid in cash for such asset by an unaffiliated third party financial buyer after taking into account all liabilities to which such asset is subject, and (ii) with respect to the Company, that the net fair market value of the Company is equal to the amount which would be paid in cash for the Company, as a going concern, by an unaffiliated third party financial buyer, after taking into account liabilities of the Company. In addition, the Manager may take into account such additional factors as the Manager may deem relevant to such determination, including the event requiring the determination of Fair Market Value.

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Failure to Cure Notice has the meaning given such term in Section 8.3(a) of the Agreement. Fiscal Period means any interim accounting period within a Taxable Year established by the Board and which is permitted or required by the Code. Fiscal Year means the Company's annual accounting period established pursuant to Section 2.7. Indemnified Party has the meaning set forth in Section 11.1 of the Agreement. Initial Capital Contributions has the meaning set forth in Section 4.1 of the Agreement. IRS means the United States Internal Revenue Service. Majority Vote has the meaning given such term in Section 6.4(c) of the Agreement. Member means, as referred to in the preamble and elsewhere in this Agreement, each of the Persons listed on the signature pages hereto as Members and each Person who is admitted to the Company as a Member pursuant to Section 3.4 or Article 7, in each case so long as such Person continuously holds a Membership Interest. Membership Interest means a Member's interest, expressed as a percentage, in the Profits, Losses and Distributions of the Company representing a fractional part of the aggregate interests in the Profits, Losses, and Distributions of the Company of all Members and shall include all classes of Membership Interests; provided that each holder of any class of Membership Interest shall have the relative rights, powers, duties, and obligations specified with respect to such class of Members in this Agreement. New Member means a Person admitted to the Company as a Member pursuant to Section 3.4. Non-Selling Members has the meaning given such term in Section 7.2 of the Agreement. Offeree has the meaning given such term in Section 7.2 of the Agreement. Officers has the meaning given such term in Section 6.2 of the Agreement. Option has the meaning given such term in Section 7.3 of the Agreement. Option Period has the meaning given such term in Section 7.3 of the Agreement. Person means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated association, corporation, limited liability company, business organization, entity or governmental entity (whether federal, state, county, city or otherwise and including any instrumentality, division, agency or department thereof.

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PRI means a program related investment as defined in Section 4944(c) of the Code and Treasury Regulations thereunder. PF Indemnified Party has the meaning set forth in Section 11.1 of the Agreement. PF Member means any Member of the Company that is a private foundation within the meaning of Code Section 509(a). Proceeding has the meaning set forth in Section 11.1 of the Agreement. Profits and Losses. The Companys taxable income or loss determined in accordance with Code Section 703(a) for each of its Fiscal Years (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to Code Section 703(a)(1) will be included in taxable income or loss); provided, such Profits and Losses will be computed as if items of tax-exempt income and nondeductible, noncapital expenditures (under Code Section 705(a)(1)(B) and 705(a)(2)(B)) were included in the computation of taxable income or loss. If any Member contributes property to the Company with an initial book value to the Company different from its adjusted basis for federal income tax purposes to the Company, or if Company property is revalued pursuant to Section 1.704-1(b)(2)(iv)(f) of the Treasury Regulations or as otherwise required by the Treasury Regulations, Profits and Losses will be computed as if the initial adjusted basis for federal income tax purposes to the Company of such contributed or revalued property equaled its initial Book Value to the Company as of the date of contribution or revaluation. Credits or debits to Capital Accounts due to a revaluation of Company assets in accordance with Section 1.704-1(b)(2)(iv)(f) of the Treasury Regulations, or due to a distribution of noncash assets, will be taken into account as gain or loss from the disposition of such assets for purposes of determining Profits and Losses. Redemption Election has the meaning set forth in Section 8.3 of the Agreement. Redemption Notice has the meaning set forth in Section 8.2 of the Agreement. Redemption Price means with respect to a Class PF Members Membership Interest the greater of (i) the Fair Market Value of such Class PF Members Membership Interest as of the close of business of the day immediately prior to the date of the Redemption Notice or (ii) the Class PF Members Unreturned Capital as of the close of business of the day immediately prior to the date of the Redemption Notice. Regulatory Allocations has the meaning given such term in Section 5.3(d) of the Agreement. Securities Act means the Securities Act of 1933, as amended, or any successor federal law then in force, together with all rules and regulations promulgated thereunder. Securities Exchange Act means the Securities Exchange Act of 1934, as amended, or any successor federal law then in force, together with all rules and regulations promulgated thereunder.

