EXHIBIT 8.1
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November 27, 2002
ABIC Realty Corporation
General Partner
ABIC Realty Fund I, L.P.
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Dear Ladies and Gentlemen:
You have requested my opinion regarding the treatment of various
federal income tax issues arising from the offering and sale of Units of limited
partnership interest of ABIC Realty Fund I, L.P., a Texas limited partnership
(the "Partnership"). The General Partner, ABIC Realty Corporation (the "General
Partner") and the Partnership are described in the Registration Statement on
Form S-11 filed with the Securities and Exchange Commission on --------- , as
amended (the "Registration Statement") and the Prospectus, as amended, included
therein (the "Prospectus"). Terms capitalized herein shall have the same
definition as set forth in the Prospectus or in the Amended and Restated
Agreement of Limited Partnership of the Partnership included as Exhibit "A" to
the Prospectus.
In rendering my opinion, I have reviewed and relied upon (a) a copy of
the executed Certificate of Limited Partnership of the Partnership filed with
the Secretary of State of the State of Texas on May 17, 2002; (b) the limited
partnership agreement of the Partnership (the "Partnership Agreement"); (c) the
Prospectus; and (d) representations of the General Partner set forth herein and
in the Prospectus. Such representations include that the statements and
information set forth in the Prospectus are accurate and complete and that the
Partnership will be operated and managed and will invest in the manner set forth
in the Prospectus and the Partnership Agreement.
In rendering my opinion, I have assumed that all statements and
representations in the Prospectus are accurate and that there are no omissions
of material facts. No independent verification has been made of any such
statements or representations; nor have any independent efforts been made to
determine if there are any omissions of material facts. I have assumed that the
Partnership Agreement will be executed in the form included as Exhibit "A" to
the Prospectus and that the Partnership will be operated and managed and will
invest in accordance with the Partnership Agreement and the Prospectus. Because
the Partnership has not yet acquired any properties or entered into contracts to
acquire any properties, it is impossible to render an opinion based upon
specific facts.
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506 OAKLAND STREET E-MAIL ▇▇▇▇▇▇▇▇▇@▇▇▇.▇▇▇ (▇▇▇) ▇▇▇-▇▇▇▇
AUSTIN, TEXAS 78703 FAX (▇▇▇) ▇▇▇-▇▇▇▇
This opinion is based upon my interpretation of the relevant portions
of the Internal Revenue Code of 1986, as amended (the "Code"), Temporary,
Proposed and Final Treasury Regulations promulgated thereunder ("Regulations"),
various administrative rulings and procedures issued by the Internal Revenue
Service ( the "IRS") and judicial decisions. All such authorities are subject to
change, which may or may not be retroactive, by future legislation, additional
actions by the IRS or judicial decisions that change or modify the existing law.
If, in the future, any of the factual assumptions relied upon are
changed or proven to be incorrect, the Code, Regulations or other administrative
rulings and procedures issued by the IRS are amended or otherwise modified or
withdrawn or judicial decisions are issued that are inconsistent with law
existing at the date of this opinion, such events could materially affect the
statements made herein and have adverse effects on the income tax consequences
of investing in the Partnership.
This opinion is strictly subject to all of the terms, conditions and
limitations set forth herein, and all references to this opinion contained in
the Prospectus are expressly qualified by reference to the entirety of this
opinion. This opinion is directed to individual taxpayers whom are citizens of
the United States. This opinion is not directed to investors who are not
individuals and who are United States citizens, including, but not limited to,
corporations, partnerships, foreign taxpayers subject to Subchapter N of the
Code, IRAs and any other retirement plans whether or not any such plans are
subject to ERISA. No opinion is given with respect to federal income tax aspects
of the offering which depend upon a Limited Partner's particular circumstances.
This opinion may be relied upon only by Limited Partners who subscribe to this
offering. It does not apply to, nor may it be relied upon by any new Limited
Partner who has been substituted for another Limited Partner or any assignee of
a limited partnership interest. It does not address foreign tax considerations.
Additionally, the opinions expressed herein do not apply to the tax consequences
of any resignation or removal of the General Partner or the operations of the
Partnership for any period following the resignation or removal of the General
Partner.
As set forth in the Prospectus, the General Partner does not anticipate
that the Partnership will be considered a tax shelter as that term is defined in
the Code. My opinion attempts to address each material tax issue that involves a
reasonable possibility of challenge by the IRS. There is no assurance that the
conclusions reached and the opinions expressed herein would not be challenged by
the IRS or sustained by a court if the IRS were to pursue its challenge. This
opinion is not a representation or a guarantee that the tax results opined to
herein or described in the Prospectus will be achieved.
The General Partner does not intend to request a ruling from the IRS as
to any of the issues discussed herein regardless of whether an opinion is given
or whether no opinion can be given.
2
When used in this opinion, the term "more likely than not" means that
there is at least a fifty-one percent chance of prevailing if the IRS challenges
the tax position taken by the Partnership and a court were to decide the issue.
