EXTENSIONS OF REMARKS

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May 24, 1995 CONGRESSIONAL RECORD — Extensions of Remarks E 1103

AN AMENDMENT TO PROVIDE A

PERMANENT EXTENSION OF THE

TRANSITION RULE FOR CERTAIN

PUBLICLY TRADED PARTNERSHIPS

HON. AMO HOUGHTON OF NEW YORK

IN THE HOUSE OF REPRESENTATIVES

Tuesday, May 23, 1995

Mr. HOUGHTON. Mr. Speaker, I am joined

today by several of my colleagues, including

Mr. KLECZKA, Mr. JACOBS, Mr. CRANE, Mrs.

KENNELLY, Mr. SHAW, Mr. HERGER, Mr.

BUNNING, Mr. MCCRERY, and Mr. NEAL, in introducing legislation to permanently extend the

10-year grandfather for publicly traded partnerships [PTP’s]. This provision applies to those

PTP’s that were in existence at the time the

Omnibus Budget Reconciliation Act of 1987

was passed.

Publicly traded partnerships, sometimes

called master limited partnerships, were first

created in the early 1980’s. PTP’s combined

the traditional limited partnership form with the

ability to have the partnership units freely traded on a stock exchange or over the counter.

In the 1987 act, Congress enacted section

7704 of the Internal Revenue Code. Section

7704 provides that PTP’s generally will be

taxed as corporations. Section 7704 does not

apply, however, to PTP’s where 90 percent or

more of their income is qualifying income,

such as from timber, oil and gas, and real estate. In addition, other PTP’s in existence

when section 7704 was enacted were grandfathered, but only for 10 years, through 1997.

Our bill would extend this grandfather provision permanently.

APPROPRIATENESS OF THE 10-YEAR GRANDFATHER

We believe the 10-year limit on the grandfather for existing PTP’s was inappropriate

and unnecessary given the purpose for which

section 7704 was enacted. According to the

committee reports accompanying the 1987

act, section 7704 was intended to stop the

‘‘long-term erosion of the corporate tax base.’’

Generally, the concern was that much of corporate America would convert to PTP’s, thereby causing corporate tax revenues to decline.

There appears to have been no serious debate in 1987 over whether limiting the duration

of the grandfather was necessary to address

these concerns.

There is no question that our purpose in enacting section 7704 was fully achieved by prospective application of that section. The movement toward use of PTP’s had barely begun

by 1987; there were only approximately 120 in

existence at that time. It was the snowball effect of future conversions that we sought to

prevent. Prospective application of section

7704 stopped that snowball effect dead in its

tracks. Permanently grandfathering all existing

PTP’s would have had no effect on this goal

whatsoever. Conversely, limiting the duration

of the grandfather to 10 years was unnecessary to achieve our purpose.

Since prospective application of section

7704 achieved our purpose, we believe Congress erred in 1987 by limiting the grandfather

to 10 years. Unless we reverse that decision

before it takes effect in 1998, those PTP’s still

in existence and their owners will face serious

hardships with no corresponding benefit to the

Government or the tax system. Our bill merely

asks Congress to rethink its decision before

any damage is done.

I can foresee that some people might view

this proposal as special interest legislation. I

strongly disagree. Had we chosen in 1987 to

provide a permanent grandfather for existing

PTP’s, no one would have batted an eye. Instead, a permanent grandfather in 1987 would

have been an appropriate decision for Congress to make based on the extent to which

existing PTP’s relied on the law that was in effect when they were created. The fact that the

decision was initially made in 1987 should not

stop us from revisiting the issue so long as the

original decision has not yet taken effect.

We in Congress are called on to make decisions about appropriate transition relief in virtually every tax bill. Indeed, these types of decisions are ones that are particularly suited for

the Members of Congress to make, since they

generally involve the balancing of competing

interests rather than technicalities of tax law.

Our proposal is different only because it is

separate in time from the 1987 act. On the

other hand, the proposal is generic in scope,

applying to any PTP fitting the criteria. We believe that it is fair, before the 10-year grandfather expires, to determine whether that decision was the proper one or whether a permanent rule would be better.

Generally, Congress does not place time

limits on grandfather provisions, other than

what might be called project-specific provisions. The reasoning behind this policy is that

if taxpayers were justified in relying on the law

in effect at the time the taxpayer took action,

then the taxpayers deserve relief from the

change in the law, not just for a limited period

but as long as the taxpayer’s circumstances

do not change.

REASONS FOR A PERMANENT GRANDFATHER

Some may wonder why these PTP’s should

be permanently grandfathered. After all, if they

were taking advantage of so large a loophole

that Congress had to shut it down, why should

they benefit merely because they got in under

the wire?

The truth is that these PTP’s did not take

advantage of an egregious loophole. PTP’s

are structured no differently from other types

of limited partnerships. They merely combined

that basic limited partnership structure with the

ability for the units to be readily traded. The

problem was thus not a loophole in the tax

code that needed to be closed retroactively.

These PTP’s relied on the law in effect before passage of the 1987 act, and that reliance was completely reasonable. The first

proposal directed toward PTP’s surfaced in

1984, but President Reagan chose not to forward it to Congress in his tax reform recommendations and we did not independently

take up the idea in 1986. It was only when

Treasury proposed section 7704 in mid-1987

as part of a list of acceptable revenue raisers

that the proposal received any official endorsement. By that time, most of the affected

PTP’s were already in existence.

This raises what I believe is the most important issue in this debate: fairness to the PTP’s

and, more importantly, their owners. The process of converting from a corporation to a PTP

is a costly and time-consuming one, easily

taking over 1 year. The conversion process involved consultation with investment bankers,

appraisals, planning by corporate finance, securities and tax lawyers, multiple filings with

the SEC and State securities agencies, proxy

statements and shareholder votes, etc. This

process would not have been started or completed had there been any reasonable prospect that a change in the tax law would have

applied retroactively or after a limited period of

time.

To make matters worse, many of these

same costs will be incurred once again if the

10-year grandfather is not made permanent.

Grandfathered PTP’s will be forced to convert

to corporate form on January 1998. To do so,

however, will require lengthy planning, and the

same investment banking advice, appraisals,

and attorney fees. The need for extensive, advance planning makes it essential that the

matter be resolved this year.

More important is the effect that loss of the

grandfather will have on PTP investors. It is a

virtual certainty that the value of PTP units will

be affected adversely if the grandfather expires. So it will be the investors that suffer

most. And who are these investors? Most are

average, middle-class taxpayers who have invested in PTP units because of their high

yield, many before the 1987 act was passed.

We do not achieve any tax policy goal by

retaining the 10-year grandfather. That goal

was fully achieved by making section 7704

apply prospectively. Instead, all we would accomplish by retaining the 10-year grandfather

would be harm to these PTP’s and their investors. There is no doubt what our decision

should be.

In conclusion I want to note the diversity of

the PTP’s that would benefit from permanent

extension of the grandfather. The PTP’s affected are involved in a wide variety of industries, from motels and restaurants to chemicals, financial advising, and macadamia nuts.

Undoubtedly, these businesses operate in

many of our districts. Of course, our districts

are the homes to the individual investors in

these PTP’s. The most recent count indicates

that there are well over 300,000 individual investors.

The 10-year grandfather hangs like a sword

of Damocles over each one of these PTP’s.

We in Congress have the ability to remove

that sword and there is no reason why we

should not do so. We urge our colleagues to

join with us to support this bill.

Thank you, Mr. Speaker.