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Houston Court of Appeals Rules Unanimously In Favor of Lance Arney’s Client

On February 28, 2023, the Houston Court of Appeals (First District) issued a 41-page memorandum opinion in favor of Gregor Wynne Arney, PLLC’s clients. The appeal involved a Texas LLC with four members and interpretation of the LLC’s company agreement. The principal issue was whether a certain provision governed distributions of company assets (including cash) or instead governed allocation of tax effects (income or losses). 

Limited liability companies are typically treated the same as partnerships for federal income tax purposes. Tax on the company passes through to its members, who must include their share of the company’s income or losses on their personal tax returns. Each member’s allocated share is reported to the IRS on a Form K-1. These tax effects are distinct from distributions of cash or other assets from the company to its members. For example, it may happen that a company does not make member distributions in a given year even though the company reports income on which the members have tax liability to the IRS. Well-drafted company agreements typically protect the members from this “phantom income” situation by requiring special member distributions equal to the members’ expected tax payments attributable to that income.

A company agreement almost always includes provisions governing distributions of cash or other assets. Members can agree to how and when the company may or must make distributions, and whether any members have preferences with respect to distributions.

On appeal, the panel unanimously agreed with appellants’ argument that the provision in question was a tax allocation provision, not a distribution provision. The panel further held that the agreement’s distribution provisions (found elsewhere in the agreement) were unambiguous in appellants’ favor. The court remanded the case for further proceedings including a reassessment of attorneys’ fees to be awarded.

Gregor Wynne Arney partner Lance C. Arney briefed and argued the appeal. Mr. Arney has handled appeals in both state and federal courts, including several Texas courts of appeals, the Texas Supreme Court, and the federal Second, Fifth, and Ninth Circuit Courts of Appeal. He also was the attorney-in-charge in the trial court.

Gregor Wynne Arney frequently represents clients in disputes among owners of partnerships or limited liability companies, “business divorces,” minority owner oppression, and other complex civil litigation. If you are facing potential business litigation or have a concern related to your LLC or partnership, call the experienced business litigation attorneys at Gregor Wynne Arney today at (832) 390-2644.

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