Federal Register, Volume 81 Issue 226 (Wednesday, November 23, 2016)
[Federal Register Volume 81, Number 226 (Wednesday, November 23, 2016)]
[Proposed Rules]
[Pages 84518-84526]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27105]
[[Page 84518]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-136978-12]
RIN 1545-BL22
Fractions Rule
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to the
application of section 514(c)(9)(E) of the Internal Revenue Code (Code)
to partnerships that hold debt-financed real property and have one or
more (but not all) qualified tax-exempt organization partners within
the meaning of section 514(c)(9)(C). The proposed regulations amend the
current regulations under section 514(c)(9)(E) to allow certain
allocations resulting from specified common business practices to
comply with the rules under section 514(c)(9)(E). These regulations
affect partnerships with qualified tax-exempt organization partners and
their partners.
DATES: Written and electronic comments and requests for a public
hearing must be received by February 21, 2017.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-136978-12), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
136978-12), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically, via the Federal
eRulemaking Portal site at http://www.regulations.gov (indicate IRS and
REG-136978-12).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Caroline E. Hay at (202) 317-5279; concerning the submissions of
comments and requests for a public hearing, Regina L. Johnson at (202)
317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document proposes amendments to the Income Tax Regulations (26
CFR part 1) under section 514(c)(9)(E) regarding the application of the
fractions rule (as defined in the Background section of this preamble)
to partnerships that hold debt-financed real property and have one or
more (but not all) qualified tax-exempt organization partners.
In general, section 511 imposes a tax on the unrelated business
taxable income (UBTI) of tax-exempt organizations. Section 514(a)
defines UBTI to include a specified percentage of the gross income
derived from debt-financed property described in section 514(b).
Section 514(c)(9)(A) generally excepts from UBTI income derived from
debt-financed real property acquired or improved by certain qualified
organizations (QOs) described in section 514(c)(9)(C). Under section
514(c)(9)(C), a QO includes an educational organization described in
section 170(b)(1)(A)(ii) and its affiliated support organizations
described in section 509(a)(3), any trust which constitutes a qualified
trust under section 401, an organization described in section
501(c)(25), and a retirement income account described in section
403(b)(9).
Section 514(c)(9)(B)(vi) provides that the exception from UBTI in
section 514(c)(9)(A) does not apply if a QO owns an interest in a
partnership that holds debt-financed real property (the partnership
limitation), unless the partnership meets one of the following
requirements: (1) all of the partners of the partnership are QOs, (2)
each allocation to a QO is a qualified allocation (within the meaning
of section 168(h)(6)), or (3) each partnership allocation has
substantial economic effect under section 704(b)(2) and satisfies
section 514(c)(9)(E)(i)(I) (the fractions rule).
A partnership allocation satisfies the fractions rule if the
allocation of items to any partner that is a QO does not result in that
partner having a share of overall partnership income for any taxable
year greater than that partner's fractions rule percentage (the
partner's share of overall partnership loss for the taxable year for
which the partner's loss share is the smallest). Section 1.514(c)-
2(c)(1) describes overall partnership income as the amount by which the
aggregate items of partnership income and gain for the taxable year
exceed the aggregate items of partnership loss and deduction for the
year. Overall partnership loss is the amount by which the aggregate
items of partnership loss and deduction for the taxable year exceed the
aggregate items of partnership income and gain for the year.
Generally, under Sec. 1.514(c)-2(b)(2)(i), a partnership must
satisfy the fractions rule both on a prospective basis and on an actual
basis for each taxable year of the partnership, beginning with the
first taxable year of the partnership in which the partnership holds
debt-financed real property and has a QO partner. However, certain
allocations are taken into account for purposes of determining overall
partnership income or loss only when actually made, and do not create
an immediate violation of the fractions rule. See Sec. 1.514(c)-
2(b)(2)(i). Certain other allocations are disregarded for purposes of
making fractions rule calculations. See, for example, Sec. 1.514(c)-
2(d) (reasonable preferred returns and reasonable guaranteed payments),
Sec. 1.514(c)-2(e) (certain chargebacks and offsets), Sec. 1.514(c)-
2(f) (reasonable partner-specific items of deduction and loss), Sec.
1.514(c)-2(g) (unlikely losses and deductions), and Sec. 1.514(c)-
2(k)(3) (certain de minimis allocations of losses and deductions). In
addition, Sec. 1.514(c)-2(k)(1) provides that changes in partnership
allocations that result from transfers or shifts of partnership
interests (other than transfers from a QO to another QO) will be
closely scrutinized, but generally will be taken into account only in
determining whether the partnership satisfies the fractions rule in the
taxable year of the change and subsequent taxable years. Section
1.514(c)-2(m) provides special rules for applying the fractions rule to
tiered partnerships.
The Treasury Department and the IRS have received comments
requesting targeted changes to the existing regulations under section
514(c)(9)(E) to allow certain allocations resulting from specified
common business practices to comply with the rules under section
514(c)(9)(E). Section 514(c)(9)(E)(iii) grants the Secretary authority
to prescribe regulations as may be necessary to carry out the purposes
of section 514(c)(9)(E), including regulations that may provide for the
exclusion or segregation of items. In response to comments and under
the regulatory authority in section 514(c)(9)(E), these 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 preferred returns, partner-specific expenditures, unlikely
losses, and chargebacks of partner-specific expenditures and unlikely
losses. The proposed regulations also simplify one of the examples
involving tiered partnerships and provide rules regarding changes to
partnership allocations as a result of capital commitment defaults and
later acquisitions of partnership interests. These proposed regulations
except from applying the fractions rule certain partnerships in which
all partners other than QOs own five percent or less of the capital or
profits interests in the
[[Page 84519]]
partnership. Finally, these proposed regulations increase the threshold
for de minimis allocations away from QO partners.
Explanation of Provisions
1. Preferred Returns
Section 1.514(c)-2(d)(1) and (2) of the existing regulations
disregard in computing overall partnership income for purposes of the
fractions rule items of income (including gross income) and gain that
may be allocated to a partner with respect to a current or cumulative
reasonable preferred return for capital (including allocations of
minimum gain attributable to nonrecourse liability (or partner
nonrecourse debt) proceeds distributed to the partner as a reasonable
preferred return) if that preferred return is set forth in a binding,
written partnership agreement. Section 1.514(c)-2(d)(2) of the existing
regulations also provides that if a partnership agreement provides for
a reasonable preferred return with an allocation of what would
otherwise be overall partnership income, items comprising that
allocation are disregarded in computing overall partnership income for
purposes of the fractions rule.