SUMMARY OF OPINIONS:
Subject to all of the qualifications herein and in the Prospectus and
in reliance upon the representations and assumptions set forth herein and in the
Prospectus, I am of the opinion that the following material income tax issues
are more likely than not to have a favorable outcome on the merits if challenged
by the IRS and litigated and decided by a court of law:
(1) The Partnership will be classified as a partnership for federal income
tax purposes and not as an association taxable as a corporation;
(2) The Partnership will not be classified as a "publicly traded partnership"
under Section 7704 of the Code because the Partnership Agreement limits
transfers of Units except for transfers of Units which satisfy IRS safe
harbors from "publicly traded partnership" status;
(3) A Limited Partner's interest in the Partnership will be treated as a
passive activity;
(4) The activities contemplated by the Partnership will be considered
activities entered into for profit by the Partnership;
(5) The Partnership is not currently required to register as a tax shelter
with the IRS under Section 6111 of the Code prior to the offer and sale
of the Units based upon the General Partner's representation that the
"tax shelter ratio" with respect to an investment in the Partnership, as
defined in the Code and Regulations, will not exceed 2 to 1 for any
investor as of the close of any year in the Partnership's first five
calendar years; and
(6) Partnership items of income, gain, loss, deduction and credit will be
allocated between the General Partner and the Limited Partners
substantially in accordance with the allocation provisions of the
Partnership Agreement.
In addition, I am of the opinion that, in the aggregate, substantially
more than half of the material federal income tax benefits contemplated by the
Prospectus, in terms of their financial impact on a typical individual investor,
more likely than not will be realized by an investor in the Partnership.
It is not possible to form an opinion as to certain material tax aspects
of the transactions described in the Prospectus if challenged by the IRS,
litigated and judicially decided, including:
3
1. whether the Partnership will be considered to hold any or all of its
properties primarily for sale to customers in the ordinary course of
business; and
2. whether the Partnership will be classified as a "tax shelter" under
Section 6662(d) of the Code for purposes of determining certain
potential exemptions from the application of the accuracy-related
penalty provisions.
No opinion is given as to the tax consequences to investors at the
individual level with regard to any tax issue that depends upon the specific
facts and circumstances of an individual partner. Such tax consequences include,
but are not limited to, the application of alternative minimum taxes, investment
interest limitations or the application at the partner level of Code Section 183
limitations on losses from activities not entered into for profit.
CLASSIFICATION AS A PARTNERSHIP
Partnerships are not subject to federal, state or local income
taxation. Instead, income, gains, losses, deductions and credits are passed
through to partners and reported on the partners' individual tax returns and
distributions of cash are taxable only to the extent that the cash exceeds basis
in the partnership interest. On the other hand, corporations and other
associations taxable as corporations are taxable entities subject to federal
income taxation and distributions of cash to owners is treated as a dividend and
not deductible by the distributing entity. The availability of the pass-through
treatment of income, gains, losses, deductions and credits and the avoidance of
taxation at the entity level is dependent upon the Partnership being classified
as a partnership for federal income tax purposes rather than as an association
taxable as a corporation.
Under current Regulations, an entity organized under the limited
partnership statutes of any state will be classified as a partnership unless it
elects to be classified as a corporation or is classified as a publicly traded
partnership as discussed infra. Treas. Reg. 301.7701-2 and Treas. Reg.
301.7701-3. Based upon those Regulations, the good standing as of the date of
this opinion of the Partnership as a limited partnership under Texas law, the
provision of the Partnership Agreement that the General Partner will not elect
to be treated as a corporation and the representation of the General Partner
that it does not intend to elect to be treated as a corporation as well as other
assumptions and representations contained herein and in the Prospectus, I am of
the opinion that the Partnership will more likely than not be classified as a
partnership for federal income tax purposes.
STATUS AS A PUBLICLY TRADED PARTNERSHIP
Code Section 7704 provides that even though an entity may be treated as
a partnership under Code Section 7701(a), if that entity is a "publicly traded
partnership", it will nonetheless be classified as a corporation rather than a
partnership for tax purposes.
4
A publicly traded partnership is defined as any partnership whose interests are
traded on an established securities market or are readily tradable on a
secondary market or the substantial equivalent thereof.
The Regulations under Code Section 7704 define what constitutes an
established securities market and a secondary market or the substantial
equivalent thereof. Treas. Reg. Section 1.7704-1(b) and (c). Those regulations
also set forth what transfers may be disregarded in determining whether such
definitions are satisfied with respect to a partnership. For example, transfers
made by gift, as a result of death, between family members and as distributions
from a retirement plan or an IRA are disregarded in determining whether a
partnership is a publicly traded partnership. A transfer or series of transfers
during any thirty calendar days by one partner (or by related parties)
aggregating more than two (2%) percent of the total interests in partnership
capital or profits will be disregarded in determining if a partnership is a
publicly traded partnership. Treas. Reg. Section 1.7704-1(e).
The Regulations also provide that interests in a partnership will not
be considered as traded on an established securities market nor will they be
readily tradable on a secondary market unless either the partnership
participates in the establishment of the market or the inclusion of interests
thereon or the partnership recognizes the transfer made on the market, for
example, by admitting the transferee as a partner or otherwise recognizing any
rights of the transferee. Treas. Reg. Section 1.7704-1(d)
The Regulations also set forth certain safe harbors (the "secondary
market safe harbors") which, after taking into consideration all transfers other
than those deemed disregarded, may be satisfied in order to avoid classification
of such transfers as being made on a secondary market or the substantial
equivalent thereof. Treas. Reg. Section 1.7704-1(j). That secondary market safe
harbor provides that partnership interests will not be readily tradable on a
secondary market or the substantial equivalent thereof if the sum of the
percentage interests in partnership capital or profits transferred during the
taxable year does not exceed two (2%) percent of the total interests in
partnership capital or profits.
