Fractions Rule
Established by section 514(c)(9)(E) and the associated Treasury regulations, the rule pertains to some types of tax-exempt qualified organizations (primarily pension funds and educational organizations) seeking to acquire real estate on a leveraged basis through a partnership without incurring an unrelated business income tax (UBIT) on what would otherwise be debt-financed income; compliance with the fractions rule requires that the partnership agreement fall within the substantial economic effect safe harbor of Regulatory Section 1.704-1(b) and that allocations under the partnership agreement cannot result in any qualified organization having a percentage share of overall partnership income in any tax year that is greater than its overall percentage of partnership loss for the tax year in which its share of loss will be smallest; the rule is qualified by several exceptions and limitations.