Source: https://www.bna.com/irs-hits-pause-n17179890032/
Timestamp: 2017-07-28 08:59:28
Document Index: 594197206

Matched Legal Cases: ['§7704', '§7704', '§7704', '§7704', '§7704', '§7704', '§7704']

IRS Hits the 'Pause' Button on PTP Rulings | Bloomberg BNA
IRS Hits the 'Pause' Button on PTP Rulings
By Jonathan R. Talansky, Esq.
Mintz Levin Cohn Ferris Glovsky and Popeo. P.C., New York,NY
Recently it has become standard operating procedure for theInternal Revenue Service (IRS) to declare moratoriums on theissuance of private letter rulings (PLRs) in certain areas. Thesetemporary (or, in certain cases, more permanent1)suspensions typically arise with respect to tax provisions thatrequire further study or that seem to be moving faster than the IRSwould like, given its limited resources and the myriad interpretivequestions presented to it for ruling each year. The latest IRSaction involves the rules governing "publicly traded partnerships"(or "PTPs") under §7704.2
The PTP moratorium was not announced through a formal IRSpronouncement. Instead, at a March 28th conference in Washington,an IRS representative confirmed that the IRS is instituting a"pause," adding that "[w]e're regrouping. We're speaking with ourcounterparts at Treasury. We're trying to decide what the rulesshould be."3
Generally speaking, PTPs are entities that are (in the absenceof the PTP rules) treated as partnerships for U.S. federal incometax purposes and whose interests are readily tradable. Theseentities, which are more commonly known as "master limitedpartnerships," or "MLPs," were proliferating in the late 1980s, andCongress determined that such entities were eroding the U.S.corporate tax base. Accordingly, §7704 was enacted, and PTPs arenow generally taxed as corporations unless at least 90% of thepartnership's gross income constitutes "qualifying income" (passiveincome or other types of income generally in the natural resourcesarena historically conducted through partnerships or otherflow-through entities).4
Over the past few years, the IRS has issued favorable rulingsregarding the qualification of numerous categories of income as"qualifying income" for PTP purposes. Most of these rulings relateto the natural resource exploration prong in §7704(d)(1)(E). In onerecent ruling, for example, the IRS ruled that income derived from"the wholesale marketing and transportation of commercial silica(also known as frac sand) to customers engaged in the explorationand production of oil and natural gas" is qualifying income under§7704(d).5
PTP qualifying income also includes "real property rents,"6 and the IRS hasalso expanded the scope of this category through the issuance ofprivate letter rulings. In PLR 201250003, the IRS ruled thata partnership's lease of an offshore oil and gas platform (alongwith related machinery and equipment) produced qualifying incomefor PTP purposes. By necessity, the ruling dealt with the REITrules as well, since the PTP provisions of the Code cross referencethe rules governing "rents from real property," a permissiblecategory of income for REIT purposes.7
In light of the close connection between the PTP and REIT rules,it is not surprising that the IRS had recently suspended (but hassince resumed) its policy of granting REIT rulings to"nontraditional" asset classes. Specifically, in the summer of2013, apparently in connection with REIT conversion rulingsrequested by Iron Mountain Inc. (which is engaged in documentmanagement services) and Equinix Inc. (data centers), the IRSconvened a working group to study the issues raised bynontraditional real estate assets.8 Although the IRSnever confirmed an actual moratorium at the time, it didretrospectively, by commenting later in 2013 that it will "resumeissuing rulings on the definition of real estate for purposes ofREIT conversions." At that time, the IRS said it has completed itsreview of REIT requests for assets other than land, buildings andstructures. The review was designed "to ensure a uniform andconsistent approach to addressing the definition of REIT realproperty."9
The IRS's review of its PTP ruling guidelines is supposedlyexpected to be completed next month, but in reality it remains tobe seen how long the "pause" will last.10 In the interim,affected taxpayers will have to proceed with caution. The PTP rulesleave only a 10% cushion for non-qualifying income, and theinability to rely on a ruling may increase the risk of engaging incertain activities to unacceptable levels, especially in light ofthe severe consequences of breaching the 90% floor.
For more information, in the Tax Management Portfolios, seeLay, Sloan, and Sutton, 723 T.M., Publicly TradedPartnerships, and in Tax Practice Series, see ¶4020,Classification as a Partnership.
Copyright © 2014 Mintz, Levin, Cohn, Ferris, Glovsky andPopeo, P.C.
1 To be sure, the IRS does regularly publish"no-rule" lists. See, e.g., Rev. Proc. 2014-3, 2014-1I.R.B. 111; Rev. Proc. 2013-32, 2013-28 I.R.B. 55. Theseannouncements identify areas in which rulings will not beissued, areas in which rulings will not ordinarily beissued, and areas under study in which rulings will not beissued. 2 All "section" references herein are to theInternal Revenue Code of 1986, as amended. 3 IRS Puts Private Letter Rulings for PublicPartnerships on 'Pause,' Official Says, 61 Daily TaxRpt. G-1 (3/31/14). 4 MLPs have historically been associated with oiland gas partnerships, as a result of the explicit reference to"income and gains derived from the exploration, development, miningor production, processing, refining, transportation (includingpipelines transporting gas, oil, or products thereof) or themarketing of any mineral or natural resource " in the statutorylist of "qualifying income" categories.See §7704(d)(1)(E). More recently, severallarge asset managers have gone public using a PTP structure, makinguse of the eligibility of capital gains (and, to a lesser extent,dividends) as qualifying income. 5 PLR 201414004. The way the author understands it,frac sand is one of the components used by oil and gas explorerswho employ the "hydraulic fracturing," or "fracking" technique toextract oil and gas from wells that would otherwise beinaccessible. 6 §7704(d)(1)(C). 7 §7704(d)(3). 8 There has been a recent flurry in the number ofcompanies expressing an interest in converting to REIT status,spanning such nontraditional REIT industries as prison operation,billboards, and cell towers (in addition to the data center anddocument storage examples cited above).
9 "Companies Say IRS Has Resumed Evaluation of REITConversion Applications," 222 Daily Tax Rpt. G-1(11/18/13). 10 An industry lobbyist predicts the IRS couldresume issuing rulings in May. See "IRS Rulings forPublicly Traded Partnerships Could Resume by May," 76 Daily TaxRpt. G-1 (4/21/14).