The "Fractions Rule" in Partnership Agreements: Drafting Section 514(c)(9)(E) Compliant Allocations

Avoiding UBTI Triggers Through Savings Clauses and Other Structuring Tools

Recording of a 90-minute premium CLE/CPE webinar with Q&A

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Conducted on Tuesday, November 28, 2017

Recorded event now available

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Course Materials

This CLE/CPE course will provide tax counsel and partnership advisers with a practical, comprehensive guide to the “fractions rule,” governing allocations between tax-exempt partners and taxable partners. The panel will define the specific issues and challenges that the fractions rule presents in structuring operating agreements for partnerships with exempt partners. The panel will also offer guidance to avoid the tax risk of having allocations disallowed because of rule violations.


The partnership “fractions rule” of Section 514(c)(9)(E) has a well deserved reputation among tax advisers and counsel as an intimidating tax trap. The fractions rule, which affects partnerships that have tax-exempt organizations as partners, is the intersection of UBTI and partnership allocations and a significant challenge for partnerships in targeting allocations.

The rule seems straightforward enough: Partnerships with “qualified organizations” may not allocate a percentage share of partnership income greater than the partner’s share of overall partnership loss in a tax year. All partnership allocations other than those made under Section 704(c) must have “substantial economic effect” within the meaning of Section 704(b)(2). However, multiple exceptions in the Section 514 UBTI rules complicate applying the rules.

Tax counsel and advisers must make several critical analyses: Determining whether the exempt partner is a “qualified organization,” verifying that the planned allocations comply with the substantial economic effect rules, and structuring the allocation provisions to ensure fractions rule compliance. Noncompliance can result in costly tax consequences for the exempt partner.

Listen as our experienced panel of tax attorneys provides a thorough and practical guide to navigating the complexities of the fractions rule in partnership allocations.



  1. UBTI rules of Section 512 in partnership context
  2. Section 514(c)(9)(E) fractions rule defined
    1. Substantial economic effect analysis
    2. Section 704(c) exception
    3. Allocation provisions of fractions rule
  3. Analysis and tests to determine if the fractions rule applies
  4. Drafting issues and practices in fractions rule-compliant partnership agreements
    1. Targeted allocations
    2. Curative allocations
    3. Savings clauses


The panel will review these and other key issues:

  • Organizations and transactions that give rise to the “fractions rule”
  • Specific determinations that tax counsel and advisers must make in structuring partnership allocations involving exempt org partners
  • Curative allocations in a fractions-rule compliant partnership agreement—and when to use them
  • Using “savings clauses” in partnership agreements to meet fractions rule requirements


Butler, Stephen
Stephen Butler

Kirkland & Ellis

Mr. Butler's practice focuses on the tax aspects of complex business transactions and reorganizations, with a...  |  Read More

O'Leary, Jennifer A.
Jennifer A. O'Leary

Pepper Hamilton

Ms. O'Leary is a partner in her firm's Tax Practice Group. She focuses her practice on the federal income...  |  Read More

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Strafford will process CLE credit for one person on each recording. CPE credit is not available on recordings. All formats include course handouts.

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