Section 1.514(c)-2(d)(6)(i) of the existing regulations limits the
amount of income and gain allocated with respect to a preferred return
that can be disregarded for purposes of the fractions rule to: (A) The
aggregate of the amount that has been distributed to the partner as a
reasonable preferred return for the taxable year of the allocation and
prior taxable years, on or before the due date (not including
extensions) for filing the partnership's return for the taxable year of
the allocation; minus (B) the aggregate amount of corresponding income
and gain (and what would otherwise be overall partnership income)
allocated to the partner in all prior years. Thus, this rule requires a
current distribution of preferred returns for the allocations of income
with respect to those preferred returns to be disregarded.
The Treasury Department and the IRS have received comments
requesting that the current distribution requirement be eliminated from
the regulations because it interferes with normal market practice,
creates unnecessary complication, and, in some cases, causes economic
distortions for partnerships with QO partners. The preamble to the
existing final regulations under section 514(c)(9)(E) responded to
objections regarding the current distribution requirement by explaining
that if the requirement were eliminated, partnerships might attempt to
optimize their overall economics by allocating significant amounts of
partnership income and gain to QOs in the form of preferred returns.
The preamble explained that these allocations ``would be a departure
from the normal commercial practice followed by partnerships in which
the money partners are generally subject to income tax.'' TD 8539, 59
FR 24924. A recent commenter explained that the vast majority of
partnerships holding debt-financed real property (real estate
partnerships) with preferred returns to investing partners (either the
QO or the taxable partner) make allocations that match the preferred
return as it accrues, without regard to whether cash has been
distributed with respect to the preferred return. Instead of requiring
distributions equal to the full amount of their preferred returns,
taxable partners generally negotiate for tax distributions to pay any
tax liabilities associated with their partnership interest.
The Treasury Department and the IRS have reconsidered the necessity
of the current distribution requirement to prevent abuses of the
fractions rule. So long as the preferred return is required to be
distributed prior to other distributions (with an exception for certain
distributions intended to facilitate the payment of taxes) and any
undistributed amount compounds, the likelihood of abuse is minimized.
Therefore, the proposed regulations remove the current distribution
requirement and instead disregard allocations of items of income and
gain with respect to a preferred return for purposes of the fractions
rule, but only if the partnership agreement requires that the
partnership make distributions first to pay any accrued, cumulative,
and compounding unpaid preferred return to the extent such accrued but
unpaid preferred return has not otherwise been reversed by an
allocation of loss prior to such distribution (preferred return
distribution requirement). The preferred return distribution
requirement, however, is subject to an exception under the proposed
regulations that allows distributions intended to facilitate partner
payment of taxes imposed on the partner's allocable share of
partnership income or gain, if the distributions are made pursuant to a
provision in the partnership agreement, are treated as an advance
against distributions to which the distributee partner would otherwise
be entitled under the partnership agreement, and do not exceed the
distributee partner's allocable share of net partnership income and
gain multiplied by the sum of the highest statutory federal, state, and
local tax rates applicable to that partner.
2. Partner-Specific Expenditures and Management Fees
Section 1.514(c)-2(f) of the existing regulations provides a list
of certain partner- specific expenditures that are disregarded in
computing overall partnership income or loss for purposes of the
fractions rule. These expenditures include expenditures attributable to
a partner for additional record-keeping and accounting costs including
in connection with the transfer of a partnership interest, additional
administrative costs from having a foreign partner, and state and local
taxes. The Treasury Department and the IRS are aware that some real
estate partnerships allow investing partners to negotiate for
management and similar fees paid to the general partner that differ
from fees paid with respect to investments by other partners. These
fees include the general partner's fees for managing the partnership
and may include fees paid in connection with the acquisition,
disposition, or refinancing of an investment. Compliance with the
fractions rule may preclude a real estate partnership with QO partners
from allocating deductions attributable to these management expenses in
a manner that follows the economic fee arrangement because the
fractions rule limits the ability of the partnership to make
disproportionate allocations.
The Treasury Department and the IRS have determined that real
estate partnerships with QO partners should be permitted to allocate
management and similar fees among partners to reflect the manner in
which the partners agreed to bear the expense without causing a
fractions rule violation. Accordingly, the proposed regulations add
management (and similar) fees to the current list of excluded partner-
specific expenditures in Sec. 1.514(c)-2(f) of the existing
regulations to the extent such fees do not, in the aggregate, exceed
two percent of the partner's aggregate committed capital.
It has been suggested to the Treasury Department and the IRS that
similar partner-specific expenditure issues may arise under the new
partnership audit rules in section 1101 of the Bipartisan Budget Act of
2015, Public Law 114-74 (the BBA), which was enacted into law on
November 2, 2015. Section 1101 of the BBA repeals the current rules
governing partnership audits and replaces them with a new centralized
partnership audit regime that, in general, assesses and collects tax at
the
[[Page 84520]]
partnership level as an imputed underpayment. Some have suggested that
the manner in which an imputed underpayment is borne by partners
potentially could implicate similar concerns as special allocations of
partner-specific items. As the Treasury Department and the IRS continue
to consider how to implement the BBA, the Treasury Department and the
IRS request comments regarding whether an imputed underpayment should
be included among the list of partner-specific expenditures.
3. Unlikely Losses
Similar to Sec. 1.514(c)-2(f), Sec. 1.514(c)-2(g) of the existing
regulations generally disregards specially allocated unlikely losses or
deductions (other than items of nonrecourse deduction) in computing
overall partnership income or loss for purposes of the fractions rule.
To be disregarded under Sec. 1.514(c)-2(g), a loss or deduction must
have a low likelihood of occurring, taking into account all relevant
facts, circumstances, and information available to the partners
(including bona fide financial projections). Section 1.514(c)-2(g)
describes types of events that give rise to unlikely losses or
deductions.