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Selling Members has the meaning given such term in Section 7.2 of the Agreement. Subsidiary means, with respect to any Person, any corporation, partnership, limited liability company, association or business entity of which (i) if a corporation, a majority of the total voting power of shares of stock entitled (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a partnership, limited liability company, association or other business entity, either (A) a majority of partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by any Person or one or more Subsidiaries of that Person or a combination thereof or (B) such Person is a general partner, managing member of managing director of such partnership, limited liability company, or other business entity. For purposes hereof and unless otherwise indicated, the term Subsidiary refers to a Subsidiary of the Company. Taxable Year means the Company's accounting period for federal income tax purposes which shall be the Companys Fiscal Year unless otherwise determined by the Managers. Tax Distribution has the meaning given such term in Section 5.1(b) of the Agreement. Tax Matters Partner has the meaning given such term in Section 10.4 of the Agreement. Transfer has the meaning given such term in Section 7.1 of the Agreement. Transferring Interests has the meaning given such term in Section 7.2 of the Agreement. Transfer Notice has the meaning given such term in Section 7.2 of the Agreement. Treasury Regulations means the income tax regulations promulgated under the Code and effective as of the date hereof. Such term shall, at the Board's sole discretion, be deemed to include any future amendments to such regulations and any corresponding provisions of succeeding regulations (whether or not such amendments and corresponding provisions are mandatory or discretionary). Unreturned Capital of any Unit means, as of any date of determination, an amount equal to the excess, if any, of (a) the Capital Contribution made or deemed made in exchange for or on account of such Membership Interest, over (b) all Distributions made by the Company with respect to such Membership Interest pursuant to Section 5.1(a)(i) and (ii).

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Appendix 5: 2012 Private Letter Ruling Request Template

INSTRUCTIONS To assist you in preparing a letter ruling request, the Service is providing this sample format. You are not required to use this sample format. If your request is not identical or similar to the sample format, the different format will not defer consideration of your request. (Insert the date of request) Internal Revenue ServiceInsert either: Associate Chief Counsel (Insert one of the following: Corporate, Financial Institutions and Products, Income Tax and Accounting, International, Passthroughs and Special Industries, or Procedure and Administration) or Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) Attn: CC:PA:LPD:DRU P.O. Box 7604Ben Franklin Station Washington, DC 20044 Dear Sir or Madam: ( Insert the name of the taxpayer) requests a ruling on the proper treatment of (insert the subject matter of the letter ruling request) under section (insert the number) of the Internal Revenue Code.. [If the taxpayer is requesting expedited handling, a statement to that effect must be attached to, or contained in, the letter ruling request. The statement must explain the need for expedited handling. See section 7.02(4) of Rev. Proc. 2012-1, 2012-1 I.R.B. 1. Hereafter, all references are to Rev. Proc. 2012-1 unless otherwise noted.] A. STATEMENT OF FACTS 1. Taxpayer Information [Provide the statements required by sections 7.01(1)(a) and (b).] 2. Description of Taxpayers Business Operations [Provide the statement required by section 7.01(1)(c).] 3. Facts Relating to Transaction [The ruling request must contain a complete statement of the facts relating to the transaction that is the subject of the letter ruling request. This statement must include a detailed description of the transaction, including material facts in any accompanying documents, and the business reasons for the transaction. See sections 7.01(1)(d), 7.01(1)(e), and 7.01(2).] B. RULING REQUESTED [The ruling request should contain a concise statement of the ruling requested by the taxpayer. The Service prefers that the language of the requested ruling be exactly the same as the language the taxpayer wishes to receive.] C. STATEMENT OF LAW [The ruling request must contain a statement of the law in support of the taxpayers views or conclusion and identify any pending legislation that may affect the proposed transaction. The taxpayer also is strongly encouraged to identify and discuss any authorities believed to be contrary to the position advanced in the ruling request. See sections 7.01(6), 7.01(8), 7.01(9), and 7.01(10).] D. ANALYSIS [The ruling request must contain a discussion of the facts and an analysis of the law. The taxpayer also is strongly encouraged to identify and discuss any authorities believed to be contrary to the position advanced in the ruling request. See sections 7.01(3), 7.01(6), 7.01(8), 7.01(9), and 7.01(10).] E. CONCLUSION [The ruling request should contain a statement of the taxpayers conclusion on the ruling requested.]

