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The Reason
why Charging
Orders are so Effective
This revenue ruling explains why a creditor only
receives a charging order to the interest in a LLC or LP. He/She
do not receive a say in management; he/she is only entitled to
distributions.Rev. Rul. 77-137. A, a Limited partner in a limited partnership
formed under the Uniform Limited Partnership Act of a state, assigned
the limited partnership interest to B. The agreement of the partnership
provides, in part, that assignees of limited partners may not
become substituted limited partners in the partnership without
the written consent of the general partners. However, it also
provides that a limited partner may, without the consent of the
general partners, assign irrevocably to another the right to share
in the profits and losses of the partnership and to receive all
distributions, including liquidating distributions, to which the
limited partner would have been entitled had the assignment not
been made. Under the terms of the assignment A, who was the nominal
limited partner under local law, agreed to exercise any residual
powers remaining in A solely in favor of and in the interest of
B.Held, even though the general partners did not
give their consent to the assignment, since B, the assignee, acquired
substantially all of the dominion and control over the limited
partnership interest, for Federal income tax purposes B is treated
as a substituted limited partner. Therefore, B must report the
distributive share of partnership items of income, gain, loss,
deduction, and credit attributable to the assigned interest on
B’s Federal income tax return in the same manner and in the
same amounts that would be required if B was a substituted limited
partner.
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