Proposed Fractions Rule Regulations Issued

• Date: 01 February 2017
• DOI: http://doi.org/10.1002/npc.30287
• Published date: 01 February 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

February 20172THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

The court also concluded that the plaintiff proved its

Schedule B disclosure would create a burden on its First

Amendment rights. Earlier, the US Court of Appeals for the

Ninth Circuit foreclosed a facial challenge to the Schedule

B disclosure requirement (opinion summarized in the July

2015 issue); it left open the possibility of an as-applied

challenge. The organization produced, at trial, evidence of

threats to and harassment of the organization and some

of its donors. The court found the plaintiff “has shown

harm sufficient to outweigh the Attorney General’s inter-

est in protecting the public from illegal charitable organi-

zations and her overly burdensome means of achieving

that interest.” Further, the court noted the “proven and

substantial history of inadvertent disclosures” by the state’s

registry and the “inability to assure confidentiality” of the

schedule’s information, which increased the “reasonable

possibility” that compelled disclosure of Schedule B would

chill the charity’s free speech rights. [28.3(i)]. ◆

PROPOSED FRACTIONS RULE

REGULATIONS ISSUED

Regulations were proposed on November 22, by the

Treasury Department and the IRS, with respect to alloca-

tions of items by partnerships that have debt-financed

property and have one or more (but not all) qualified

tax-exempt organization partners (REG-136978-12).

This proposal would amend existing regulations to facili-

tate compliance, regarding certain allocations resulting

from specified common business practices, with the

statutory law.

Background

Tax-exempt organizations are generally taxable on

their unrelated business taxable income (IRC § 511).

This taxable income generally includes a percentage

of income derived from debt-financed property (IRC

§ 514). An exception is available, however, for debt-

financed real property acquired or improved by a

qualified organization (IRC § 514(c)(9)(A)). A qualified

organization includes a tax-exempt educational institu-

tion (IRC § 170(b)(1)(A)(ii)) and any affiliated supporting

organization (IRC § 509(a)(3)), and a multiparent exempt

title-holding company (IRC § 501(c)(25)).

There is, however, an exception to this exception, in

the form of a rule concerning certain situations where a

qualified organization owns an interest in a partnership

that holds debt-financed real property (IRC § 514(c)(9)

(B)(vi)). This exception to the exception does not apply if

all of the partners of the partnership are qualified orga-

nizations, each allocation to a qualified organization is a

qualified allocation (IRC § 168(h)(6)), or each partnership

allocation has substantial economic effect (IRC § 704(b)

(2)) and satisfied the fractions rule (IRC § 514(c)(9)(E)(i)(I)).

Fractions Rule

A partnership allocation satisfies the fractions rule

if the allocation of items to any partner that is a quali-

fied organization does not result in that partner having

a share of overall partnership income for a tax year

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