The General Partner has represented that the Units will not be traded
nor will they cause the Units to be traded on an established securities market
or a secondary market or the equivalent thereof. The Partnership Agreement
provides that the Units may be transferred only if the transfer meets the
secondary market safe harbor provisions of the Regulations. The General Partner
has represented that the Partnership will be operated strictly in accordance
with the Partnership Agreement and that any transfers of Units that would cause,
in the General Partner's opinion, the Partnership to be treated as a publicly
traded partnership under the Code and Regulations, including but not limited to
transfers in excess of two (2%) percent of total partnership capital or profits,
will be void. Accordingly, based upon the foregoing representations of the
General Partner and the Partnership Agreement, it is my opinion that the
partnership will not be classified as a publicly traded partnership.
5
If, however, the Partnership were classified as a publicly traded
partnership, Code Section 7704(c) provides an exception to treatment as a
corporation if ninety (90%) percent of more of the gross income of the
Partnership for each taxable year consists of "qualifying income." Qualifying
income includes interest, real property rents and gain from the sale or other
disposition of real property. Qualifying income does not include income from the
rental or lease of personal property or real property rents which are contingent
on the profits of the lessees. The Prospectus states the Partnership will
purchase and operate income producing real estate properties. Until Proceeds of
the Offering are invested in real estate they may earn interest. The General
Partner has represented that it intends to operate the Partnership in a manner
that will insure that more than ninety (90%) percent of the gross income will be
interest, real property rents that are not contingent on the profits of the
lessees and gain from the sale of real property. Accordingly, even if the
Partnership were deemed to be a publicly traded partnership, if the Partnership
is operated in accordance with the Prospectus and the General Partner's
representations, it is more likely than not that the qualifying income exception
will be satisfied and the Partnership will not be treated as a corporation for
tax purposes. However, in the event that the Partnership is deemed a publicly
traded partnership but meets the requirements of the qualifying income
exception, the Partnership's income will be reclassified from passive income to
portfolio income as discussed infra.
If the Partnership is treated as a partnership for federal income tax
purposes, the Partnership will not be a taxable entity subject to federal income
tax. Each Partner will be required to report on his individual tax return for
each year his distributive share of the Partnership's items of income, gain,
loss, deduction or credit regardless of whether any cash distributions are
actually made. The remaining summary of federal tax consequences in this opinion
assumes that the Partnership will be classified as a partnership for tax
purposes.
LIMITATIONS ON DEDUCTIONS OF PARTNERSHIP LOSSES
While each Limited Partner's distributive share of losses and
deductions will generally be reported on his own federal tax return, in certain
circumstances the deductibility of those losses and deductions may be limited.
The deductibility of losses and deductions may be limited because such losses
and deductions exceed the adjusted basis of the respective Unit, exceed "passive
income" reported on the Limited Partner's tax return or exceed the amount by
which the Limited Partner is "at risk."
BASIS LIMITATIONS
A Limited Partner may not deduct his share of Partnership losses and
deductions in excess of the adjusted basis of his Partnership interest
determined as of the end of the taxable year. Code Section 704(d). Losses which
exceed a Limited Partner's basis will not be allowed but may be carried over
indefinitely and claimed as a deduction in
6
a subsequent year to the extent that such Limited Partner's adjusted basis in
his Units increases above zero. Id.
A Limited Partner's adjusted basis in his Units is determined by adding
his cash investment in the Partnership, his pro rata share of any Partnership
liabilities for which no Partner is personally liable and his distributive share
of the Partnership's taxable income and reducing that sum by any distributive
share of Partnership losses and deductions and by cash distributions received by
him. Code Section 705. Reductions in Partnership liabilities for which no
Partner is personally liable will be treated as cash distributions to the extent
that such a liability has previously been added to basis. Code Section 752(b).
To the extent that cash distributions are received in excess of basis, the
excess distribution will be taxable as gain from the sale of the Unit. To the
extent that the cash received does not exceed basis, the cash distribution will
be treated as a return of capital, the Unit's basis will be reduced and the
receipt of cash will not be taxable.
PASSIVE LOSS LIMITATIONS
Individuals may deduct "passive losses" only to the extent of "passive
income". Code Section 469. Passive losses and passive income are losses and
income derived from "passive activities." Passive activities include any
activity involving the conduct of a trade or business in which the taxpayer does
not materially participate, such as a limited partner, and certain rental
activities. Code Section 469(c). It is my opinion that it is more likely than
not that an investment in Units will be a passive activity. As such, income and
loss from the Partnership other than interest earned on temporary investments
and working capital reserves will constitute passive income and loss.
Generally, losses from passive activities are deductible only to the
extent of a taxpayer's income or gains from passive activities. Accordingly, any
losses from the Partnership will not be available to reduce salary and other
personal services income, income from businesses in which the Limited Partner is
an active participant, and "portfolio income". Portfolio income includes
nonbusiness income from dividends, interest, royalties, annuities and gains from
the sale of property held for investment. Code Section 469(e).
In the event that losses from the Partnership exceed a Limited
Partner's passive income from all sources and the loss is not allowed, the loss
will be suspended and carried forward indefinitely and allowed in subsequent
years as an offset against future years passive income from any source. Code
Section 469(f). Upon a taxable disposition of a taxpayer's entire interest in a
passive activity to an unrelated party, suspended losses with respect to that
activity will then be allowed as a deduction against any remaining income or
gain from that activity including gain recognized from the disposition; and then
against any net income or gain for the taxable year from other passive
activities; and, finally, any other non-passive income or gain. Code Section
469(g). It should be noted that all of the Partnership Properties will be
aggregated into a single "activity" for purposes of these rules so that the
disposition of one Partnership Property (other than in
7
liquidation of the Partnership) will not be considered a disposition of the
entire interest in the passive activity. Accordingly, suspended passive losses
attributable to that disposed of Partnership Property will not be separately
deducted. Temp. Reg. Section 1.469-4T(k)(2)(ii).