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F. PROCEDURAL MATTERS 1. Revenue Procedure 2012-1 Statements [Provide the statement required by section 7.01(4) regarding whether any return of the taxpayer, a related taxpayer within the meaning of 267 or of a member of an affiliated group of which the taxpayer is also a member within the meaning of 1504 which would be affected a. by the requested letter ruling or determination letter, is currently under examination, before Appeals, or before a Federal court, or was previously under examination, before Appeals, or before a Federal court.] [Provide the statement required by section 7.01(5)(a) regarding whether the Service previously ruled on the same or similar issue for the taxpayer, a related taxpayer, or a b. predecessor. Please further note that if a reduced user fee is being submitted, a certification of eligibility for the reduced fee must be included with the ruling request.] [Provide the statement required by section 7.01(5)(b) regarding whether the taxpayer, a related taxpayer, a predecessor, or any representatives previously submitted a request c. (including an application for change in method of accounting) involving the same or similar issue but withdrew the request before a letter ruling or determination letter was issued.] [Provide the statement required by section 7.01(5)(c) regarding whether the taxpayer, a related taxpayer, or a predecessor previously submitted a request (including an application d. for change in method of accounting) involving the same or a similar issue that is currently pending with the Service.] [Provide the statement required by section 7.01(5)(d) regarding whether, at the same time as this request, the taxpayer or a related taxpayer is presently submitting another request e. (including an application for change in method of accounting) involving the same or similar issue to the Service.] [If the letter ruling request involves the interpretation of a substantive provision of an income or estate tax treaty, provide the statement required by section 7.01(6) regarding whether the tax authority of the treaty jurisdiction has issued a ruling on the same or similar issue for the f. taxpayer, a related taxpayer, or a predecessor; whether the same or similar issue is being examined, or has been settled, by the tax authority of the treaty jurisdiction or is otherwise the subject of a closing agreement in that jurisdiction; and whether the same or similar issue is being considered by the competent authority of the treaty jurisdiction.] [Provide the statement required by section 7.01(8) regarding whether the law in connection g. with the letter ruling request is uncertain and whether the issue is adequately addressed by relevant authorities.] [If the taxpayer determines that there are no contrary authorities, a statement in the request h. to this effect should be included. See section 7.01(9).] [If the taxpayer wants to have a conference on the issues involved in the letter ruling request, i. the ruling request should contain a statement to that effect. See section 7.02(6).] [If the taxpayer is requesting a copy of any document related to the letter ruling request to be j. sent by facsimile (fax) transmission, the ruling request should contain a statement to that effect. See section 7.02(5).] [If the taxpayer is requesting separate letter rulings on multiple issues, the letter ruling k. request should contain a statement to that effect. See section 7.02(1).] [If the taxpayer is seeking to obtain the user fee provided in paragraph (A)(5)(a) of Appendix l. A for substantially identical letter rulings, the letter ruling request must contain the statements required by section 15.07.] 2. Administrative [The ruling request should state: The deletion statement and checklist required by Rev. Proc. a. 2012-1 are enclosed. See sections 7.01(11) and 7.01(18).] [The ruling request should state: The required user fee of $ (Insert the amount of the fee) is b. enclosed. Please note that the check or money order must be in U.S. dollars and made payable to the Internal Revenue Service. See section 15 and Appendix A.] [If the taxpayers authorized representative is to sign the letter ruling request or is to appear c. before the Service in connection with the request, the ruling request should state: A Power of Attorney is enclosed. See sections 7.01(13), 7.01(14), and 7.02(2).] Sincerely yours,

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(Insert the name of the taxpayer or the taxpayers authorized representative ) By:

Date

Signature

Typed or printed name ofperson signing request DECLARATION: [See section 7.01(15).] Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. (Insert the name of the taxpayer) By:

Signature Date Title (must be signed by taxpayer, not by taxpayers representative, see section 7.01(15)(b) of this revenue procedure)

Typed or printed name of person signing declaration [If the taxpayer is a corporation that is a member of an affiliated group filing consolidated returns, the above declaration must also be signed and dated by an officer of the common parent of the group. See section 7.01(15).]

