The American Jobs Creation Act of 2004 created Internal Revenue Code Sec. 470 to deal with perceived abuses from Sales-in Leased-out, or SILO, transactions. These transactions were created to shift tax benefits to taxable entities and shift reportable income to tax-exempt entities.
The law was to take effect for all years beginning in 2004.
When the act was signed and I first looked into this new section, I found it confusing and thought it had little relevance to my clients. After all, I don't assist clients with creating tax shelters, and I don't deal with tax-exempt entities.
Soon after the law was enacted, the provisions of IRC Sec. 470 were postponed for a year and I, again, put off study. I had a reprieve for 2005 as the law was again postponed.
But the section was not repealed or postponed this year, and as of this writing, IRC Sec. 470 is the law and in effect for calendar year 2006.
Take Note of Sec. 470's Broad Applicability
This law may surprise many practitioners in its broad applicability as it affects legitimate, common transactions in some very powerful ways.
Any time a pass-through entity has a tax-exempt partner--which includes IRAs, Roth IRAs, pension plans, foundations or charities (entities that file Form 990)--the deductibility of losses by the non tax-exempt entities will likely be reduced with rules similar to the passive loss limitations. This also can be true if a lessee (tenant in a building) is a not-for-profit entity.
Another challenge for practitioners navigating the new law is that Secs. 1031 and 1033 are not available for common transactions that fall under Sec. 470. So, commercial real estate with a not-for-profit tenant may not be able to be exchanged or an exchange may be blown if a not-for-profit tenant is in the acquired property.
Now that I have your attention, there are safe harbors in the law that can be used to weave your way through this mine field.
However, a potential difficulty facing practitioners is that these safe harbors don't address common entity structures and common lease transactions that many of our clients routinely hold.
Where it once was rare to have partnerships and LLCs with IRA partners, it is now common, at least in the partnerships and LLCs I prepare.
In short, if a partnership is a partner in another partnership, you have to look through to determine if there is a problem throughout the entire chain of entities.
Sec. 470 Cross References to...