The Treasury Department and the IRS have received comments
suggesting that a ``more likely than not'' standard is appropriate for
determining when a loss or deduction is unlikely to occur. Notice 90-41
(1990-1 CB 350) (see Sec. 601.601(d)(2)(ii)(b)), which preceded the
initial proposed regulations under section 514(c)(9)(E), outlined this
standard. The commenter explained that the ``low likelihood of
occurring'' standard in the existing regulations is vague and gives
little comfort to QOs and their taxable partners when drafting
allocations to reflect legitimate business arrangements (such as,
drafting allocations to account for cost overruns). The Treasury
Department and the IRS are considering changing the standard in Sec.
1.514(c)-2(g) and request further comments explaining why ``more likely
than not'' is a more appropriate standard than the standard contained
in the existing regulations, or whether another standard turning upon a
level of risk that is between ``more likely than not'' and ``low
likelihood of occurring'' might be more appropriate and what such other
standard could be.
4. Chargebacks of Partner-Specific Expenditures and Unlikely Losses
Because allocations of partner-specific expenditures in Sec.
1.514(c)-2(f) and unlikely losses in Sec. 1.514(c)-2(g) are
disregarded in computing overall partnership income or loss,
allocations of items of income or gain or net income to reverse the
prior partner-specific expenditure or unlikely loss could cause a
violation of the fractions rule. For example, a QO may contribute
capital to a partnership to pay a specific expenditure with the
understanding that it will receive a special allocation of income to
reverse the prior expenditure once the partnership earns certain
profits. If the allocation of income is greater than the QO's fractions
rule percentage, the allocation will cause a fractions rule violation.
Section 1.514(c)-2(e)(1) of the existing regulations generally
disregards certain allocations of income or loss made to chargeback
previous allocations of income or loss in computing overall partnership
income or loss for purposes of the fractions rule. Specifically, Sec.
1.514(c)-2(e)(1)(i) disregards allocations of what would otherwise be
overall partnership income that chargeback (that is, reverse) prior
disproportionately large allocations of overall partnership loss (or
part of the overall partnership loss) to a QO (the chargeback
exception). The chargeback exception applies to a chargeback of an
allocation of part of the overall partnership income or loss only if
that part consists of a pro rata portion of each item of partnership
income, gain, loss, and deduction (other than nonrecourse deductions,
as well as partner nonrecourse deductions and compensating allocations)
that is included in computing overall partnership income or loss.
The Treasury Department and the IRS understand that often a real
estate partnership with QO partners may seek to reverse a special
allocation of unlikely losses or partner-specific items with net
profits of the partnership, which could result in allocations that
would violate the fractions rule. Such allocations of net income to
reverse special allocations of unlikely losses or partner-specific
items that were disregarded in computing overall partnership income or
loss for purposes of the fractions rule under Sec. 1.514(c)-2(f) or
(g), respectively, do not violate the purpose of the fractions rule.
Accordingly, the proposed regulations modify the chargeback exception
to disregard in computing overall partnership income or loss for
purposes of the fractions rule an allocation of what would otherwise
have been an allocation of overall partnership income to chargeback
(that is, reverse) a special allocation of a partner-specific
expenditure under Sec. 1.514(c)-2(f) or a special allocation of an
unlikely loss under Sec. 1.514(c)-2(g). Notwithstanding the rule in
the proposed regulations, an allocation of an unlikely loss or a
partner-specific expenditure that is disregarded when allocated, but is
taken into account for purposes of determining the partners' economic
entitlement to a chargeback of such loss or expense may, in certain
circumstances, give rise to complexities in determining applicable
percentages for purposes of fractions rule compliance. Accordingly, the
Treasury Department and the IRS request comments regarding the
interaction of disregarded partner-specific expenditures and unlikely
losses with chargebacks of such items with overall partnership income.
5. Acquisition of Partnership Interests After Initial Formation of
Partnership
Section 1.514(c)-2(k)(1) of the existing regulations provides
special rules regarding changes in partnership allocations arising from
a change in partners' interests. Specifically, Sec. 1.514(c)-2(k)(1)
provides that changes in partnership allocations that result from
transfers or shifts of partnership interests (other than transfers from
a QO to another QO) will be closely scrutinized (to determine whether
the transfer or shift stems from a prior agreement, understanding, or
plan or could otherwise be expected given the structure of the
transaction), but generally will be taken into account only in
determining whether the partnership satisfies the fractions rule in the
taxable year of the change and subsequent taxable years. Section
1.514(c)-2(k)(4) of the existing regulations provides that Sec.
1.514(c)-2 may not be applied in a manner inconsistent with the purpose
of the fractions rule, which is to prevent tax avoidance by limiting
the permanent or temporary transfer of tax benefits from tax-exempt
partners to taxable partners.
The Treasury Department and the IRS have received comments
requesting guidance in applying the fractions rule when additional
partners are admitted to a partnership after the initial formation of
the partnership. The commenter explained that many real estate
partnerships with QO partners admit new partners in a number of rounds
of closings, but treat the partners as having entered at the same time
for purposes of sharing in profits and losses (staged closings). A
number of commercial arrangements are used to effect staged closings.
For example, the initial operations of the partnership may be funded
entirely through debt financing, with all partners contributing their
committed capital at a later date. Alternatively, later entering
partners may contribute capital and an interest
[[Page 84521]]
factor, some or both of which is then distributed to the earlier
admitted partners to compensate them for the time value of their
earlier contributions.
Under existing regulations, staged closings could cause violations
of the fractions rule in two ways. First, when new partners are
admitted to a partnership, shifts of partnership interests occur.
Changes in allocations that result from shifts of partnership interests
are closely scrutinized under Sec. 1.514(c)-2(k)(1) of the existing
regulations if pursuant to a prior agreement and could be determined to
violate the fractions rule. Second, after admitting new partners,
partnerships may disproportionately allocate income or loss to the
partners to adjust the partners' capital accounts as a result of the
staged closings. These disproportionate allocations could cause
fractions rule violations if one of the partners is a QO.
The Treasury Department and the IRS have determined that changes in
allocations and disproportionate allocations resulting from common
commercial staged closings should not violate the fractions rule if
they are not inconsistent with the purpose of the fractions rule under
Sec. 1.514(c)-2(k)(4) and certain conditions are satisfied. The
conditions include the following: (A) The new partner acquires the
partnership interest no later than 18 months following the formation of
the partnership (applicable period); (B) the partnership agreement and
other relevant documents anticipate the new partners acquiring the
partnership interests during the applicable period, set forth the time
frame in which the new partners will acquire the partnership interests,
and provide for the amount of capital the partnership intends to raise;
(C) the partnership agreement and any other relevant documents
specifically set forth the method of determining any applicable
interest factor and for allocating income, loss, or deduction to the
partners to adjust partners' capital accounts after the new partner
acquires the partnership interest; and (D) the interest rate for any
applicable interest factor is not greater than 150 percent of the
highest applicable Federal rate, at the appropriate compounding period
or periods, at the time the partnership was formed.