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APPENDIX 6: Checklist for Private Letter Ruling Request

INSTRUCTIONS The Service will be able to respond more quickly to your letter ruling request if it is carefully prepared and complete. Use this checklist to ensure that your request is in order. Complete the four items of information requested before the checklist. Answer each question by circling Yes, No, or N/A. When a question contains a place for a page number, insert the page number (or numbers) of the request that gives the information called for by a Yes answer to a question. Sign and date the checklist (as taxpayer or authorized representative) and place it on top of your request. If you are an authorized representative submitting a request for a taxpayer, you must include a completed checklist with the request or the request will either be returned to you or substantive consideration of it will be deferred until a completed checklist is submitted. If you are a taxpayer preparing your own request without professional assistance, an incomplete checklist will not cause the return of your request or defer substantive consideration of your request. You should still complete as much of the checklist as possible and submit it with your request. TAXPAYERS NAME TAXPAYERS I.D. NO. ATTORNEY/P.O.A. PRIMARY CODE SECTION CIRCLE ONE ITEM 1. Does your request involve an issue under the jurisdiction of the Associate Chief Counsel (Corporate), the Associate Chief Counsel (Financial Institutions and Products), the Associate Chief Counsel (Income Tax and Accounting), the Associate Chief Counsel (International), the Associate Chief Counsel (Passthroughs and Special Industries), the Associate Chief Counsel (Procedure and Administration), or the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities)? See section 3 of Rev. Proc. 2012-1, 2012-1 I.R.B. 1. For issues under the jurisdiction of other offices, see section 4 of Rev. Proc. 2012-1. (Hereafter, all references are to Rev. Proc. 2012-1 unless otherwise noted.) 2. Have you read Rev. Proc. 2012-3, 2012-1 I.R.B. 114 and Rev. Proc. 2012-7, 2012-1 I.R.B. 233, to see if part or all of the request involves a matter on which letter rulings are not issued or are ordinarily not issued? 3. If your request involves a matter on which letter rulings are not ordinarily issued, have you given compelling reasons to justify the issuance of a letter ruling? Before preparing your request, you may want to call the branch in the Office of Associate Chief Counsel (Corporate), the Office of Associate Chief Counsel (Financial Institutions and Products), the Office of Associate Chief Counsel (Income Tax and Accounting), the Office of Associate Chief Counsel (International), the Office of Associate Chief Counsel (Passthroughs and Special Industries), the Office of Associate Chief Counsel (Procedure and Administration), or the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) responsible for substantive interpretations of the principal Internal Revenue Code section on which you are seeking a letter ruling to discuss the likelihood of an exception. For matters under the jurisdiction of (a) the Office of Associate Chief Counsel (Corporate), the Office of Associate Chief Counsel (Financial Institutions and Products), the Office of Associate Chief Counsel (Income Tax and Accounting), the Office of Associate Chief Counsel (Passthroughs and Special Industries), or the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), the Office of the Associate Chief Counsel (Procedure and Administration), the appropriate branch to call may be obtained by calling (202) 622-7280 (not a toll-free call); (b) the Office of the Associate Chief Counsel (International), the appropriate branch to call may be obtained by calling (202) 622-3800 (not a toll-free call). Yes No 4. If the request deals with a completed transaction, have you filed the return for the year in which N/A Page the transaction was completed? See section 5.01.

