Marcum 2021 Year-End Tax Guide

The Real Estate Industry’s Pandemic Rebuild

In 2010, Rodriguez made another contribution, which was recorded as a liability allocated 100% to Rodriguez on his Schedule K-1. Income and losses were allocated pro rata among the partners. In 2011, a similar liability was recorded, and there was no income or loss. The final tax return was filed in 2012, reflecting no liabilities on any of the partners’ K-1s. To determine whether Rodriguez’s cash infusions should be classified as capital contributions or not, the Tax Court looked at the substance of the transaction. The three factors considered were:

The U.S. real estate industry was forced to slow the pace of projects and, in some cases, pause them entirely during the pandemic. Looking forward, investors who are moving ahead with previous projects and starting new ones will have much to consider from a tax perspective. Though this year may not have seen the same turbulence as last year in terms of tax policy, there were many shifts that will impact real estate businesses in 2021 and beyond. The following considerations are important to keep in mind with each deal moving forward: 1. Cash infusions to businesses and their effect on partners’ capital accounts ( Hohl v. Commissioner ) 2. Carried Interest Rules 3. State and Local Tax (“SALT”) Workarounds Below are some of the key points to be considered for tax purposes as real estate businesses seek to move forward and create efficient deals for investors. Some businesses and projects required additional capital in order to move forward during the pandemic. It is important to consider the tax impact of a cash infusion on the partners and investors in order to ensure it has the intended effect on their capital accounts. In Hohl v. Commissioner , the Tax Court ruled that cash contributed by one partner was to be treated as cancellation of debt income upon liquidation of the partnership. Michael Hohl was a partner in a partnership, Echo Marketing Solutions (“Echo”) which was formed in 2009, with three service partners each receiving a 30% ownership stake and one partner, Rodriguez, who would contribute the capital to start the business in exchange for a 10% interest. In 2009, the contribution was recorded on Echo’s tax return as an “Other Liability” and allocated pro rata as a recourse liability on the partners’ K-1s. Partners were also allocated losses pro rata. There were no beginning balances recorded on any of the partners’ capital accounts. CASH INFUSION TREATED AS COD INCOME

1. The presence of a written agreement; 2. The intent of the parties; and 3. The likelihood of obtaining similar loans from disinterested investors.

The Court mostly focused on the intent of the parties, as it was clear in the way the transaction was reported on Echo’s tax returns that the initial cash infusion was to be treated as a loan. The Court went on to analyze the contribution section of Echo’s partnership agreement, which required the partnership to notify all partners in writing and give all partners an opportunity to contribute in the event additional cash was required. No evidence was provided to show this had occurred. Based on the above facts and analysis, the Tax Court concluded that the infusions of cash made by Rodriguez were loans to the partnership and the partners were subject to cancellation of debt income upon liquidation of the partnership. This case is an important reminder that, when making or receiving cash infusions, the partnership agreement should be reviewed carefully in each scenario to ensure it reflects the parties’ intent for the transaction, in order to prevent an adverse tax impact. CARRIED INTEREST Another important development this year related to the carried interest rules originally created as part of the 2017 Tax Cuts & Jobs Act (“TCJA”). In January of 2021, Treasury released final guidance on the rules, which allows more precise decision-making and planning from a tax standpoint.

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