The two equal partners (“PartnerCo1” and “PartnerCo2”) of “Partnership” subscribe for voting redeemable retractable preferred shares of a corporation (“ManagementCo”) which had been newly formed by them. ManagementCo hires employees to fulfill its new contract to manage the Partnership and grants the employees options to acquire non-voting common shares of ManagementCo (the “Option Shares”) with an exercise price equal to their current modest fair market value and specified vesting and forfeiture conditions. In general, vested options may be exercised on the occurrence of a specified exit event (e.g., IPO or sale of the Partnership assets), or after XX years of service (or earlier “not for cause” termination or death. The options may be physically exercised, or cash-surrendered for their in-the-money value, at the optionee’s election. The preferred share proceeds will then be used by ManagementCoto acquire shares of a newly-incorporated subsidiary (“ManagementSubCo”) which, in turn, will use those proceeds to acquire an interest in the Partnership. The optionees will have the right to sell Option Shares to PartnerCo1 and PartnerCo2 for an amount not exceeding their fair market value.
Ruling that where options are cash-surrendered, ManagementCo may deduct the gross amount of the cash payment made by it.