IRS's 10-Year Transition Rule in MLP Proposal Seen as Unlikely to Change

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Sept. 22 — The IRS isn't likely to change its proposed master limited partnership rules' 10-year sunset provision for entities that no longer have 90 percent of their income from qualifying sources, Timothy Fenn, a partner at Latham & Watkins LLP, said.

“They seem to love the 10-year rule,” Fenn said Sept. 22 at a Bloomberg BNA and Mayer Brown LLP energy tax conference in Houston.

An Internal Revenue Service official said Sept. 18 he would “not be surprised” if the 10-year transition period were to be retained when the proposed regulations (REG-132634-14) are finalized. The IRS has said issuing final rules under tax code Section 7704(d)(1)(e) is a priority for the 2015-16 year (182 DTR G-9, 9/21/15).

Investor Vision

“The IRS is looking at it that 10 years is a long time. Investors feel somewhat differently,” said Greg Matlock, the U.S. MLP leader at EY LLP.

The proposed rules scale back the income-generating activities that qualify for the tax-advantaged structure, especially those tied to chemical and timber processing. The IRS restricted the structure in 1987 and allowed a grandfathering provision for MLPs that had rulings from the IRS. Matlock said IRS officials have told him they have carefully considered the transition period.

The lack of a provision that would allow MLPs with private letter rulings to maintain their status is especially harmful to companies with rulings that haven't yet had an initial public offering, but have started to invest in facilities, Fenn said.


“It's ridiculous to think that investors in year eight would go give you money in an equity offering knowing you were only going to be around for two years,” he said. “That's not the way the world works. It's not 10 free years and then the world turns black the next day. There is an effect today and there will be a continued effect.”

MLPs that no longer qualify at the end of the transition period could go private or convert to a C corporation. MLPs should be conscious of converting their investors units to corporate shares, Matlock said.

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