LSI 2010 Real Estate Joint Ventures conference materials.pdf

Brian Todd of Davis Wright Tremaine LLP
Andrew H. Zuccotti of K&L Gates LLP
event the Company is liquidated within the meaning of Regulation Section 1.704-
1(b)(2)(ii)(g), liquidating distributions shall be made by the end of the taxable year in
which the Company liquidates or, if later, within 90 days of the date of such liquidation.
V. Allocations in LLCs and Partnerships with Exempt Entity Partners or Members.
A. Unrelated Business Taxable Income – General Rule. Under Code Section
511, a retirement plan or other entity otherwise exempt from federal income tax
nonetheless will be subject to tax on its “unrelated business taxable income” (“UBTI”)
which, generally speaking is the net income the tax-exempt entity derives from the
conduct of any trade or business not substantially related to its exempt function. Included
in the computation of UBTI is the tax-exempt entity’s allocable share of net income of a
partnership (or limited liability company treated as a partnership for federal tax purposes)
in which the entity is a partner or member (as the case may be), except to the extent the
income is derived from activities of the partnership that are substantially related to the
exempt function of the tax-exempt entity. This latter rule applies regardless of whether
the income is distributed and regardless of whether the entity holds the interest as a
general partner, a limited partner or a member in an LLC. Rev. Rul. 79-222, 1979-2 C.B.
236; Service Bolt & Nut Co. Profit Sharing Trust v. Comm'r, 78 T.C. 812 (1982).
B. General Exclusions from UBTI. Subject to limitations, UBTI does not
include certain enumerated types of investment income – such as dividends, interest,
rents and royalties – or gain from the sale of property other than inventory and property
held for sale to customers in the ordinary course of business. I.R.C. § 512(b)(1), (2), (3)
and (5).
C. Debt Financed Property. In addition to income derived from activities not
substantially related to a tax-exempt entity’s exempt purpose, UBTI includes “unrelated
debt financed income,” which is a portion of the income (including gain from a sale or
exchange) derived from property held to produce income with respect to which there is
“acquisition indebtedness.” I.R.C. §§ 512(b)(4); 514. The percentage of the income
generated by an item of property that is unrelated debt financed income depends upon the
extent to which the cost of acquisition or improvement of the property was financed
through borrowing. I.R.C. § 514(a).
“Acquisition indebtedness” is indebtedness incurred directly or indirectly in
connection with the acquisition or improvement of property. Acquisition indebtedness
does not, however, include indebtedness incurred by certain defined categories of taxexempt
entities (“qualified organizations”), or by a partnership or LLC in which such an
entity is a partner or member, to acquire or improve real property if certain conditions are
satisfied. I.R.C. § 514(c)(9). These conditions are:
• The price for the acquisition or improvement must be a fixed amount,
determined as of the date of the acquisition or completion of the
improvement;
Speaker 11: 21
Speaker 12: 21
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Law Seminars International | Real Estate Joint Ventures and Funds | 02/08/10 in Seattle, WA