Under the proposed regulations, if those conditions are satisfied,
the IRS will not closely scrutinize changes in allocations resulting
from staged closings under Sec. 1.514(c)-2(k)(1) and will disregard in
computing overall partnership income or loss for purposes of the
fractions rule disproportionate allocations of income, loss, or
deduction made to adjust the capital accounts when a new partner
acquires its partnership interest after the partnership's formation.
6. Capital Commitment Defaults or Reductions
The Treasury Department and the IRS received comments requesting
guidance with respect to calculations of overall partnership income and
loss when allocations change as a result of capital commitment defaults
or reductions. The commenter indicated that, in the typical real estate
partnership, a limited partner generally will not contribute its entire
investment upon being admitted as a partner. Rather, that limited
partner will commit to contribute a certain dollar amount over a fixed
period of time, and the general partner will then ``call'' on that
committed, but uncontributed, capital as needed. These calls will be
made in proportion to the partners' commitments to the partnership.
The commenter identified certain remedies that partnership
agreements provide if a partner fails to contribute a portion (or all)
of its committed capital. These remedies commonly include: (i) Allowing
the non-defaulting partner(s) to contribute additional capital in
return for a preferred return on that additional capital; (ii) causing
the defaulting partner to forfeit all or a portion of its interest in
the partnership; (iii) forcing the defaulting partner to sell its
interest in the partnership, or (iv) excluding the defaulting partner
from making future capital contributions. Alternatively, the agreement
may allow partners to reduce their commitment amounts, reducing
allocations of income and loss as well. The commenter noted that,
depending on the facts, any of these partnership agreement provisions
could raise fractions rule concerns.
There is little guidance in the existing regulations regarding
changes to allocations of a partner's share of income and losses from
defaulted capital calls and reductions in capital commitments. Section
1.514(c)-2(k)(1) applies to changes in allocations resulting from a
default if there is a ``transfer or shift'' of partnership interests.
The Treasury Department and the IRS have determined that changes in
allocations resulting from unanticipated defaults or reductions do not
run afoul of the purpose of the fractions rule if such changes are
provided for in the partnership agreement. Therefore, the proposed
regulations provide that, if the partnership agreement provides for
changes to allocations due to an unanticipated partner default on a
capital contribution commitment or an unanticipated reduction in a
partner's capital contribution commitment, and those changes in
allocations are not inconsistent with the purpose of the fractions rule
under Sec. 1.514(c)-2(k)(4), then: (A) Changes to partnership
allocations provided in the agreement will not be closely scrutinized
under Sec. 1.514(c)-2(k)(1) and (B) partnership allocations of income,
loss, or deduction (including allocations to adjust partners' capital
accounts to be consistent with the partners' adjusted capital
commitments) to partners to adjust the partners' capital accounts as a
result of unanticipated capital contribution defaults or reductions
will be disregarded in computing overall partnership income or loss for
purposes of the fractions rule.
7. Applying the Fractions Rule to Tiered Partnerships
Section 1.514(c)-2(m)(1) of the existing regulations provides that
if a QO holds an indirect interest in real property through one or more
tiers of partnerships (a chain), the fractions rule is satisfied if:
(i) The avoidance of tax is not a principal purpose for using the
tiered-ownership structure; and (ii) the relevant partnerships can
demonstrate under ``any reasonable method'' that the relevant chains
satisfy the requirements of Sec. 1.514(c)-2(b)(2) through (k). Section
1.514(c)-2(m)(2) of the existing regulations provides examples that
illustrate three different ``reasonable methods:'' the collapsing
approach, the entity-by-entity approach, and the independent chain
approach.
The Treasury Department and the IRS have received comments
requesting guidance with respect to tiered partnerships and the
application of the independent chain approach. Under the independent
chain approach in Sec. 1.514(c)-2(m)(2) Example 3 of the existing
regulations, different lower-tiered partnership chains (one or more
tiers of partnerships) are examined independently of each other, even
if these lower-tiered partnerships are owned by a common upper-tier
partnership. The example provides, however, that chains are examined
independently only if the upper-tier partnership allocates the items of
each lower-tier partnership separately from the items of another lower-
tier partnership.
The comment noted that in practice, a real estate partnership
generally invests in a significant number of properties, often through
joint ventures with other partners. A typical real estate partnership
will not make separate allocations to its partners of lower-tier
partnership items. Accordingly, the
[[Page 84522]]
proposed regulations amend Sec. 1.514(c)-2(m)(2) Example 3 to remove
the requirement that a partnership allocate items from lower-tier
partnerships separately from one another. Partnership provisions
require that partnership items such as items that would give rise to
UBTI be separately stated. See Sec. 1.702-1(a)(8)(ii). That
requirement suffices to separate the tiers of partnerships, and, thus,
the proposed regulations do not require the upper-tier partnership to
separately allocate partnership items from separate lower-tier
partnerships. The proposed regulations also revise Sec. 1.514(c)-
2(m)(1)(ii) to remove the discussion of minimum gain chargebacks that
refers to language that has been deleted from the example.
8. De Minimis Exceptions From Application of the Fractions Rule
Section 1.514(c)-2(k)(2) of the existing regulations provides that
the partnership limitation in section 514(c)(9)(B)(vi) does not apply
to a partnership if all QOs hold a de minimis interest in the
partnership, defined as no more than five percent in the capital or
profits of the partnership, and taxable partners own substantial
interests in the partnership through which they participate in the
partnership on substantially the same terms as the QO partners. If the
partnership limitation in section 514(c)(9)(B)(vi) does not apply to
the partnership, the fractions rule does not apply to the partnership.
