CHAPTER 9
Debt-Financed Income
§ 9.1 INTRODUCTION
p. 669. The last citation in footnote 3, second sentence, should read as follows:
Reg. § 1.514(c)-2.
§ 9.2 DEBT-FINANCED PROPERTY
(a) Overview
p. 671. Add the following to the end of footnote 10:
See TAM 201741019 (Oct. 13, 2017) (a tax-exempt trust's activities incurred UBIT from income generated by debt-financed property held through interests in a partnership when the property's activities were not substantially related to the trust's exempt purpose); PLR 20173005 (Jan. 20, 2017) & PLR 201702002 (Jan. 13, 2017) (a tax-exempt hospital may lease its premises to a state university as part of reorganization without incurring UBIT when the proceeds are used to expand and modernize the premises, an activity in furtherance of charitable purposes. Thus, the underlying property is not unrelated debt-financed property).
(c) Acquisition Indebtedness
pp. 676–677. Add the following to the end of footnote 29:
PLR 201418061 (Feb. 6, 2014) (borrowing of stocks by the funds—structured as partnerships, in which charity is invested—and entering into short positions held to not result in acquisition indebtedness incurred by organization, so that none of the distributive shares of funds' income or gain derived from these trading activities is treated as debt-financed property); PLR 201434024 (Aug. 22, 2014) (purchase of long positions in stocks in accounts at one or more affiliates of broker using any cash proceeds from short sales made through funds' accounts at these affiliates held to not result in acquisition indebtedness, so that none of distributive shares of funds' income or gain derived from these trading activities will be treated as debt-financed property); PLR 201434026 (Aug. 22, 2014) (use of long positions in stocks, including those purchased with short-sale proceeds, as collateral to secure performance by funds of their obligations to deliver stock to broker to cover its open short positions will not result in acquisition indebtedness).
§ 9.6 THE FINAL REGULATIONS
(c) Exceptions to the Fractions Rule for Preferred Returns and Guaranteed Payments
p. 683. Add the following after the first paragraph of this subsection:
On November 22, 2016, the IRS and Treasury Department issued proposed regulations addressing allocations of items by partnerships that have debt-financed property and one or more (but not all) qualified exempt organization partners.64.1 The proposed regulations provide further guidance in determining a partner's share of partnership income or loss.
(iv) Timing Rules.
(A) PREFERRED RETURNS
p. 686. Insert the following after the second paragraph on this page, before the Example:
The proposed regulations expand the preferred return exception to allow related allocations to be disregarded even if the accompanying distribution is not made currently. The proposed regulations require only that the partnership agreement require that the partnership make distributions first to pay any unpaid preferred return to the extent the unpaid preferred return has not been reversed by an allocation of loss before the distribution.
(d) Chargebacks and Offsets
(i) Disproportionate Allocations. p. 689. Add the following at the end of this subsection:
The proposed regulations modify the chargeback exception to disregard certain additional items in computing overall partnership income or loss for purposes of the fractions rule. Specifically, an allocation of overall partnership income that is made to reverse a special allocation of a partner-specific expenditure or a special allocation of an unlikely loss will be ignored in applying the fractions rule.
(e) Partner-Specific Items of Deductions
p. 691. Add the following at the end of the last paragraph of this subsection:
The Proposed Regulations add management and similar fees to the current list of excluded partner-specific expenditures under the existing regulations, to the extent that the fees do not, in the aggregate, exceed 2 percent of the partner's aggregate committed capital.
(f) Unlikely Losses and Deductions
p. 692. Add the following paragraph at the end of this subsection:
It should be noted that the preamble to the proposed regulations provides that the IRS and Treasury are considering changing the unlikely loss standard from “low likelihood of occurring” to “more likely than not,” or some standard in between.
(g) De Minimis Rules
(i) De Minimis Interests. p. 693. Add the following new paragraph at the end of this subsection:
The proposed regulations provide that certain partnerships in which all partners (other than qualified organizations) own 5 percent or less of the capital or profits interest in the partnership will be exempt from application of the fractions rule.
(ii) De Minimis Allocations. p. 693. Add the following at the end of footnote 119:
The Proposed Regulations increase the $50,000 amount to $1 million.
(i) Tiered Partnerships. p. 694. Add the following paragraph at the end of this subsection:
The proposed regulations amend the third example provided in the regulations that illustrates application of the tiered partnership rules to eliminate the implication that violation of the fractions rule by a lower-tier partnership can cause the upper-tier partnership to violate the fractions rule unless the upper-tier partnership allocates items from the violating lower-tier partnership separately from other items. Thus, where the allocations of an upper-tier partnership satisfy the fractions rule on a stand-alone basis, an arrangement with a lower-tier partnership should not cause a fractions rule violation with respect to the other investments of the upper-tier partnership.
NOTE
- 64.1 Proposed Amendments to Internal Revenue Code § 514(c)(9)(E), 81 Fed. Reg. 84518 (Nov. 23, 2016).