The BNA Tax and Accounting Center is the only planning resource to offer expert analysis and practice tools from the world's leading tax and accounting authorities along with the rest of the tax...
By David I. Kempler, Esq. and Elizabeth Carrott Minnigh, Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
Generally, the co-ownership of property will not result in the creation of a partnership for federal income tax purposes. However, where the co-owners enter into extensive agreements regarding the management of the property and the alienability of interest therein, the co-ownership arrangement will constitute a partnership for federal tax purposes.1 In Rev. Proc. 2002-22,2 the IRS listed the conditions under which it will consider a request for a ruling that an undivided fractional interest (i.e., a tenancy-in-common interest) in rental real property (other than a mineral property as defined in §614 is not an interest in a corporation or partnership for federal tax purposes. For purposes of §1031, it is important that co-owners of real property not be treated as partners in a partnership since a partnership interest is excluded property for §1031 purposes. In a program manager technical advice memorandum,3 the IRS Office of Chief Counsel stated that the temporary pooling of funds on a non-pro rata basis and the appointment of a payment and/or communications agent because of the bankruptcy of the master tenant did not cause the tenants-in-common to become partners in a partnership for federal income tax purposes where the tenant-in-common arrangements were not partnerships for federal income tax purposes prior to the temporary pooling of funds.
X, a company sponsoring the syndication of undivided tenant-in-common interests in rental real property, organized the sale of properties to a significant number of investors, generally individuals. In a tenancy-in-common, two or more parties hold an individual, undivided ownership interest in a parcel of property, which means that each party has the right to transfer the ownership of that party's ownership interest. The tenants-in-common may hold unequal interests in the property. In a typical transaction, X, or one of its affiliates, purchased real property for rental and then sold those interests to investors seeking to complete like-kind exchanges under §1031. Contemporaneously with purchasing the interest, the tenant-in-common owners leased the property to a master tenant, an affiliate of X, and entered a tenants-in-common agreement that, pursuant to Rev. Proc. 2002-22,4 required all owners share revenues and fund expenses related to the rental property pro rata in proportion to their relative percentage interests in the property.
Thereafter, X and several of its affiliates filed petitions for bankruptcy. The tenant-in-common owners undertook the certain actions to protect their interests, including (i) pooling funds to pay legal fees in connection with the bankruptcy and to make debt service payments, (ii) designating a payment agent to collect funds and remit to legal counsel for disbursement and (iii) designating a communications agent to act as liaison between the owners and various third parties involved in the bankruptcy proceedings.
The tenant-in-common owners initially pooled funds on a non-pro rata basis, to expeditiously pay legal fees and costs related to the bankruptcy, and to make debt service payments. The non-pro rata payments made by certain tenant-in-common owners could not be equalized within the 31 days prescribed by §6.08 of Rev. Proc. 2002-22 due to the urgency of the bankruptcy and difficulties in obtaining the information regarding the other tenant-in-common owners. The tenant-in-common owners who contributed the funds would undertake actions to enforce the equalization of payments. Accordingly, the IRS Office of Chief Counsel concluded that the tenant-in-common owners had not become partners in a partnership for federal income tax purposes even though one or more tenant-in-common owners had not made the equalization payments.
Moreover, the IRS Office of Chief Counsel concluded that, given the circumstances resulting from the bankruptcy, the appointment of a payment agent and a communications agent was not sufficiently extensive to cause the tenancy-in-common to be treated as a partnership for federal income tax purposes.5
This PMTA is of value to practitioners especially during these tough economic times when transactions may not meet the exact guidelines previously announced by the IRS.
For more information, in the BNA Tax Management Portfolios, see Levine, 567 T.M., Taxfree Exchanges Under Section 1031, and in Tax Practice Series, see ¶4020, Classification as a Partnership.
4 Rev. Proc. 2002-22 lists the condition under which the IRS will consider a request for a private letter ruling that an undivided fractional interest (i.e., tenancy in common interest) in rental real property will not be reclassified as a partnership interest. If reclassification occurred, §1031 would not be available.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)