In the case of partnerships that are deemed to be publicly traded
partnerships, the Code provides that the passive activity loss rules are applied
separately with respect to items attributable to a publicly traded partnership.
Code Section 469(k). Accordingly, if the Partnership were deemed to be a
publicly traded partnership, Partnership losses, if any, would be available only
to offset future non-portfolio income of the Partnership. H.R. Rep. No. 495,
100th Cong., 1st Sess. 951, reprinted in 1987 U.S. Code Cong. & Ad. News
2313-1697. In addition, if the Partnership were deemed to be a publicly traded
partnership which is not treated as a corporation because of the qualifying
income exception, Partnership income would be treated as portfolio income rather
than passive income. Id.
AT RISK LIMITATIONS
The deductibility of partnership losses is limited further by the "at
risk" limitations in the Code. Code Section 465(a). Limited partners who are
individuals are not allowed to deduct partnership losses in excess of the
amounts which such limited partners are considered to have "at risk" at the
close of the partnership's year. A limited partner's amount "at risk" will
include the amount of his cash capital contribution to the partnership plus his
pro rata share of "qualified nonrecourse financing" of the partnership, if any.
Code Section 465(b). Qualified nonrecourse financing is defined to mean
nonrecourse financing provided by a person unrelated to the taxpayer which is
actively and regularly engaged in the business of lending money (other than a
person from whom the property was purchased). Code Section 465(b)(6). Unless and
until the Partnership incurs any such financing, only the cash Capital
Contribution of a Limited Partner will be taken into account when determining
such Partner's amount "at risk." A limited partner's amount "at risk" is reduced
by his allocable share of partnership losses and by partnership distributions
and increased by his allocable share of partnership gains and income. Any
deductions disallowed to a limited partner under this limitation may be carried
forward indefinitely and utilized in subsequent years to the extent that the
limited partner's amount "at risk" is increased in those years.
ALLOCATION OF PROFIT AND LOSS.
Generally, partnership items of income, gain, loss, deduction and
credit are allocated among partners as set forth in the relevant partnership
agreement pursuant to Code Section 704(a). Section 704(b) provides, however,
that if an allocation does not have substantial economic effect, such allocation
will instead be made in accordance with the partner's interest in the
partnership as determined by taking into account all facts and circumstances.
8
Regulations under Section 704(b) of the Code (the "Section 704(b)
Regulations") provide complex rules for determining (i) whether allocations will
be deemed to have economic effect; (ii) whether the economic effect of
allocations will be deemed to be substantial; (iii) and whether allocations not
having substantial economic effect will be deemed to be made in accordance with
a partner's interest in the partnership.
The Section 704(b) Regulations provide generally that an allocation
will be considered to have economic effect if: (i) partners' capital accounts
are determined and maintained in accordance with the Section 704(b) Regulations;
(ii) upon the liquidation of the partnership, liquidating distributions are made
in accordance with the positive capital account balances of the partners after
taking into account all capital account adjustments for the year during which
such liquidation occurs; and (iii) the partnership agreement contains a
"qualified income offset" provision and the allocation in question does not
cause or increase a deficit balance in a partner's capital account at the end of
the partnership's taxable year.
The Partnership Agreement contains a "qualified income offset" if it
provides that a partner who unexpectedly receives an adjustment, allocation or
distribution of certain items which causes a deficit or negative capital account
balance (which means generally that the sum of losses allocated and cash
distributed to a partner exceeds the sum of his capital contributions to the
partnership and any income allocated to such partner) will be allocated items of
income and gain in an amount and manner sufficient to eliminate the deficit
balance as quickly as possible.
Even if the allocations of profits and losses of a partnership are
deemed to have economic effect under the Section 704(b) Regulations, however, an
allocation will not be upheld unless the economic effect of such allocation, is
"substantial." In this regard, the Section 704(b) Regulations generally provide
that the economic effect of an allocation is "substantial" if there is a
reasonable possibility that the allocation will affect the dollar amounts to be
received by partners from a partnership, independent of tax consequences. The
economic effect of an allocation is presumed not to be substantial if there is a
strong likelihood that the net adjustments to the partner's capital account for
any taxable year will not differ substantially from the net adjustments which
would have been made for such year in the absence of such allocation and the
total tax liability of the partners for such year is less than it would have
been in the absence of such allocations. The economic effect will also be
presumed not to be substantial where: (i) the partnership agreement provides for
the possibility that the allocation will be largely offset by one or more other
allocations; (ii) the net adjustments to the partners' capital accounts for the
taxable years to which the allocations relate will not differ substantially from
the net adjustments which would have been recorded in such partners' respective
capital accounts for such years if the original allocations and the offsetting
allocations were not contained in the partnership agreement; and (iii) the total
tax liability of the partners for such year is less than it would have been in
the absence of such allocations.
9
With respect to the foregoing provision, the Section 704(b) Regulations
state that original allocations and offsetting allocations will not be deemed to
not be substantial if, at the time the allocations become part of the
partnership agreement, there is a strong likelihood that the offsetting
allocations will not, in large part, be made within five years after the
original allocations are made. The Section 704(b) Regulations further state that
for purposes of testing substantiality, the adjusted tax basis of partnership
property will be presumed to be the fair market value of such property, and
adjustments to the adjusted tax basis of partnership property (such as
depreciation or cost recovery deductions) will be presumed to be matched by
corresponding changes in the property's fair market value.
