LSI 2010 Real Estate Joint Ventures conference materials.pdf

Brian Todd of Davis Wright Tremaine LLP
Andrew H. Zuccotti of K&L Gates LLP
• The partnership agreement or LLC operating agreement complies with the
“substantial economic effect” safe-harbor under the Treasury Regulations
and also satisfies the so-called “fractions rule.” I.R.C. § 514(c)(9)(E).
The fractions rule requires that the allocation of items to a partner or
member that is a qualified organization cannot result in the partner or
member having a percentage share of overall partnership or LLC income
for any taxable year that is greater than the partner’s or member’s
“fraction rule percentage,” which is the partner’s or member’s percentage
of overall partnership or LLC loss for the taxable year for which the
partner’s or member’s percentage share of overall partnership or LLC loss
will be the smallest. Overall partnership or LLC income and loss are the
respective amounts by which the aggregate items of partnership or LLC
income and gain for a taxable year exceed, or are less than, (as the case
may be) the aggregate items of partnership or LLC loss and deduction for
the year. For purposes of applying the fractions rule, a reasonable
preferred return or guaranteed payment for capital may be disregarded.
Additionally, allocations that reverse prior disproportionate allocations
that were made because proportionate allocations would have caused one
or more non-qualifying organization members to have a deficit capital
account are disregarded for purposes of the fractions rule.
Speaker 11: 23
Speaker 12: 23
disregarded for purposes of the fractions rule (discussed in the following paragraph), a solid argument can
be made by analogy that such allocations should not be treated as other than qualified allocations.
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Law Seminars International | Real Estate Joint Ventures and Funds | 02/08/10 in Seattle, WA