Because the fractions rule does not apply to a partnership if all QOs
are de minimis interest holders in the partnership, the Treasury
Department and the IRS considered whether the inverse fact pattern, in
which all non-QO partners are de minimis partners, implicates the
purpose of the fractions rule. See Sec. 1.514(c)-2(k)(4) (providing
that the purpose of the fractions rule is to ``prevent tax avoidance by
limiting the permanent or temporary transfer of tax benefits from tax-
exempt partners to taxable partners, whether by directing income or
gain to tax-exempt partners, by directing losses, deductions or credits
to taxable partners, or by some similar manner.'').
The Treasury Department and the IRS have determined that the
purpose of the fractions rule is similarly not violated if all non-QO
partners hold a de minimis interest. Therefore, the proposed
regulations provide that the fractions rule does not apply to a
partnership in which non-QO partners do not hold (directly or
indirectly through a partnership), in the aggregate, interests of
greater than five percent in the capital or profits of the partnership,
so long as the partnership's allocations have substantial economic
effect. For purposes of the proposed rule, the determination of whether
an allocation has substantial economic effect is made without
application of the special rules in Sec. 1.704-1(b)(2)(iii)(c)(2)
(regarding the presumption that there is a reasonable possibility that
allocations will affect substantially the dollar amounts to be received
by the partners from the partnership if there is a strong likelihood
that offsetting allocations will not be made in five years, and the
presumption that the adjusted tax basis (or book value) of partnership
property is equal to the fair market value of such property).
The existing regulations also provide for a de minimis exception
for allocations away from QO partners. Section 1.514(c)-2(k)(3) of the
existing regulations provides that a QO's fractions rule percentage of
the partnership's items of loss and deduction, other than nonrecourse
and partner nonrecourse deductions, that are allocated away from the QO
and to other partners in any taxable year, are treated as having been
allocated to the QO for purposes of the fractions rule if: (i) The
allocation was neither planned nor motivated by tax avoidance; and (ii)
the total amount of those items of partnership loss or deduction is
less than both one percent of the partnership's aggregate items of
gross loss and deduction for the taxable year and $50,000. The preamble
to the existing final regulations under section 514(c)(9)(E) explained
that the de minimis allocation exception was ``to provide relief for
what would otherwise be minor inadvertent violations of the fractions
rule.'' TD 8539, 59 FR 24924. The exception was ``not intended . . .
[to] be used routinely by partnerships to allocate some of the
partnership's losses and deductions.'' Id. To that end, the final
regulations limited the exception to $50,000. As an example of a de
minimis allocation intended to meet this exception, the preamble
described a scenario in which a plumber's bill is paid by the
partnership but overlooked until after the partner's allocations have
been computed and then is allocated entirely to the taxable partner.
Id.
In current business practices, a $50,000 threshold does not provide
sufficient relief for de minimis allocations away from the QO partner.
The proposed regulations still require that allocations not exceed one
percent of the partnership's aggregate items of gross loss and
deduction for the taxable year, but raise the threshold from $50,000 to
$1,000,000.
Proposed Applicability Date
The regulations under section 514(c)(9)(E) are proposed to apply to
taxable years ending on or after the date these regulations are
published as final regulations in the Federal Register. However, a
partnership and its partners may apply all the rules in these proposed
regulations for taxable years ending on or after November 23, 2016.
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory impact assessment is
not required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations. Because these proposed regulations do not impose a
collection of information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of
the Code, this notice of proposed rulemaking has been submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ``Addresses''
heading. The Treasury Department and the IRS request comments on all
aspects of the proposed rules. All comments will be available at
www.regulations.gov or upon request. A public hearing will be scheduled
if requested in writing by any person that timely submits written
comments. If a public hearing is scheduled, notice of the date, time,
and place for the public hearing will be published in the Federal
Register.
Drafting Information
The principal author of these proposed regulations is Caroline E.
Hay, Office of the Associate Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income Taxes, Reporting and recordkeeping requirements.
[[Page 84523]]
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.514(c)-2 also issued under 26 U.S.C.
514(c)(9)(E)(iii).
0
Par. 2. Section 1.514(c)-2 is amended by:
0
1. In paragraph (a), adding entries for (d)(2)(i) through (iii), adding
entries for (d)(3)(i) and (ii), revising the entry for (d)(6), removing
entries for (d)(6)(i) and (ii), and (d)(7), adding entries for
(k)(1)(i) through (iv), revising the entries for (k)(2)(i) and (ii),
adding an entry for (k)(2)(iii), and revising the entry for (n).
0
2. Revising paragraphs (d)(2) and (3).
0
3. Removing paragraph (d)(6).
0
4. Redesignating paragraph (d)(7) as paragraph (d)(6).
0
5. Revising newly redesignated paragraph (d)(6) Example 1 paragraph (i)
and adding paragraph (iv).
0
6. Removing the language ``(i.e., reverse)'' in paragraph (e)(1)(i) and
adding the language ``(that is, reverse)'' in its place.
0
7. Removing the language ``other partners; and'' at the end of
paragraph (e)(1)(iii) and adding the language ``other partners;'' in
its place.
0
8. Removing the language ``of Sec. 1.704-1(b)(2)(ii)(d).'' at the end
of paragraph (e)(1)(iv) and adding the language ``of Sec. 1.704-
1(b)(2)(ii)(d);'' in its place.
0
9. Removing the language ``the regulations thereunder.'' at the end of
paragraph (e)(1)(v) and adding the language ``the regulations
thereunder;'' in its place.
0
10. Adding new paragraphs (e)(1)(vi) and (vii).
0
11. Adding Example 5 to paragraph (e)(5).
0
12. Removing the word ``and'' at the end of paragraph (f)(3).
0
13. Redesignating paragraph (f)(4) as paragraph (f)(5) and adding new
paragraph (f)(4).
0
14. Revising paragraph (k)(1).
0
15. Revising the subject heading for paragraph (k)(2)(i).
0
16. Revising paragraph (k)(2)(i)(A).
0
17. Redesignating paragraph (k)(2)(ii) as paragraph (k)(2)(iii) and
adding new paragraph (k)(2)(ii).
0
18. Revising paragraph (k)(3)(ii)(B).
0
19. Removing the second sentence in paragraph (m)(1)(ii).
0
20. Revising Example 3(ii) of paragraph (m)(2).
0
21. Revising the subject heading for paragraph (n).
0
22. Adding a sentence to the end of paragraph (n)(2).
The revisions and additions read as follows:
Sec. 1.514(c)-2. Permitted allocations under section 514(c)(9)(E).
