The Tax Debt Agreement (TRA) is a contract between former shareholders who sold their partners and the new public company C Corp, which acquired the shares in order to share the value of the tax benefits resulting from the gradual implementation of the sale of the shares. Typically, senior partners receive 85% of the tax savings from the sale and C Corp retains 15% of the value. A TRA liability is covered by C Corp for the 85% tax savings to be paid to former partners. The passage of tax reform last December gave investors greater security when it comes to corporate tax rates in the near future. One consequence is the increased interest of some investors in acquiring payment rights under existing tax receivable agreements (TRAs). In short, ACCORDS are agreements made by a company (a « pubco ») as part of an IPO to monetize Pubco`s tax attributes after the IPO for the benefit of owners prior to the IPO and investors who acquire payment rights under TRAs to such pre-IPO owners. Our previous article on ARTs focused on some ways in which tax reform could affect the value of TRA payment rights. Since the introduction of tax reform, we have seen a marked increase in investor interest in the acquisition of TRA payment rights, including through hedge funds, family offices and private trust funds. This article describes some of the functions of an AED that an investor should analyze before acquiring rights under an AER. Traditionally, legacy partners obtain super-voting shares in the new C Corp public and therefore retain control of the old and C Corp businesses. Therefore, booking for accounting purposes is not covered by accounting purchasing rules and there is no leap for accounting purposes. This inherent difference between the accounting asset base and the tax value base creates a significantly deferred tax asset.
An assessment of future income is required to determine whether there is sufficient revenue to take advantage of this deferred tax asset. This analysis may indicate that an assessment allowance is required in relation to the deferred tax payable. « We are pleased to have entered into an agreement to honour our TRA commitments, which will allow us to make full use of the tax base reached at the time of Clarivate`s initial carve-out and create incremental cash flow and shareholder value, » said Jerre Steaderre, Executive Chairman and CEO of Clarivate Analytics.