1 / 17

NEW DEVELOPMENTS IN PARTNERSHIP AND REAL ESTATE TAXATION The Governments Perspective

NEW DEVELOPMENTS IN PARTNERSHIP AND REAL ESTATE TAXATION The Governments Perspective. Curtis G. Wilson, Esq. Associate Chief Counsel, Internal Revenue Service Cameron L. Hess, Esq. Wagner Kirkman Blaine Klomparens & Youmans LLP. FINAL REGS AND REV PROCs.

jane
Download Presentation

NEW DEVELOPMENTS IN PARTNERSHIP AND REAL ESTATE TAXATION The Governments Perspective

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. NEW DEVELOPMENTS IN PARTNERSHIP AND REAL ESTATE TAXATIONThe Governments Perspective Curtis G. Wilson, Esq. Associate Chief Counsel, Internal Revenue Service Cameron L. Hess, Esq. Wagner Kirkman Blaine Klomparens & Youmans LLP

  2. FINAL REGS AND REV PROCs • Deduction for Start-up/Organizational Expenses • Final Regulations TD 9542 (August 23, 2011) • 1.195-1, 1.248-1, 1.709-1 • Formal separate election not required. • Consistency in characterizing “what” is a start-up expense. • Employee labor vs. independent advisor/broker/atty costs. • (Outline, page 2) • Extension of Due Date for Partnership Returns • Final Regulations TD 9531 (June 24, 2011) • 1.6081-2 - Automatic 5 Month Extension for Partnerships • Preamble summarizes taxpayer comments/concerns.

  3. REV PROC 2012-17 • Electronic K-1s to Partners • Rev. Proc. 2012-17 (February 13, 2012) • 6031(b); 1.6031(b)-1T(a)(3) Duty to furnish K-1 • Electronic K-1 (secure web site or delivery) okay if • Partner consents (e-consent is okay) • Partner access of K-1 on website after notice = consent • Partner may withdraw consent • 708 Termination – terminates all consents

  4. LENDER EXCHANGES OF DEBT FOR A PARTNERSHIP INTEREST • Lender Exchange of Debt for Partnership Interest (outline page 16) • Final Regulations TD 9557 (November 17, 2011) • Treas. Reg. 1.108-8 added (effective prospectively) • New (d) to Treas. Reg. 1.721-1 • If P-ship transfers capital or profit interest to settle debt, then P-ship is deemed to satisfy debt for money equal to FMV of the P-ship interest (FMV). • Safe Harbor: FMV = liquidation value of debt-for-equity interest if (b)(2)(A) through (b)(2)(D) met

  5. LENDER EXCHANGES OF DEBT FOR A PARTNERSHIP INTEREST • Safe Harbor: FMV = liquidation value of debt-for-equity interest • Liquidation Value = Net proceeds a partner would receive if P-ship sold all assets (including goodwill). • Conditions • P-ship, partners & lender consistently use liquidation value • If 2 or more creditors, both creditors participate • The terms are comparable to unrelated party deals • No later redemption or purchase by a 267(b) or 707(b) partner of exchanged interest with a principal purpose to avoid CODI.

  6. LENDER EXCHANGES OF DEBT FOR A PARTNERSHIP INTEREST • Safe Harbor: FMV = liquidation value of debt-for-equity interest • Liquidation Value = Net proceeds a partner would receive if P-ship sold all assets (including goodwill). • Conditions • P-ship, partners & lender consistently use liquidation value • If 2 or more creditors, both creditors participate • The terms are comparable to unrelated party deals • No later redemption or purchase by a 267(b) or 707(b) partner of exchanged interest with a principal purpose to avoid CODI.

  7. LENDER EXCHANGES OF DEBT FOR A PARTNERSHIP INTEREST • Lender Exchange of Debt for Partnership Interest • Treas. Reg. 1.721-1(d) added: • Section 721 – Non-recognition. Lender’s receipt of P-ship interest for debt = a non-taxable P-ship contribution. (Lender’s basis = FMV) • But, if interest exchanged for unpaid (i) rent, (ii) royalties, or (iii) interest (including accrued OID) • Section 721 is N/A, but it won’t be a gain/loss on transfer • It will be income to creditor, an expense to P-ship.

  8. LENDER EXCHANGES OF DEBT FOR A PARTNERSHIP INTEREST • Lender Exchange of Debt for Partnership Interest • Open Question: • Does Treas. Reg. 1.721-1(d) create sufficient certainty regarding Section 721 non-recognition , that private letter rulings on Section 707 are no longer needed? • PLR 20110318 (January 23, 2010). Drop-down into new LLC with creditor as owner. (page 12)

  9. PROPOSED REGs – 1.704-1 • Eliminate the De Minimis Partner Rule. • Current Law: Treas. Reg. 1.704-1(b)(2)(iii)(E). For substantial economic effect test, P-ship can disregard a < 10% capital/profit partner(s) (2008 Final Regulations) • Prop. Treas. Reg. 1.704-1(b)(2)(iii)(E) – Proposes this rule be eliminated (all interests will be reviewed) • Reasons – potential for abuse • Concerns – how simplify administrative consequences? • Proposals – Safe Harbors, Treating common class of partners as one partner for testing, other?