If the allocations of profits and losses set forth in a partnership
agreement are deemed not to have substantial economic effect, the allocations
are then to be made in accordance with the partners' interests in the
partnership as determined by taking into account all facts and circumstances.
The Section 704(b) Regulations provide in this regard that a partner's interest
in a partnership will be determined by taking into account all facts and
circumstances relating to the economic arrangement of the partners, including:
(i) the partners' relative contributions to the partnership; (ii) the interests
of the partners in economic profits and losses (if different from those in
taxable income or loss); (iii) the interests of the partners in cash flow and
other nonliquidating distributions; and (iv) the rights of the partners to
distributions of capital upon liquidation.
The Partnership Agreement: (i) provides for the determination and
maintenance of Capital Accounts in accordance with the Section 704(b)
Regulations; (ii) provides that liquidation proceeds will be distributed to the
Partners in accordance with Capital Accounts, and (iii) contains a qualified
income offset provision. Assuming the accuracy of the representations of the
General Partner, including that the Partnership will be operated strictly in
accordance with the terms of the Partnership Agreement it is more likely than
not that Partnership items of income, gain, loss, deduction and credit will be
allocated among the General Partner and the Limited Partners substantially in
accordance with the allocation provisions of the Partnership Agreement.
ACTIVITIES NOT ENGAGED IN FOR PROFIT
Section 183 of the Code provides for the disallowance of deductions
attributable to activities "not engaged in for profit." The term "not engaged in
for profit," is defined as any activity other than an activity that constitutes
a trade or business or an activity that is engaged in for the production or
collection of income. In general, an activity will be considered as entered into
for profit where there is a reasonable expectation of profit in the future. The
determination of whether an activity is engaged in for profit is based upon the
facts and circumstances of each case.
Based upon the investment objectives of the Partnership and the
representation of the General Partner that the Partnership will be operated in a
business-like manner in all material respects and in strict accordance with the
Partnership Agreement and this Prospectus, and assuming the determination as to
whether the activities of the Partnership
10
are activities entered into for profit under Code Section 183 is made at the
partnership level, it is my opinion that it is more likely than not that the
activities contemplated by the Partnership will be considered activities entered
into for profit by the Partnership, if such issue were challenged by the IRS,
litigated and judicially decided.
However, since the test of whether an activity is deemed to be engaged
in for profit is based upon facts and circumstances that exist from time to
time, no opinion can be given that Section 183 of the Code may not be applied in
the future to disallow deductions allocable to Limited Partners from Partnership
operations if my underlying assumptions change. Additionally, no opinion is
given with respect to the application of Code Section 183 at the partner level.
TAX SHELTER REGISTRATION
Any entity deemed to be a "tax shelter," as defined in Section 6111 of
the Code, is required to register with the IRS. Regulations under Section 6111
define a "tax shelter" as an investment in connection with which an investor can
reasonably infer from the representations made that the "tax shelter ratio" may
be greater than 2 to 1 as of the close of any of the first five years ending
after the date in which the investment is offered for sale. The "tax shelter
ratio" is generally determined by dividing the investor's share of the aggregate
deductions derived from the investment, determined without regard to income or
passive loss limitations, by the amount of the investor's capital contributions.
The Partnership is not intended to constitute a "tax shelter." Further,
the General Partner has represented that, in the absence of events which are
unlikely to occur, the aggregate amount of deductions derived from any Limited
Partner's investment in the Partnership, determined without regard to income,
will not exceed twice the amount of any such Limited Partner's investment in the
Partnership as of the close of any year in the Partnership's first five calendar
years. There have been no representations in the Prospectus that are
inconsistent with the General Partner's representations regarding the
anticipated level of deductions.
Based upon the authority of the Regulations under Section 6111 and the
representations of the General Partner that, in the absence of events which are
unlikely to occur, the "tax shelter ratio" with respect to an investment in the
Partnership will not exceed 2 to 1 for any investor as of the close of any year
in the Partnership's first five calendar years, it is my opinion that it is more
likely than not the Partnership is not currently required to register as a tax
shelter with the IRS under Section 6111 of the Code prior to the offer and sale
of the Units.
PROPERTY HELD PRIMARILY FOR SALE
The Partnership has been organized for the purpose of acquiring and
developing real estate for investment and rental purposes. However, if the
Partnership were at any
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time deemed for tax purposes to be a "dealer" in real property (one who holds
real estate primarily for sale to customers in the ordinary course of business),
any gain recognized upon a sale of such real property would be taxable as
ordinary income, rather than as capital gain, and would constitute UBTI to
Limited Partners which are tax-exempt entities.
Under existing law, whether property is or was held primarily for sale
to customers in the ordinary course of business, must be determined from all the
facts and circumstances surrounding the particular property and sale in
question. The Partnership intends to acquire real estate and construct
improvements thereon for investment and rental only and to engage in the
business of owning and operating such improvements. The Partnership will make
sales thereof only as, in the opinion of the General Partner, are consistent
with the Partnership's investment objectives. Although the General Partner does
not anticipate that the Partnership will be treated as a dealer with respect to
any of its properties, there is no assurance that the IRS will not take a
contrary position. Because the issue is dependent upon facts which will not be
known until the time a property is sold or held for sale and due to the lack of
judicial authority in this area, it is impossible to render an opinion as to
whether the Partnership will be considered to hold any or all of its properties
primarily for sale to customers in the ordinary course of business.
