The "Fractions Rule" in Partnership Agreements: Drafting Section 514(c)(9)(E) Compliant Allocations

The partnership “fractions rule” of Section 514(c)(9)(E) has a well deserved reputation among tax advisers and counsel as an intimidating tax trap. The fractions rule, which affects partnerships that have tax-exempt organizations as partners, is the intersection of UBTI and partnership allocations and a significant challenge for partnerships in targeting allocations.

The rule seems straightforward enough: Partnerships with “qualified organizations” may not allocate a percentage share of partnership income greater than the partner’s share of overall partnership loss in a tax year. All partnership allocations other than those made under Section 704(c) must have “substantial economic effect” within the meaning of Section 704(b)(2). However, multiple exceptions in the Section 514 UBTI rules complicate applying the rules.

Tax counsel and advisers must make several critical analyses: Determining whether the exempt partner is a “qualified organization,” verifying that the planned allocations comply with the substantial economic effect rules, and structuring the allocation provisions to ensure fractions rule compliance. Noncompliance can result in costly tax consequences for the exempt partner.

Listen as our experienced panel of tax attorneys provides a thorough and practical guide to navigating the complexities of the fractions rule in partnership allocations.

1. UBTI rules of Section 512 in partnership context
2. Section 514(c)(9)(E) fractions rule defined
   1. Substantial economic effect analysis
   2. Section 704(c) exception
   3. Allocation provisions of fractions rule
3. Analysis and tests to determine if the fractions rule applies
4. Drafting issues and practices in fractions rule-compliant partnership agreements
   1. Targeted allocations
   2. Curative allocations
   3. Savings clauses

The panel will review these and other key issues:

• Organizations and transactions that give rise to the “fractions rule”
• Specific determinations that tax counsel and advisers must make in structuring partnership allocations involving exempt org partners
• Curative allocations in a fractions-rule compliant partnership agreement—and when to use them
• Using “savings clauses” in partnership agreements to meet fractions rule requirements

Learning Objectives

After completing this course, you will be able to:

• Identify partnership scenarios in which the fractions rule applies in making allocations to exempt org partners
• Recognize the tax consequences of partnership allocations that violate the fractions rule
• Discern the impact of curative allocations clauses on fractions rule compliance
• Decide when to include “savings clauses” in partnership agreements as a means of complying with the fractions rule

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, drafting complex partnership operating agreements and supervising other attorneys.Specific knowledge and understanding of partnership structure, operating agreements and liquidation, including partner capital accounts, allocation and distributions; familiarity with the unrelated business taxable income regulations of IRC section 512.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).