Yes No

Yes No

Yes No N/A

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Yes No Yes No

5. Are you requesting the letter ruling on a hypothetical situation or question? See section 6.12. 6. Are you requesting the letter ruling on alternative plans of a proposed transaction? See section 6.12. 7. Are you requesting the letter ruling for only part of an integrated transaction? See sections 6.03. 8. Are you requesting the letter ruling for a business, trade, industrial association, or similar group concerning the application of tax law to its members? See section 6.05. 9. Are you requesting the letter ruling for a foreign government or its political subdivision? See section 6.07. 10. Have you included a complete statement of all the facts relevant to the transaction? See section 7.01(1). 11. Have you submitted with the request true copies of all wills, deeds, and other documents relevant to the transaction, and labeled and attached them in alphabetical sequence? See section 7.01(2). 12. Have you submitted with the request a copy of all applicable foreign laws, and certified English translations of documents that are in a language other than English or of foreign laws in cases where English is not the official language of the foreign country involved? See section 7.01(2). 13. Have you included an analysis of facts and their bearing on the issues? Have you included, rather than merely incorporated by reference, all material facts from the documents in the request? See section 7.01(3). 14. Have you included the required statement regarding whether any return of the taxpayer (or any return of a related taxpayer within the meaning of 267 or of a member of an affiliated group of which the taxpayer is also a member within the meaning of 1504) who would be affected by the requested letter ruling or determination letter is currently or was previously under examination, before Appeals, or before a Federal court? See section 7.01(4). 15. Have you included the required statement regarding whether the Service previously ruled on the same or similar issue for the taxpayer, a related taxpayer, or a predecessor? See section 7.01(5)(a). 16. Have you included the required statement regarding whether the taxpayer, a related taxpayer, a predecessor, or any representatives previously submitted a request (including an application for change in method of accounting) involving the same or similar issue but withdrew the request before the letter ruling or determination letter was issued? See section 7.01(5)(b). 17. Have you included the required statement regarding whether the taxpayer, a related taxpayer, or a predecessor previously submitted a request (including an application for change in method of accounting) involving the same or similar issue that is currently pending with the Service? See section 7.01(5)(c). 18. Have you included the required statement regarding whether, at the same time as this request, the taxpayer or a related taxpayer is presently submitting another request (including an application for change in method of accounting) involving the same or similar issue to the Service? See section 7.01(5)(d). 19. If your request involves the interpretation of a substantive provision of an income or estate tax

Yes No

Yes No

Yes No Yes No Pages Yes No N/A

Yes No N/A

Yes No

Yes No Page

Yes No Page

Yes No Page

Yes No Page

Yes No Page

Yes No

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N/A Page treaty, have you included the required statement regarding whether the tax authority of the treaty jurisdiction has issued a ruling on the same or similar issue for the taxpayer, a related taxpayer, or a predecessor; whether the same or similar issue is being examined, or has been settled, by the tax authority of the treaty jurisdiction or is otherwise the subject of a closing agreement in that jurisdiction; and whether the same or similar issue is being considered by the competent authority of the treaty jurisdiction? See section 7.01(6). 20. If your request is for recognition of Indian tribal government status or status as a political subdivision of an Indian tribal government, does your request contain a letter from the Bureau of Yes No Indian Affairs regarding the tribes status? See section 7.01(7), which states that taxpayers are N/A Page encouraged to submit this letter with the request and provides the address for the Bureau of Indian Affairs. Yes No Pages Yes No Page 21. Have you included the required statement of relevant authorities in support of your views? See section 7.01(8). 22. Have you included the required statement regarding whether the law in connection with the request is uncertain and whether the issue is adequately addressed by relevant authorities? See section 7.01(8). 23. Does your request discuss the implications of any legislation, tax treaties, court decisions, regulations, notices, revenue rulings, or revenue procedures that you determined to be contrary to the position advanced? See section 7.01(9), which states that taxpayers are encouraged to inform the Service of such authorities.

Yes No Pages

Yes No 24. If you determined that there are no contrary authorities, have you included a statement to this N/A Page effect in your request? See section 7.01(9). Yes No 25. Have you included in your request a statement identifying any pending legislation that may N/A Page affect the proposed transaction? See section 7.01(10). Yes No Yes No Page Yes No N/A Yes No Page Yes No N/A Yes No N/A Pages Yes No N/A Yes No N/A 26. Have you included the deletion statement required by 6110 and placed it on top of the letter ruling request as required by section 7.01(11)(b)? 27. Have you (or your authorized representative) signed and dated the request? See section 7.01(12). 28. If the request is signed by your representative or if your representative will appear before the Service in connection with the request, is the request accompanied by a properly prepared and signed power of attorney with the signatorys name typed or printed? See section 7.01(14). 29. Have you included, signed, and dated the penalties of perjury statement in the format required by section 7.01(15)? 30. Are you submitting your request in duplicate if necessary? See section 7.01(16).