CLASSIFICATION AS "TAX SHELTER" FOR IMPOSITION OF PENALTIES
Under Section 6662 of the Code, a twenty (20%) percent penalty is
imposed on any portion of an underpayment of tax attributable to a "substantial
understatement of income tax." In general, a "substantial understatement of
income tax" will exist if the actual income tax liability of the taxpayer
exceeds the income tax liability shown on his return by the greater of 10% of
the actual income tax liability or $5,000. Unless the understatement is
attributable to a "tax shelter," the amount of an understatement is reduced by
any portion of such understatement which is attributable to (i) the income tax
treatment of any item shown on the return if there is "substantial authority"
for the taxpayer's treatment of such item on his return or (ii) any item with
respect to which the taxpayer adequately discloses on his return the relevant
facts affecting the item's income tax treatment. In the case of a "tax shelter,"
which is defined in Section 6662 of the Code as a partnership or other entity
that has as its principal purpose the avoidance or evasion of federal income
tax, this reduction in the understatement only will apply in cases where, in
addition to having "substantial authority" for treatment of the item in
question, the taxpayer reasonably believed that the income tax treatment of that
item was more likely than not the proper treatment.
In addition to the substantial understatement penalty, Section 6662 of the Code
also imposes a 20 % penalty on any portion of an underpayment of tax (i)
attributable to any substantial valuation misstatement (generally where the
value or adjusted basis of a property claimed on a return is 200% or more of the
correct value or adjusted basis), or (ii) attributable to negligence, defined as
any failure to make a reasonable attempt to
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comply with the Code, or a careless, reckless or intentional disregard of
federal income tax rules or regulations.
Although the Partnership is not intended to be a so-called "tax
shelter," it is possible that it may be considered a tax shelter for purposes of
Section 6662 of the Code and that certain Partnership tax items could be
considered tax shelter items within the meaning of Section 6662. The Regulations
under Section 6662 provide that an entity will be deemed to be a tax shelter if
the tax avoidance or evasion in motive exceeds all other motives. Based on the
investment objectives of the Partnership, the General Partner believes there are
substantial grounds for a determination that the Partnership does not constitute
a tax shelter. However, because the issue is dependent upon facts relating to
future Partnership operations, the acquisition and disposition of Partnership
Properties and other factual determinations which are not known at this time, it
is impossible to render an opinion as to whether an investment in the
Partnership will be considered a tax shelter for purposes of Section 6662 of the
Code.
OTHER MATERIAL TAX ISSUES
CHARACTERIZATION OF LEASES
The Partnership has the authority to purchase properties and lease them
back to the sellers of such properties pursuant to "sale-leaseback"
transactions. The tax benefits described herein associated with ownership of a
property, such as depreciation or cost recovery deductions, depend on having the
lease in any such leaseback transaction treated as a "true lease" under which
the Partnership is treated as the owner of the property for federal income tax
purposes, rather than having such transaction treated as a conditional sale of
the property or a financing transaction entered into with the seller.
Judicial decisions and IRS administrative pronouncements make it clear
that the characterization of a transaction as a sale-leaseback, conditional sale
or a financing transaction will be determined by weighing all the facts and
circumstances in each particular situation. In some instances courts have
reached different conclusions based upon very similar facts.
While the General Partner will use its best efforts to structure any
such sale-leaseback transaction to insure that the lease will be characterized
as a "true lease," so that the Partnership will be treated as the owner of the
property in question for federal income tax purposes, the Partnership will not
seek an advance ruling from the IRS or obtain an opinion of counsel that it will
be treated as the owner of any leased properties for federal income tax
purposes. A determination by the IRS that the Partnership is not the owner of
leased properties could result in substantial adverse tax consequences,
including depriving Limited Partners of deductions for depreciation. In
addition, if a sale-leaseback transaction is recharacterized as a financing for
federal income tax purposes, any Partnership income derived from such leaseback
would be treated as
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interest which is portfolio income, rather than passive activity income which
may be offset by passive activity losses generated by the Partnership or from
investments in other passive activities. Because of the fact specific nature of
any future sale-leaseback transaction, it is impossible to render any opinion
regarding characterization for tax purposes.
DEPRECIATION
It is currently anticipated that the real property improvements
acquired by the Partnership and any personal property acquired by the
Partnership will be depreciated for tax purposes using the Alternative
Depreciation System set forth in the Code for partnerships (such as the
Partnership) having both taxable and tax exempt partners. Under that Alternative
Depreciation System, real property improvements will be depreciated on a
straight-line basis over a recovery period of 40 years, and personal property
acquired by the Partnership will be depreciated over a recovery period of 12
years on a straight-line basis.
SYNDICATION AND ORGANIZATIONAL EXPENSES
Expenses incurred in connection with organizing the Partnership or
syndicating the Partnership must be capitalized. Syndication costs can not be
recovered through amortization. However, amounts which qualify as organizational
expenses may, if so elected, be amortized over 60 months.
Code Section 709 defines organizational expenses as expenses which are
1) incident to the creation of the partnership, 2) chargeable to capital account
and 3) of a character which, if expended incident to the creation of a
partnership having an ascertainable life, would be amortized over such life.
Only expenses related to the partnership's organization which meet all three
tests may be deductible. Examples of expenses which qualify as organization fees
amortizable over sixty months include legal fees incident to the organization of
the partnership including negotiating and preparing the partnership agreement,
accounting fees for services incident to the organization of the partnership,
and filing fees. Expenses connected with acquiring assets for the partnership or
transferring assets to the partnership, connected with the admission or removal
of partners other than at the initial organization, connected with contracts
related to the operation of the partnership or connected with the syndication of
the partnership do not meet the three tests and, accordingly, must be
capitalized.