  10. PROPOSED REGs – 1.469-5(e) • Passive Activity Loss Rules • Creation of definition for Limited Partner • Prop. Treas. Reg. 1.469-5(e) (November 25, 2011) • Current Law • IRC Section 469(h)(2). Except as provided in regulations, no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates. • Regulations: A person holding an interest as a limited partner establishes material participation only 3 ways: • Participation for 500 hours or more. • Material participation for five of the preceding 10 tax years. • Material participation in a personal service activity for any three prior tax years • Regulations: do not “define” a limited partner.

  11. Define Limited Partner for Purposes of Passive Loss Rules. (469(h)(2)) • In 1986: Everyone knew what a limited partnership was. ULPA • Since then: LLCs, LLPs, LLLPs, Re-ULPA, Kitner regs replaced with check-the-box. • Court Decisions: • Service: LP interest = a partner with limited liability. • Courts: A limited liability company is not a “limited partner” for purposes of section 469 even though the member has limited liability. See e.g. Gregg v. U.S., 186 F.Supp.2d 1123 (D. Or. 2000), Garnett v. Commissioner, 132 T.C. 368 (2009), and Thompson v. U.S., 87 Fed. Cl. 728 (2009), acq’d result only AOD 2010-02, 2010-14 I.R.B. 515. • Cases involved managing members.

  12. Define Limited Partner for Purposes of Passive Loss Rules. (469(h)(2)) • Prop. Treas. Reg. 1.469-5(e) (November 25, 2011) • Define “limited partner” – 2 elements • Entity = Partnership for tax purposes • “Holder of such interest does not have rights to manage the entity”

  13. PROJECTS PENDING • Medicare 3.8% Tax • Review of Look-Through Rule where active partner sells interest in partnership holding both business and investment assets. • Noncompensatory Partnership Options. • Re-propose 2003 regulations for non-recognition on exercise of option. • Disguised Sale of Property • Further clarify section 707. Canal. Leveraged partnership distribution as a disguised sale • “Hot Assets” Notice 2006-14 • Section 751 involves a sale of a partner interest where there are hot assets or a liquidation where there is a disproportional distribution of hot and cold assets. (Example , a partial liquidating distribution of a partner’s interest for cash.) • Notice 2006-14 raises the discussion as to the application of Section 751(a) where 704(c) does not come into play. • Notice 2006-14 proposes the use of the use of the hypothetical sale approach. • Under the hypothetical sale approach, on a triggering event, a snap shot is taken of all assets, wherein built-in income/gain/loss for each asset is determined as if all assets were sold Distributions of Unrealized Receivables and Substantially Appreciated Property .

  14. PROJECTS PENDING • Rev. Rul. 92-53 Non-recourse Debt • Application within P-ship Context. • Finalize Prop Treas. Reg. 1.706-4 • Ref: IRB 2009-18 (May 4, 2009) • Allocation of profit/loss where P’s interest in P-ship changes during the year • Adopt accrual treatment on cash basis items • Propose Regs for 704(c)(1)(C). • adjustment P-ship basis for built-in loss upon transfer of partnership interest or distribution as if Section 754 election made. (2004 JOBS Act)

  15. Other Developments • General • Deprecation (179, bonus deprecation) • 263A Capitalization (Dominion – temp removal) • 263A Real estate development - production • Repair v. Capitalization (Temp Regs 12/23/2011) • Real Estate • Passive Activity Loss • Late Aggregation (Rev. Proc. 2011-34) • Real Estate Professional (Miller v. Com’r) • Proof of Time (Vandegrift v. Com’r) • S Corp Rental Real Estate (PLR 201118011)

  16. Other Developments • Partnerships • Formation (page 10 & 11) • Robucci v. Com’r. (Corp members disregarded) • Rigas v. US. Payment of 20% profits as performance fee not a sale of an interest. • Allocations (page 11 & 14) • Reckenmeyer v. Com’r (Law firm allocations not proven) • Historic Boardwalk v Com’r (TC 2011) (Sec 47 allocations) • New LLC interest in exchange for debt (page 12) • PLR 201103018 (2011)Unreimbursed Expenses

  17. SACRAMENTO OFFICE 10640 Mather Blvd., Suite 200 Mather, CA 95655 T: (916) 920-5286 F: (916) 920-8608 WALNUT CREEK OFFICE 1350 Treat Blvd., Suite 400 Walnut Creek, CA 94597 T: (925) 478-7308 F: (925) 202-2868 To find out how we can help you through the complexities of today’s legal issues, give us a call or email us at reachus@wkblaw.com Choose A Legal Partner That’s Committed To Your Success

More Related