31. If you are requesting separate letter rulings on different issues involving one factual situation, have you included a statement to that effect in each request? See section 7.02(1). 32. If you want copies of the letter ruling sent to a representative, does the power of attorney contain a statement to that effect? See section 7.02(2). 33. If you do not want a copy of the letter ruling to be sent to any representative, does the power of attorney contain a statement to that effect? See section 7.02(2).

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Yes No N/A

34. If you are making a two-part letter ruling request, have you included a summary statement of the facts you believe to be controlling? See section 7.02(3).

35. If you want your letter ruling request to be processed ahead of the regular order or by a specific date, have you requested expedited handling in the manner required by section 7.02(4) Yes No and stated a compelling need for such action in the request? Note that certain requests under the N/A Page jurisdiction of the Associate Chief Counsel (Corporate) may receive expedited treatment without stating a compelling need. See section 7.02(4) of this revenue procedure. Yes No 36. If you are requesting a copy of any document related to the letter ruling request to be sent by N/A Page facsimile (fax) transmission, have you included a statement to that effect? See section 7.02(5). Yes No 37. If you want to have a conference on the issues involved in the request, have you included a N/A Page request for conference in the letter ruling request? See section 7.02(6). 38. Have you included the correct user fee with the request and is your check or money order in U.S. dollars and payable to the Internal Revenue Service? See section 15 and Appendix A to determine the correct amount.

Yes No

39. If your request involves a personal or business-related tax issue and you qualify for the Yes No reduced user fee because your gross income is less than $250,000, have you included the N/A Page required certification? See paragraphs (A)(4)(a) and (B)(1) of Appendix A. 40. If your request involves a personal or business-related tax issue and you qualify for the Yes No reduced user fee because your gross income is less than $1 million, have you included the N/A Page required certification? See paragraphs (A)(4)(b) and (B)(1) of Appendix A. Yes No 41. If you qualify for the user fee for substantially identical letter rulings, have you included the N/A Page required information? See section 15.07(2) and paragraph (A)(5)(a) of Appendix A. 42. If you qualify for the user fee for a 301.9100 request to extend the time for filing an identical change in method of accounting on a single Form 3115, Application for Change in Accounting Yes No N/A Page Method, have you included the required information? See section 15.07(4) and paragraph (A)(5)(d) of Appendix A. Yes No N/A 43. If your request is covered by any of the checklists, guideline revenue procedures, notices, safe harbor revenue procedures, or other special requirements listed in Appendix E, have you complied with all of the requirements of the applicable revenue procedure or notice?

List other applicable revenue procedures or notices, including checklists, used or relied upon in Rev. Proc. the preparation of this letter ruling request (Cumulative Bulletin or Internal Revenue Bulletin citation not required). Yes No 44. If you are requesting relief under 7805(b) (regarding retroactive effect), have you complied N/A Page with all of the requirements in section 11.11? Yes No N/A 45. If you are requesting relief under 301.9100 for a late entity classification election, have you included a statement that complies with section 4.04 of Rev. Proc. 2009-41, 2009-39 I.R.B. 439? See section 5.03(5) of this revenue procedure. 46. Have you addressed your request to the attention of the Associate Chief Counsel (Corporate), the Associate Chief Counsel (Financial Institutions and Products), the Associate Chief Counsel (Income Tax and Accounting), the Associate Chief Counsel (International), the Associate Chief Counsel (Passthroughs and Special Industries), the Associate Chief Counsel (Procedure and Administration), or the Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), as appropriate? The mailing address is: Internal Revenue Service Attn: CC:PA:LPD:DRU P. O. Box 7604Ben Franklin Station

Yes No

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Washington, DC 20044 If a private delivery service is used, the address is: Internal Revenue Service Attn: CC:PA:LPD:DRU, Room 5336 1111 Constitution Ave., NW Washington, DC 20224 The package should be marked: RULING REQUEST SUBMISSION. Improperly addressed requests may be delayed (sometimes for over a week) in reaching CC:PA:LPD:DRU for initial processing. Signature Title or Authority Date

Typed or printed name of person signing checklist

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