Service Attempts to Help Tenancy-in-Common Investors Exchanging Like-Kind Property Under Section 1031 in Workouts
Now we can add Program Manager’s Technical Advice or “PMTA” to the list of administrative projects on tax matters that are open to FOIA and review by the tax practitioner community. One area that needs some help are investors in tenancy-in-common programs. On May 15, 2010, the Service issue PMTA 2010-05 which provides an legal analysis from Chief Counsel’s office directed to IRS program managers in the field. In addressing a bankruptcy in which TIC investors were involved, the PMTA concluded : (i) the short-term pooling of funds by TIC owners with a payment agent does not result in a partnership even if provided in a non-pro rata format; and (ii) the appointment of a communications agent by TIC owners to facilitate communication between the TIC owners and their counsel does not result in a partnership.
The PMTA addressed a TIC offering in which A, the hypothetical TIC sponsor, or an affiliate of A, purchased rental property and then sold TIC interests in the property to TIC individual investors to complete section 1031 exchanges. The purchase price paid was (i) the amount of cash funded by a prior section 1031 exchange and (ii) the assumption of debt encumbering the property. The total number of investors (including the A affiliate) did not exceed 35 in any single property.
At the same time as the purchase of the TIC interests, the TIC owners leased the Property to a master tenant (an affiliate of A) under a master law. The TIC owners further entered into a TIC Agreement which contained the requirements for an (favorable) advance ruling under Rev. Proc. 2002-22. The Agreement required the TIC owners to share all revenues and fund all expenses related to the Property pro rata in proportion to their relative percentage TIC interests.
Under the facts, A and several of its affiliates owning the Property filed petitions for bankruptcy and as a direct result, the TIC owners undertook the following actions to protect their respective interests in the Property: (i) the TIC owners raised funds (initially on a non-pro rata basis) to pay legal fees and costs of the bankruptcy and make debt service payments on the Property; (ii) intended to file for reimbursements of such funds, costs and debt service payments in relation to their percentage TIC interests; (iii) one TIC owner was designated as a payment agent to collect funds and make required disbursements; and (iv) designated a point person for working with the various parties involved in the bankruptcy. The PMTA stated indicates that in most cases, the TIC owners equalized the non-pro-rata pooling of funds in an amount of time in a “reasonable amount of time.”
The issue was whether the temporary pooling of funds on a non-pro rata basis and the appointment of the payment agent and communications agent, caused by the bankruptcy converted the TIC owners to become partners in a de facto partnership for federal income tax purposes. The PMTA concluded that the actions taken did not cause the TIC owners to become partners for federal income tax purposes.