Innovative Strategies For Winning Tax Controversies, Business Structuring And Estate Planning

Cong/ Levin Proposes to Increase Tax on Real Estate Investments!

by | Jun 25, 2007 | Uncategorized

Cong. Levin Bill (HR 2834) Proposing New §710, Treating Partnership Allocations To Investment Management Services As Ordinary Income.

This bill is designed to attack REITs and large public partnerships which have some tax advantages. HR 2834 is that it would tax as ordinary income the income interests of “sweat equity” partners for a much broader class of partnerships than simply hedge funds and private equity. Examples are:
A real estate property management company – not a REIT, just a parents and children apartment management company — structured to give working kids a bigger percentage of the income than they’d earn on their capital contributions alone.

A private holding company that owned operating companies as subsidiaries — as the holding company owns those as “securities.” The bill would convert income interests at the holding company level into ordinary income, while allowing income interests in each operating subsidiary (that’s not based on real estate, securities, commodities, or derivatives thereof) to retain current tax treatment.

A securities family limited partnership structured with 2701-compliant preferred interests held by the older generation and common interests held by the younger generation, as the latter are receiving distributions out of proportion to their capital. If the older generation held at least some of the common interest, so that distributions with respect to the common interest were always in proportion to the capital contributed. Note also the new rule for deemed disposition of appreciated assets distributed in-kind with respect to a partnership interest subject to the new rules. This would diminish a secondary advantage of the current rules that allow in-kind distributions of appreciated securities, which the distributee could use for tax-driven planning, such as contributions to charities while avoiding gain recognition or contributions to CRTs while deferring gain recognition.

Once again, Congress does its best to confuse the tax law and public.