Insights & News

Tax Insights, November 30, 2016
Tracking Tax News You Need to Know

November 30, 2016
Publications
IRS Issues Proposed Regulations Liberalizing Fractions Rule
The IRS has issued proposed regulations (REG-136978-12) that would liberalize and simplify the “fractions rule,” a rule which provides an exception to the rule that a portion of gross income derived from debt-financed real property is unrelated business taxable income, and which applies where that income is earned by certain partnerships in which a tax-exempt organization is a partner.

An exemption from unrelated business taxable income (UBTI) exists for 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 known as the “partnership limitation”) unless the partnership satisfies one of the following: (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.” (Section references are to the Internal Revenue Code of 1986, as amended.)

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 arrangements involving: (1) preferred returns; (2) partner-specific expenditures; (3) chargebacks of partner-specific expenditures and unlikely losses; (4) acquisition of partnership interests after initial formation; (5) capital commitment defaults or reductions; and (6) tiered partnerships.

IRS Creates New Fast Track Mediation–Collection Program
In Revenue Procedure 2016-57, 2016-49 IRB, the IRS announced that it has replaced the Small Business/Self-Employed (SB/SE) Division’s Appeals Fast Track Mediation Procedure with a new fast track mediation program, SB/SE Fast Track Mediation–Collection (FTMC), that is specifically directed at resolving certain collection cases and issues. FTMC allows taxpayers an opportunity to resolve certain offer-in-compromise and trust fund recovery penalty disputes on an expedited basis with an Office of Appeals mediator serving as a neutral party.

IRS Issues REIT Ruling on Qualified Health Care Properties
The IRS found, in Private Letter Ruling 201647005, that “age in place” senior living communities are health care facilities under Section 856(e)(6)(D)(ii) and constitute qualified health care properties under Section 856(e)(6)(D); therefore, amounts paid to taxpayer by its taxable REIT subsidiary will not be excluded from the definition of rents from real property by reason of Section 856(d)(2)(B), provided properties are operated and managed by an eligible independent contractor.

Pennsylvania/New Jersey Reciprocity Agreement Reinstated
New Jersey Gov. Chris Christie has announced that he will be keeping the income tax reciprocity agreement between New Jersey and Pennsylvania. The Governor previously issued an executive order that would have ended the agreement effective Dec. 31. The reciprocity agreement allows commuters to pay state income tax in the state where they live, rather than the state where they work.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2016 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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