The U.S. Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-136978-12) concerning the “fractions rule” for partnerships with qualified tax-exempt organization partners and their partners.
The proposed regulations [PDF 245 KB] amend existing regulations under section 514(c)(9)(E)—concerning partnerships that hold debt-financed real property and have one or more (but not all) qualified tax-exempt organization partners—to allow certain allocations resulting from specified common business practices to comply with the rules under section 514(c)(9)(E).
The proposed regulations will appear in the Federal Register on November 23, 2016, and comments and requests for a public hearing must be received within 90 days after that date.
Under the rules of section 511 (relating to tax imposed on the unrelated business taxable income (UBTI) of tax-exempt organizations), there is an exemption from UBTI income derived from debt-financed real property acquired or improved by certain “qualified organizations” (QOs). The exemption from UBTI does not apply if a QO owns an interest in a partnership that holds debt-financed real property (this is the “partnership limitation”) unless the partnership satisfies one of the following:
The preamble to today’s proposed regulations notes that the IRS and Treasury have received comments requesting “targeted changes” to the fractions rule under existing regulations to allow certain allocations resulting from specified common business practices to comply with the fractions rule. The referenced comments appear to be comments submitted by the American Bar Association (Tax Section) on January 19, 2010 (the “ABA Comments”).
The proposed regulations provide guidance in determining a partner’s share of overall partnership income or loss for purposes of the fractions rule—including allowing allocations consistent with common arrangements involving:
For more information, contact a tax professional with KPMG’s Washington National Tax:
Jim Sowell | +1 (202) 533-5710 | firstname.lastname@example.org
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