Historic Preservation Can Be Exempt Function; However…

• DOI: http://doi.org/10.1002/npc.30288
• Published date: 01 February 2017
• Date: 01 February 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

February 20174THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

gain multiplied by the sum of the highest federal, state,

and local tax rates applicable to that partner.

Partner-Specific Expenditures and Man-

agement Fees

Existing regulations provide a list of certain partner-spe-

cific expenditures that are disregarded in computing overall

partnership income or loss for purposes of the fractions

rule (Reg. § 1.514(c)-2(f)). These expenditures include those

attributable to a partner for additional recordkeeping and

accounting costs including, in connection with transfer of

a partnership interest, additional administrative costs from

having a foreign partner, and state and local taxes.

The Treasury Department and the IRS determined

that real estate partnerships with qualified organizations

partners should be permitted to allocate management

and similar fees among partners to reflect the manner in

which the partners agreed to bear the expense without

causing a fractions rule violation. Accordingly, the proposed

regulations would add management and similar fees to the

current list of excluded partner-specific expenditures to the

extent these fees do not, in the aggregate, exceed 2 per-

cent of the partner’s aggregate committed capital.

Unlikely Losses

The existing regulations generally disregard specially

allocated unlikely losses or deductions (other than

items of nonrecourse deductions) in computing overall

partnership income or loss for purposes of the fractions

rule (Reg. § 1.514(c)-2(g)). To be disregarded, a loss or

deduction must have a low likelihood of occurring, tak-

ing into account all relevant facts, circumstances, and

information available to the partners, including bona

fide financial projections. The regulations describe types

of events that give rise to unlikely losses or deductions.

The Treasury Department and the IRS are considering

changing the standard in this context and have requested

comments as to why “more likely than not” is a more

appropriate standard or whether another standard turn-

ing on a level of risk that is between more likely than not

and low likelihood of occurring might be more appropri-

ate and what that intermediate standard could be.

Chargebacks as to the Foregoing

Present regulations generally disregard certain alloca-

tions of income or loss made to charge back previous allo-

cations of income or loss in computing overall partnership

income or loss for purposes of the fractions rule (Reg. §

1.514(c)-2(e)(1)). The proposed regulations would modify

the chargeback exception to disregard, in computing over-

all partnership income or loss for these purposes, an allo-

cation of what would otherwise have been an allocation

of overall partnership income to chargeback (i.e., reverse)

a special allocation of a partner-specific expenditure or a

special allocation of an unlikely loss. Comments have been

requested as to the interaction of disregarded partner-

specific expenditures and unlikely losses with chargebacks

of these items with overall partnership income. [24.9(c)] ◆

HISTORIC PRESERVATION

CAN BE EXEMPT FUNCTION;

HOWEVER…

A property, a building and surrounding land, has been

designated by a county as an historic landmark. An indi-

vidual, F, resides in the building. Prior to the formation of

the nonprofit organization that is the subject of this case,

F used personal funds as part of an effort to restore the

property.

F is the founder of this organization, which was estab-

lished to educate the public as to the significance of the

past through preservation of this historic structure. This

entity was formed to obtain contributions and grants to

continue to pay for the extensive restoration and mainte-

nance of the property.

F, who is one of three directors of the organization,

will select the workers who will provide the restorative

services and supervise the work. F’s permission is needed

to view the property. The organization advised the IRS

that it is interested in inviting school groups for educa-

tional field trips; it plans to eventually provide an educa-

tional program on site.

The IRS ruled that this organization is not eligible for

recognition of tax exemption because it is violating the

private inurement doctrine (Priv. Ltr. Rul. 201648020).

The primary purpose of this entity is, the IRS held, to

restore the property owned by its founder and director,

and used as her private residence. Any public benefit from

its operations was deemed “secondary and incidental.”

[20.5(d), (i)]

Commentary: Presumably unrepresented, F stumbled

into a private inurement morass. There is a way to gain

exemption in this context, but it is not easy. F has created

the potential for an educational organization. The ruling is

silent on the point, but let’s give F the benefit of the doubt

and assume she has the expertise to properly oversee

the restoration and the maintenance. Let’s also assume

the property needs ongoing protection from a security

standpoint. So, F should carve out a small apartment in

the building or build a small dwelling on the land for her

living quarters; she would provide security for the facility.

She would implement some educational programs on the

premises and open the property to the public. Tax exemp-

tion may be available under these circumstances. But not

if F regards the entirety of the property as her private

residence. (The report of the Senate Finance Committee

on small museums, summarized in the August 2016 issue,

is relevant here.) The IRS wrote that the facts in this case

indicate that private interests are being served because F

controls all aspects of the restoration. But there is nothing