IRS Hits the 'Pause' Button on PTP Rulings

The Tax Management Transfer Pricing Report ™ provides news and analysis on U.S. and international governments’ tax policies regarding intercompany transfer pricing.

By Jonathan R. Talansky, Esq.

Mintz Levin Cohn Ferris Glovsky and Popeo. P.C., New York,

Recently it has become standard operating procedure for the
Internal Revenue Service (IRS) to declare moratoriums on the
issuance of private letter rulings (PLRs) in certain areas. These
temporary (or, in certain cases, more permanent1)
suspensions typically arise with respect to tax provisions that
require further study or that seem to be moving faster than the IRS
would like, given its limited resources and the myriad interpretive
questions presented to it for ruling each year. The latest IRS
action involves the rules governing "publicly traded partnerships"
(or "PTPs") under §7704.2

The PTP moratorium was not announced through a formal IRS
pronouncement. 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 our
counterparts at Treasury. We're trying to decide what the rules
should be."3

Generally speaking, PTPs are entities that are (in the absence
of the PTP rules) treated as partnerships for U.S. federal income
tax purposes and whose interests are readily tradable.  These
entities, which are more commonly known as "master limited
partnerships," or "MLPs," were proliferating in the late 1980s, and
Congress determined that such entities were eroding the U.S.
corporate tax base. Accordingly, §7704 was enacted, and PTPs are
now generally taxed as corporations unless at least 90% of the
partnership's gross income constitutes "qualifying income" (passive
income or other types of income generally in the natural resources
arena historically conducted through partnerships or other
flow-through entities).4

Over the past few years, the IRS has issued favorable rulings
regarding the qualification of numerous categories of income as
"qualifying income" for PTP purposes. Most of these rulings relate
to the natural resource exploration prong in §7704(d)(1)(E). In one
recent 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 exploration
and production of oil and natural gas" is qualifying income under

PTP qualifying income also includes "real property rents,"6 and the IRS has
also expanded the scope of this category through the issuance of
private letter rulings.  In PLR 201250003, the IRS ruled that
a partnership's lease of an offshore oil and gas platform (along
with related machinery and equipment) produced qualifying income
for PTP purposes. By necessity, the ruling dealt with the REIT
rules as well, since the PTP provisions of the Code cross reference
the rules governing "rents from real property," a permissible
category 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 has
since resumed) its policy of granting REIT rulings to
"nontraditional" asset classes. Specifically, in the summer of
2013, apparently in connection with REIT conversion rulings
requested by Iron Mountain Inc. (which is engaged in document
management services) and Equinix Inc. (data centers), the IRS
convened a working group to study the issues raised by
nontraditional real estate assets.8 Although the IRS
never confirmed an actual moratorium at the time, it did
retrospectively, by commenting later in 2013 that it will "resume
issuing rulings on the definition of real estate for purposes of
REIT conversions." At that time, the IRS said it has completed its
review of REIT requests for assets other than land, buildings and
structures. The review was designed "to ensure a uniform and
consistent approach to addressing the definition of REIT real

The IRS's review of its PTP ruling guidelines is supposedly
expected to be completed next month, but in reality it remains to
be seen how long the "pause" will last.10 In the interim,
affected taxpayers will have to proceed with caution. The PTP rules
leave only a 10% cushion for non-qualifying income, and the
inability to rely on a ruling may increase the risk of engaging in
certain activities to unacceptable levels, especially in light of
the severe consequences of breaching the 90% floor.

For more information, in the Tax Management Portfolios, see
Lay, Sloan, and Sutton, 723 T.M.
, Publicly Traded
Partnerships, and in Tax Practice Series, see ¶4020,
Classification as a Partnership.

Copyright © 2014 Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C.



  1 To be sure, the IRS does regularly publish
"no-rule" lists. See, e.g., Rev. Proc. 2014-3, 2014-1
I.R.B. 111; Rev. Proc. 2013-32, 2013-28 I.R.B. 55. These
announcements identify areas in which rulings will not be
issued, areas in which rulings will not ordinarily be
issued, and areas under study in which rulings will not be

  2 All "section" references herein are to the
Internal Revenue Code of 1986, as amended. 

  3  IRS Puts Private Letter Rulings for Public
Partnerships on 'Pause,' Official Says
, 61 Daily Tax
 G-1 (3/31/14). 

  4 MLPs have historically been associated with oil
and gas partnerships, as a result of the explicit reference to
"income and gains derived from the exploration, development, mining
or production, processing, refining, transportation (including
pipelines transporting gas, oil, or products thereof) or the
marketing of any mineral or natural resource " in the statutory
list of "qualifying income" categories.
See §7704(d)(1)(E).  More recently, several
large asset managers have gone public using a PTP structure, making
use 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 explorers
who employ the "hydraulic fracturing," or "fracking" technique to
extract oil and gas from wells that would otherwise be

  6 §7704(d)(1)(C). 

  7 §7704(d)(3). 

  8 There has been a recent flurry in the number of
companies 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 and
document storage examples cited above).

  9 "Companies Say IRS Has Resumed Evaluation of REIT
Conversion Applications," 222 Daily Tax Rpt. G-1

  10 An industry lobbyist predicts the IRS could
resume issuing rulings in May. See "IRS Rulings for
Publicly Traded Partnerships Could Resume by May," 76 Daily Tax
 G-1 (4/21/14).

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