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New Section 514(c) Fractions Rule Guidance for Exempt Orgs: Avoiding UBTI in Real Estate Partnership Investments

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, October 3, 2017

Recorded event now available

This course will provide advisers to tax-exempt organizations with a practical guide to the fractions rule, which governs the tax implications of allocations between tax-exempt partners and taxable partners. The panel will detail recent IRS guidance permitting certain partnership allocations that may have otherwise violated the fractions rule. The webinar will define the specific issues and challenges the fractions rule presents for exempt organizations in designing an investment strategy.

Description

The partnership “fractions rule” of Section 514(c)(9)(E) has a well-deserved reputation among tax advisers and counsel as an intimidating tax trap for exempt organizations investing in real estate partnerships. The rule represents the intersection of UBTI and partnership allocations and creates a significant challenge to partnerships in designing appropriate allocations. This often discourages exempt organizations from investing directly in real estate partnerships, particularly those with debt financing.

The rule generally provides that partnerships with “qualified organizations” as partners may not allocate a percentage share of partnership income to a qualified organization in any year that is higher than their share of overall partnership loss in any tax year where such share of the loss is the smallest. All partnership allocations must also have “substantial economic effect” within the meaning of Section 704(b)(2). However, the multiple exceptions in the Section 514(c)(9) rules and regulations make applying the rules particularly complex.

The IRS recently issued proposed regulations to simplify the tax burden on exempt organizations investing in real estate partnerships. Under the proposed regulations, partnerships would be allowed to make allocations consistent with common business practices, although some questions still remain. The changes are generally taxpayer-friendly and may (if finalized) provide opportunities for reduced tax liabilities for exempt organizations that invest in fractions-rule compliant partnerships. Tax advisers must understand the application of the regulations to avoid costly tax consequences.

Listen as our experienced panel of exempt organization advisers provides a thorough and practical guide to navigating the complexities of the fractions rule in light of the proposed regulations.

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Outline

  1. UBTI rules of Section 512 in partnership context
  2. Section 514(c)(9)(E) fractions rule defined
  3. Analysis and tests to determine if fractions rule applies
  4. REG-136978-12 proposed changes to fractions rule treatment
  5. Issues and practices in fractions rule compliant partnership agreements

Benefits

The panel will discuss these and other important issues:

  • Qualified organizations and transactions that give rise to the “fractions rule”
  • Previously prohibited allocations which may be permissible under the proposed regulations
  • Curative allocations in a fractions-rule compliant partnership agreement—and when to use them

Faculty

Butler, Stephen
Stephen Butler
Partner
Kirkland & Ellis

Mr. Butler's practice focuses on the tax aspects of complex business transactions and reorganizations, with a...  |  Read More

Luksis, John
John R. Luksis
Senior Manager
RSM US

Mr. Luksis is a tax advisor with the Firms's national real estate practice. He provides comprehensive tax services...  |  Read More

Klebaner, Demetre
Demetre Klebaner
Kirkland & Ellis

Mr. Klebaner focuses of his practice on an array of tax areas, including the tax aspects of commercial real estate...  |  Read More