(a) Table of contents. * * *
(d) * * *
(2) * * *
(i) In general.
(ii) Limitation.
(iii) Distributions disregarded.
(3) * * *
(i) In general.
(ii) Reasonable guaranteed payments may be deducted only when
paid in cash.
* * * * *
(6) Examples.
* * * * *
(k) * * *
(1) * * *
(i) In general.
(ii) Acquisition of partnership interests after initial
formation of partnership.
(iii) Capital commitment defaults or reductions.
(iv) Examples.
(2) * * *
(i) Qualified organizations.
(ii) Non-qualified organizations.
(iii) Example.
* * * * *
(n) Effective/applicability dates.
* * * * *
(d) * * *
(2) Preferred returns--(i) In general. Items of income (including
gross income) and gain that may be allocated to a partner with respect
to a current or cumulative reasonable preferred return for capital
(including allocations of minimum gain attributable to nonrecourse
liability (or partner nonrecourse debt) proceeds distributed to the
partner as a reasonable preferred return) are disregarded in computing
overall partnership income or loss for purposes of the fractions rule.
Similarly, if a partnership agreement effects a reasonable preferred
return with an allocation of what would otherwise be overall
partnership income, those items comprising that allocation are
disregarded in computing overall partnership income for purposes of the
fractions rule.
(ii) Limitation. Except as otherwise provided in paragraph
(d)(2)(iii) of this section, items of income and gain (or part of what
would otherwise be overall partnership income) that may be allocated to
a partner in a taxable year with respect to a reasonable preferred
return for capital are disregarded under paragraph (d)(2)(i) of this
section for purposes of the fractions rule only if the partnership
agreement requires the partnership to make distributions first to pay
any accrued, cumulative, and compounding unpaid preferred return to the
extent such accrued but unpaid preferred return has not otherwise been
reversed by an allocation of loss prior to such distribution.
(iii) Distributions disregarded. A distribution is disregarded for
purposes of paragraph (d)(2)(ii) of this section if the distribution--
(A) Is made pursuant to a provision in the partnership agreement
intended to facilitate the partners' payment of taxes imposed on their
allocable shares of partnership income or gain;
(B) Is treated as an advance against distributions to which the
distributee partner would otherwise be entitled under the partnership
agreement; and
(C) Does not exceed the distributee partner's allocable share of
net partnership income and gain multiplied by the sum of the highest
statutory federal, state, and local tax rates applicable to such
partner.
(3) Guaranteed payments--(i) In general. A current or cumulative
reasonable guaranteed payment to a qualified organization for capital
or services is treated as an item of deduction in computing overall
partnership income or loss, and the income that the qualified
organization may receive or accrue from the current or cumulative
reasonable guaranteed payment is not treated as an allocable share of
overall partnership income or loss. The treatment of a guaranteed
payment as reasonable for purposes of section 514(c)(9)(E) does not
affect its possible characterization as unrelated business taxable
income under other provisions of the Internal Revenue Code.
(ii) Reasonable guaranteed payments may be deducted only when paid
in cash. If a partnership that avails itself of paragraph (d)(3)(i) of
this section would otherwise be required (by virtue of its method of
accounting) to deduct a reasonable guaranteed payment to a qualified
organization earlier than the taxable year in which it is paid in cash,
the partnership must delay the deduction of the guaranteed payment
until the taxable year it is paid in cash. For purposes of this
paragraph (d)(3)(ii), a guaranteed payment that is paid in cash on or
before the due date (not including extensions) for filing the
partnership's return for a taxable year may be treated as paid in that
prior taxable year.
* * * * *
(6) * * *
Example 1. * * *
(i) The partnership agreement provides QO a 10 percent preferred
return on its
[[Page 84524]]
unreturned capital. The partnership agreement provides that the
preferred return may be compounded (at 10 percent) and may be paid
in future years and requires that when distributions are made, they
must be made first to pay any accrued, cumulative, and compounding
unpaid preferred return not previously reversed by a loss
allocation. The partnership agreement also allows distributions to
be made to facilitate a partner's payment of federal, state, and
local taxes. Under the partnership agreement, any such distribution
is treated as an advance against distributions to which the
distributee partner would otherwise be entitled and must not exceed
the partner's allocable share of net partnership income or gain for
that taxable year multiplied by the sum of the highest statutory
federal, state, and local tax rates applicable to the partner. The
partnership agreement first allocates gross income and gain 100
percent to QO, to the extent of the preferred return. All remaining
income or loss is allocated 50 percent to QO and 50 percent to TP.
* * * * *
(iv) The facts are the same as in paragraph (i) of this Example
1, except the partnership makes a distribution to TP of an amount
computed by a formula in the partnership agreement equal to TP's
allocable share of net income and gain multiplied by the sum of the
highest statutory federal, state, and local tax rates applicable to
TP. The partnership satisfies the fractions rule. The distribution
to TP is disregarded for purposes of paragraph (d)(2)(ii) of this
section because the distribution is made pursuant to a provision in
the partnership agreement that provides that the distribution is
treated as an advance against distributions to which TP would
otherwise be entitled and the distribution did not exceed TP's
allocable share of net partnership income or gain for that taxable
year multiplied by the sum of the highest statutory federal, state,
and local tax rates applicable to TP. The income and gain that is
specially allocated to QO with respect to its preferred return is
disregarded in computing overall partnership income or loss for
purposes of the fractions rule because the requirements of paragraph
(d) of this section are satisfied. After disregarding those
allocations, QO's fractions rule percentage is 50 percent (see
paragraph (c)(2) of this section), and, under the partnership
agreement, QO may not be allocated more than 50 percent of overall
partnership income in any taxable year.
(e) * * *
(1) * * *
(vi) Allocations of what would otherwise be overall partnership
income that may be made to chargeback (that is, reverse) prior
allocations of partner-specific expenditures that were disregarded in
computing overall partnership income or loss for purposes of the
fractions rule under paragraph (f) of this section; and
(vii) Allocations of what would otherwise be overall partnership
income that may be made to chargeback (that is, reverse) prior
allocations of unlikely losses and deductions that were disregarded in
computing overall partnership income or loss for purposes of the
fractions rule under paragraph (g) of this section.