Examples of nondeductible syndication expenses that must be capitalized
and are not subject to amortization include brokerage fees, legal fees of the
underwriter or placement agent and general partner for securities advice and for
advice related to the adequacy of tax disclosures to partners, accounting fees
for preparations of representations and projections to be included in the
offering material, printing costs of
14
the other selling and promotional material. Accordingly, the vast majority of
the expenses connected with this offering must be capitalized and will not be
subject to any recovery through depreciation, amortization or otherwise.
There are no assurances that the IRS will not attempt to recharacterize
as nondeductible syndication expenses certain costs and expenses which the
Partnership attempts to deduct or amortize over 60 months as organizational
expenses or start up expenses.
DEDUCTIBILITY OF ACQUISITION AND ADVISORY FEES AND PROPERTY MANAGEMENT AND
LEASING FEES
The Code recognizes three types of payments made to a partner by a
partnership. Those payments are (i) payments governed by Code Section 707(a)
made to a partner when he is acting in a capacity other than that of a partner;
(ii) distributions made to a partner in his capacity as a partner governed by
Code Section 731; and (iii) "guaranteed payments" governed by Code Section
707(c). Guaranteed payments are payments made to a partner for services or for
the use of capital without regard to the income of the partnership. For purposes
of determining gross income of the recipient and whether a payment is deductible
or must be capitalized, guaranteed payments are viewed as having been paid to a
non-partner.
It is anticipated that the Partnership may pay the General Partner an
Acquisition and Advisory Fee, a Property Supervision Fee, a Partnership
Management and Investor Administration Fee, and possibly a Property Management
and Leasing Fee and real estate commission on sale of Partnership Property.
The Acquisition and Advisory Fee, the Property Supervision Fee and the
Partnership Management and Investor Administration Fee are all payable to the
General Partner regardless of whether the Partnership has income. All three
items are calculated upon gross offering proceeds or funds expended for
acquisition of Property. The Acquisition and Advisory Fee is payable ratably as
properties are acquired as compensation for services related to the selection,
valuation and acquisition of Partnership Properties.
It is likely that the Acquisition and Advisory Fee will be considered a
payment made to a partner acting in a capacity other than that of a partner and
be considered a capital expenditure and added to the basis of the Partnership
Properties. Accordingly, it will not be deductible in computing net income or
loss.
The Property Supervision Fee and the Investor Administration Fee,
whether considered a guaranteed payment under Code Section 707(c) or as being
made to a third party under Code Section 707(a), relate to the ongoing
operations of the Partnership and should be deductible rather than capitalized.
In the event that such items are not
15
considered deductible, it is likely that, and the intent of the General Partner
that, they would be considered as a distribution to the General Partner,
reducing the taxable income allocable to Limited Partners for tax purposes.
Accordingly, in either instance, the Limited Partners would be treated the same.
The Partnership Agreement also provides for a Property Management and
Leasing Fee or real estate commission paid to the General Partner or an
Affiliate in the event that such services are not provided by unrelated third
parties. In the event that such fees are paid, under the terms of the
Partnership Agreement, such fees are limited to the amounts that would be paid
for comparable services to unrelated parties in arm's length transactions. It is
anticipated that the IRS will recognize the fees as ordinary and necessary
business expenses payable to a non-partner and deductible by the Partnership
under Code Section 162.
However, it is possible that the IRS could disregard the existence of
the Affiliate and take the position that the Management and Leasing Fee and real
estate commission is in reality a payment made to the General Partner. The IRS
has held that a payment will be made without regard to income of the partnership
when it is based upon a percentage of gross rental revenues. In that case, the
Management and Leasing Fee or real estate commission could be viewed as a
guaranteed payment made to the General Partner. However, assuming the payment is
reasonable, it would be deductible by the Partnership regardless of the IRS's
recharacterization.
It is possible that the IRS could rule that the Management and Leasing
Fee or real estate commission is not reasonable compensation for the services
performed by the General Partner, instead the fee represents a disguised
distribution from the Partnership. In that case, the management fee would not be
deductible by the Partnership and taxable income would be increased accordingly.
However, it is the intent in such a case that the General Partner would be
allocated that increased amount of Partnership income to reflect the deemed
distribution and the Limited Partners would not be impacted.
Since the appropriate classification of fees and expenses paid by the
Partnership into their proper categories and a determination of whether certain
fees and expenses are ordinary and necessary and reasonable in amount depends
upon facts relating to and existing at the time the services are to be rendered
to the Partnership, it is impossible to predict to the probable outcome if the
IRS were to challenge the deductibility or the timing of deduction or
amortization of those fees and expenses, if such challenge to any or all of such
fees and expenses were to be litigated and judicially decided. Disallowance by
the IRS of any of these fees and expenses would result in an increase in the
taxable income of the Partnership and its Partners with no associated increase
in Net Cash From Operations. However, as stated above, in the event any such
items are deemed to be distributions to the General Partner, allocations of
taxable income will be adjusted to reflect such a determination.