* * * * *
(5) * * *
Example 5. Chargeback of prior allocations of unlikely losses
and deductions. (i) Qualified organization (QO) and taxable
corporation (TP) are equal partners in a partnership that holds
encumbered real property. The partnership agreement generally
provides that QO and TP share partnership income and deductions
equally. QO contributes land to the partnership, and the partnership
agreement provides that QO bears the burden of any environmental
remediation required for that land, and, as such, the partnership
will allocate 100 percent of the expense attributable to the
environmental remediation to QO. In the unlikely event of the
discovery of environmental conditions that require remediation, the
partnership agreement provides that, to the extent its cumulative
net income (without regard to the remediation expense) for the
taxable year the partnership incurs the remediation expense and for
subsequent taxable years exceeds $500x, after allocation of the
$500x of cumulative net income, net income will first be allocated
to QO to offset any prior allocation of the environmental
remediation expense deduction. On January 1 of Year 3, the
partnership incurs a $100x expense for the environmental remediation
of the land. In that year, the partnership had gross income of $60x
and other expenses of $30x for total net income of $30x without
regard to the expense associated with the environmental remediation.
The partnership allocated $15x of income to each of QO and TP and
$100x of remediation expense to QO.
(ii) The partnership satisfies the fractions rule. The
allocation of the expense attributable to the remediation of the
land is disregarded under paragraph (g) of this section. QO's share
of overall partnership income is 50 percent, which equals QO's share
of overall partnership loss.
(iii) In Year 8, when the partnership's cumulative net income
(without regard to the remediation expense) for the taxable year the
partnership incurred the remediation expense and subsequent taxable
years is $480x (the $30x from Year 3, plus $450x of cumulative net
income for Years 4-7), the partnership has gross income of $170x and
expenses of $50x, for total net income of $120x. The partnership's
cumulative net income for all years from Year 3 to Year 8 is $600x
($480x for Years 3-7 and $120x for Year 8). Pursuant to the
partnership agreement, the first $20x of net income for Year 8 is
allocated equally between QO and TP because the partnership must
first earn cumulative net income in excess of $500x before making
the offset allocation to QO. The remaining $100x of net income for
Year 8 is allocated to QO to offset the environmental remediation
expense allocated to QO in Year 3.
(iv) Pursuant to paragraph (e)(1)(vii) of this section, the
partnership's allocation of $100x of net income to QO in Year 8 to
offset the prior environmental remediation expense is disregarded in
computing overall partnership income or loss for purposes of the
fractions rule. The allocation does not cause the partnership to
violate the fractions rule.
(f) * * *
(4) Expenditures for management and similar fees, if such fees in
the aggregate for the taxable year are not more than 2 percent of the
partner's capital commitments; and * * *
* * * * *
(k) Special rules--(1) Changes in partnership allocations arising
from a change in the partners' interests--(i) In general. A qualified
organization that acquires a partnership interest from another
qualified organization is treated as a continuation of the prior
qualified organization partner (to the extent of that acquired
interest) for purposes of applying the fractions rule. Changes in
partnership allocations that result from other transfers or shifts of
partnership interests will be closely scrutinized (to determine whether
the transfer or shift stems from a prior agreement, understanding, or
plan or could otherwise be expected given the structure of the
transaction), but generally will be taken into account only in
determining whether the partnership satisfies the fractions rule in the
taxable year of the change and subsequent taxable years.
(ii) Acquisition of partnership interests after initial formation
of partnership. Changes in partnership allocations due to an
acquisition of a partnership interest by a partner (new partner) after
the initial formation of a partnership will not be closely scrutinized
under paragraph (k)(1)(i) of this section, but will be taken into
account only in determining whether the partnership satisfies the
fractions rule in the taxable year of the change and subsequent taxable
years, and disproportionate allocations of income, loss, or deduction
to the partners to adjust the partners' capital accounts as a result
of, and to reflect, the new partner acquiring the partnership interest
and the resulting changes to the other partners' interests will be
disregarded in computing overall partnership income or loss for
purposes of the fractions rule if such changes and disproportionate
allocations are not inconsistent with the purpose of the fractions rule
under paragraph (k)(4) of this section and--
(A) The new partner acquires the partnership interest no later than
18 months following the formation of the partnership (applicable
period);
(B) The partnership agreement and other relevant documents
anticipate the
[[Page 84525]]
new partners acquiring the partnership interest during the applicable
period, set forth the time frame in which the new partners will acquire
the partnership interests, and provide for the amount of capital the
partnership intends to raise;
(C) The partnership agreement and other relevant documents
specifically set forth the method for determining any applicable
interest factor and for allocating income, loss, or deduction to the
partners to account for the economics of the arrangement in the
partners' capital accounts after the new partner acquires the
partnership interest; and
(D) The interest rate for any applicable interest factor is not
greater than 150 percent of the highest applicable Federal rate, at the
appropriate compounding period or periods, at the time the partnership
was formed.
(iii) Capital commitment defaults or reductions. Changes in
partnership allocations that result from an unanticipated partner
default on a capital contribution commitment or an unanticipated
reduction in a partner's capital contribution commitment, that are
effected pursuant to provisions prescribing the treatment of such
events in the partnership agreement, and that are not inconsistent with
the purpose of the fractions rule under paragraph (k)(4) of this
section, will not be closely scrutinized under paragraph (k)(1)(i) of
this section, but will be taken into account only in determining
whether the partnership satisfies the fractions rule in the taxable
year of the change and subsequent taxable years. In addition,
partnership allocations of income, loss, or deduction to partners made
pursuant to the partnership agreement to adjust partners' capital
accounts as a result of unanticipated capital contribution defaults or
reductions will be disregarded in computing overall partnership income
or loss for purposes of the fractions rule. The adjustments may include
allocations to adjust partners' capital accounts to be consistent with
the partners' adjusted capital commitments.
(iv) Examples. The following examples illustrate the provisions of
paragraph (k)(1) of this section.
Example 1. Staged closing. (i) On July 1 of Year 1, two taxable
partners (TP1 and TP2) form a partnership that will invest in debt-
financed real property. The partnership agreement provides that,
within an 18-month period, partners will be added so that an
additional $1000x of capital can be raised. The partnership
agreement sets forth the method for determining the applicable
interest factor that complies with paragraph (k)(1)(ii)(D) of this
section and for allocating income, loss, or deduction to the
partners to account for the economics of the arrangement in the
partners' capital accounts. During the partnership's Year 1 taxable
year, partnership had $150x of net income. TP1 and TP2, each, is
allocated $75x of net income.