16
SALES OF PARTNERSHIP PROPERTIES
Upon the sale of Partnership Properties, the Partnership will recognize
gain or loss to the extent that the amount realized is more or less than the
adjusted basis of the Partnership Property sold. The amount realized upon the
sale of a Partnership Property will generally be equal to the sum of the cash
received plus the amount of indebtedness encumbering the property, if any,
assumed by the purchaser or to which the property remains subject upon the
transfer of the property to the purchaser. The adjusted basis of Partnership
Property will in general be equal to the original cost of the property less
depreciation allowances allowed to the Partnership with respect to such
property.
Assuming that the Partnership is not deemed to be a dealer with respect
to its properties (see "Property Held Primarily for Sale" above), such gain or
loss will generally be taxable under Section 1231 of the Code. A Limited
Partner's share of the gains or losses resulting from the sale of Partnership
Properties would generally be combined with any other Section 1231 gains or
losses realized by the Limited Partner in that year from sources other than the
Partnership, and the net Section 1231 gain or loss is generally treated as
long-term capital gain (subject to depreciation or cost recovery allowance
recapture, if any) or ordinary loss, as the case may be. Investors should be
aware that the amount of taxable gain allocated to a Limited Partner with
respect to the sale of Partnership Property may exceed the cash proceeds
received by such Limited Partner with respect to such sale.
SALES OF LIMITED PARTNERSHIP UNITS
A Limited Partner may be unable to sell any of his Units. In the event
that Units are sold, however, the selling Limited Partner will realize gain or
loss equal to the difference between the gross sale market price or proceeds
received from sale and the Limited Partner's adjusted tax basis in his Units.
Assuming the Limited Partner is not a "dealer" with respect to such Units and
has held the Unit for more than one year, his gain or loss will be long-term
capital gain or loss, except for that portion of any gain attributable to such
Limited Partner's share of the Partnership's "unrealized receivables" and
"substantially appreciated inventory," as defined in Section 751 of the Code,
which would be taxable as ordinary income.
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
The dissolution and liquidation of the Partnership will involve the
distribution to the Partners of the cash remaining after the sale of its assets,
if any, and after payment of all the Partnership's debts and liabilities. If a
Limited Partner receives cash in excess of the basis of his Units, such excess
will be taxable as a gain. If a Limited Partner were to receive only cash upon
dissolution and liquidation, he would recognize a loss to the extent, if any,
that the adjusted basis of his Units exceeded the amount of cash received. No
loss would be recognized if a Limited Partner were to receive property other
than money, unrealized receivables and substantially appreciated inventory (as
defined in
17
Section 751 of the Code). There are a number of exceptions to these general
rules, including but not limited to, the effect of a special basis election
under Section 732(d) of the Code for a Limited Partner who may have acquired his
Partnership interest within the two years prior to the dissolution, and the
effects of distributing one kind of property to some Partners and a different
kind of property to others as determined under Section 751 (b) of the Code.
Because it is anticipated that only cash will be distributed upon liquidation,
each prospective investor should consult his own tax advisor for a more detailed
explanation of the tax consequences of receipt of assets other than cash upon
liquidation.
STATE AND LOCAL TAXES
It is likely that the Partnership will conduct its activities and own
properties in more than one jurisdiction. Accordingly, it is likely that an
investment in the Partnership will impose upon a Limited Partner the obligation
to file annual tax returns in a number of different states or localities, as
well as the obligation to pay taxes to more than one state or locality. In
addition, many states now require partnerships to withhold taxes from
partnership distributions and pay state income taxes owed by partners who do not
reside in the state where the income producing property is located.
The Prospectus does not summarize state and local tax consequences to a
Limited Partner. Nor is any opinion rendered herein regarding state and local
tax issues. However, each Limited Partner should consider whether the state in
which he resides will impose an income tax upon his share of taxable income and
gains and allow reductions in tax as a result of losses, deductions and credits.
Each Limited Partner should also consider whether income or other tax returns
will be required to be filed in states where the Limited Partner does not reside
but in which the Partnership has acquired properties and whether any such states
will impose withholding on the Partnership.
TAX SHELTER INVESTOR LISTS
Code Section 6112 requires that a list identifying each person who has
invested in a potentially abusive tax shelter must be maintained by the tax
shelter organizer. The list must include the name, address and taxpayer
identification number of each investor, as well as other information. The
organizer is required to make the list available for inspection upon request by
the IRS. The term "potentially abusive tax shelter" is defined for this purpose
as any tax shelter required to register as such and any other entity, plan or
arrangement that is treated under the Regulations as a tax shelter for purposes
of the list requirements. The General Partner does not believe that the
Partnership constitutes a potentially abusive tax shelter. Nonetheless, it has
represented that it will maintain a list of Limited Partners and all the
information required under Code Section 6112.
Subject to to the assumptions and limitations set forth herein, it is
my opinion that it is more likely than not that, in the aggregate, substantially
more than half of the
18
material tax benefits contemplated by the Prospectus, will be realized by an
individual investor in the Partnership.
I have no obligation to update the opinions expressed herein at any
time after the date hereof. This opinion is prepared solely for your use in
connection with the filing of the Registration Statement on the date of this
opinion letter and should not be quoted in whole or in part or otherwise
referred to, nor filed with or furnished to any governmental agency or other
person or entity without my prior written opinion.
Consent is hereby given to the filing of this opinion as an exhibit to
the Registration Statement and to the reference to my firm under the captions
"Legal Opinions" and "Federal Income Tax Consequences" in the Prospectus
concerning this opinion. In giving this consent, I do not admit that I am an
"expert" within the meaning of the Securities Act of 1933, as amended, or that I
come within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules or regulations of the
Securities and Exchange Commission promulgated thereunder.
Very truly yours,
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