(ii) On January 1 of Year 2, qualified organization (QO) joins
the partnership. The partnership agreement provides that TP1, TP2,
and QO will be treated as if they had been equal partners from July
1 of Year 1. Assume that the interest factor is treated as a
reasonable guaranteed payment to TP1 and TP2, the expense from which
is taken into account in the partnership's net income of $150x for
Year 2. To balance capital accounts, the partnership allocates $100x
of the income to QO ($50x, or the amount of one-third of Year 1
income that QO was not allocated during the partnership's first
taxable year, plus $50x, or one-third of the partnership's income
for Year 2) and the remaining income equally to TP1 and TP2. Thus,
the partnership allocates $100x to QO and $25x to TP1 and TP2, each.
(iii) The partnership's allocation to QO would violate the
fractions rule because QO's overall percentage of partnership income
for Year 2 of 66.7 percent is greater than QO's fractions rule
percentage of 33.3 percent. However, the special allocation of $100x
to QO for Year 2 is disregarded in determining QO's percentage of
overall partnership income for purposes of the fractions rule
because the requirements in paragraph (k)(1)(ii) of this section are
satisfied.
Example 2. Capital call default. (i) On January 1 of Year 1,
two taxable partners, (TP1 and TP2) and a qualified organization
(QO) form a partnership that will hold encumbered real property and
agree to share partnership profits and losses, 60 percent, 10
percent, and 30 percent, respectively. TP1 agreed to a capital
commitment of $120x, TP2 agreed to a capital commitment of $20x, and
QO agreed to a capital commitment of $60x. The partners met half of
their commitments upon formation of the partnership. The partnership
agreement requires a partner's interest to be reduced if the partner
defaults on a capital call. The agreement also allows the non-
defaulting partners to make the contribution and to increase their
own interests in the partnership. Following a capital call default,
the partnership agreement requires allocations to adjust capital
accounts to reflect the change in partnership interests as though
the funded commitments represented the partner's interests from the
partnership's inception.
(ii) In Year 1, partnership had income of $100x, which was
allocated to the partners $60x to TP1, $10x to TP2, and $30x to QO.
(iii) In Year 2, partnership required each partner to contribute
the remainder of its capital commitment, $60x from TP1, $10x from
TP2, and $30x from QO. TP1 could not make its required capital
contribution, and QO contributed $90x, its own capital commitment,
in addition to TP1's. TP1's default was not anticipated. As a result
and pursuant to the partnership agreement, TP1's interest was
reduced to 30 percent and QO's interest was increased to 60 percent.
Partnership had income of $60x and losses of $120x in Year 2, for a
net loss of $60x. Partnership allocated to TP1 $48x of loss (special
allocation of $30x of gross items of loss to adjust capital accounts
and $18x of net loss (30 percent of $60x net loss)), TP2 $6x of net
loss (10 percent of $60x net loss), and QO $6x of loss (special
allocation of $30x of gross items of income to adjust capital
accounts--$36x of net loss (60 percent of $60x net loss)). At the
end of Year 2, TP1's capital account equals $72x (capital
contribution of $60x + $60x income from Year 1--$48x loss from Year
2); TP2's capital account equals $24x (capital contributions of $20x
+ $10x income from Year 1--$6x loss from Year 2); and QO's capital
account equals $144x (capital contributions of $120x ($30x + $90x) +
$30x income from Year 1--$6x loss from Year 2).
(iv) The changes in partnership allocations to TP1 and QO due to
TP1's unanticipated default on its capital contribution commitment
were effected pursuant to provisions prescribing the treatment of
such events in the partnership agreement. Therefore these changes in
allocations will not be closely scrutinized under paragraph
(k)(1)(i) of this section, but will be taken into account only in
determining whether the partnership satisfies the fractions rule in
the taxable year of the change and subsequent taxable years. In
addition, pursuant to paragraph (k)(1)(iii) of this section, the
special allocations of $30x additional loss to TP1 and $30x
additional income to QO to adjust their capital accounts to reflect
their new interests in the partnership are disregarded when
calculating QO's percentage of overall partnership income and loss
for purposes of the fractions rule.
(2) * * *
(i) Qualified organizations. * * *
(A) Qualified organizations do not hold (directly or indirectly
through a partnership), in the aggregate, interests of greater than
five percent in the capital or profits of the partnership; and
* * * * *
(ii) Non-qualified organizations. Section 514(c)(9)(B)(vi) does not
apply to a partnership otherwise subject to that section if--
(A) All partners other than qualified organizations do not hold
(directly or indirectly through a partnership), in the aggregate,
interests of greater than five percent in the capital or profits of the
partnership; and
(B) Allocations have substantial economic effect without
application of the special rules in Sec. 1.704-1(b)(2)(iii)(c)
(regarding the presumption that there is a reasonable possibility that
allocations will affect substantially the dollar amounts to be received
by the partners from the partnership if there is a strong likelihood
that offsetting allocations will not be made in five years, and the
presumption that the adjusted tax basis (or book value) of partnership
property
[[Page 84526]]
is equal to the fair market value of such property).
* * * * *
(3) * * *
(ii) * * *
(B) $1,000,000.
* * * * *
(m) * * *
(2) * * *
Example 3. * * *
(ii) P2 satisfies the fractions rule with respect to the P2/P1A
chain. See Sec. 1.702-1(a)(8)(ii) (for rules regarding separately
stating partnership items). P2 does not satisfy the fractions rule
with respect to the P2/P1B chain.
(n) Effective/applicability dates. * * *
(2) * * * However, paragraphs (d)(2)(ii) and (iii), (d)(6) Example
1 (i) and (iv), (e)(1)(vi) and (vii), (e)(5) Example 5, (f)(4),
(k)(1)(ii) through (iv), (k)(2)(i)(A), (k)(2)(ii), (k)(3)(ii)(B),
(m)(1)(ii), and (m)(2) Example 3 (ii) of this section apply to taxable
years ending on or after the date these regulations are published as
final regulations in the Federal Register.
* * * * *
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-27105 Filed 11-22-16; 8:45 am]
BILLING CODE 4830-01-P