Publicly Traded Partnerships (Portfolio 723)

Tax Management Portfolio No. 723 T.M., Publicly Traded Partnerships, analyzes in depth the U.S. federal income taxation of publicly traded partnerships and their partners.

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Tax Management Portfolio No. 723 T.M., Publicly Traded Partnerships, analyzes in depth the U.S. federal income taxation of publicly traded partnerships and their partners.

As a general matter, partnerships are not subject to an income tax under U.S. federal income tax laws. Instead, partners are liable for income tax on their distributive shares of a partnership's items of income, gain, loss, deduction, and credit. Under §7704, however, partnerships that are “publicly traded” are classified as corporations for U.S. federal income tax purposes unless at least 90% of the partnership's gross income is from sources commonly considered to be passive or from certain types of businesses historically conducted in partnership form (“qualifying income”).

This Portfolio includes comprehensive discussions of the rules for determining whether a partnership is “publicly traded” and the rules for determining which types of income are treated as qualifying income. This Portfolio also examines the conventions that publicly traded partnerships frequently use to comply with the U.S. federal income tax rules generally applicable to partnerships and to ensure that their publicly traded units are fungible. In addition, this Portfolio explores the U.S. federal income tax consequences of owning interests in publicly traded partnerships for various types of investors, such as individuals, tax-exempt parties, and foreign persons. Finally, this Portfolio summarizes significant developments in the law affecting, and novel uses of, publicly traded partnerships.


Matthew W. Lay

Matthew W. Lay, Esq., Director, Deloitte Tax LLP; B.A., University of Chicago; J.D., Lewis and Clark, Northwestern School of Law; LL.M. (Taxation), New York University; a member of the Executive Committee of the Tax Section of the New York State Bar Association, a member of the Tax Section of the American Bar Association and Former Chair, Subcommittee on Government Submissions, (Partnerships and LLCs Committee); admitted to practice in Oregon and the District of Columbia; author of various articles in the Journal of Passthrough Entities, Tax Notes, and Tax Management's Real Estate Journal.

Eric B. Sloan

Eric B. Sloan, Esq., Principal, Deloitte Tax LLP; B.A. (with honors), Northwestern University; J.D., University of Chicago Law School; LL.M. (Taxation) (with distinction), Georgetown University Law Center; a member of the Executive Committee of the Tax Section of the New York State Bar Association, a Co-Chair of the Tax Section's Committee on Partnerships and Former Co-Chair of the Tax Section's Committee on Investment Funds; a member of the Tax Section of the American Bar Association and member and Past Chair of the Tax Section's Committee on Partnerships and LLCs; admitted to practice in California, Illinois, and the District of Columbia; author and co-author of various articles in Tax Notes, Journal of Taxation, Tax Executive, TAXES, Major Tax Planning (The Law School of the University of Southern California), Journal of Passthrough Entities, Tax Management Memorandum, and Tax Planning for Domestic & Foreign Partnerships, LLCs, Joint Ventures, & Other Strategic Alliances (Practising Law Institute); lecturer, Practising Law Institute, the American Bar Association, the Tax Executive Institute, The University of Chicago Law School's Federal Tax Conference, the University of Southern California Law School's Institute on Federal Taxation, and the California Bar Association; member of the planning committee for the University of Chicago Law School's Annual Federal Tax Conference and member of the advisory board of NYU Institute on Federal Taxation; Adjunct Professor, Georgetown University Law Center.

Amy L. Sutton

Amy L. Sutton, Partner, Deloitte Tax LLP; B.A. (with honors), Rice University; M.B.A. (concentrations in Accounting and Finance), Jones Graduate School of Business, Rice University; Masters in Taxation, Golden Gate University; Certified Public Accountant, licensed in California and Texas; member, American Institute of Certified Public Accountants; co-author of the on-line treatise Federal Income Taxation of Passive Activities, published by Warren, Gorham & Lamont; lecturer, the Tax Executives Institute, the National Association of Publicly Traded Partnerships Annual Meeting, Deloitte's National Publicly Traded Partnership Conference, and the Parker C. Fielder Oil and Gas Tax Conference.

Table of Contents

Detailed Analysis

I. Introduction

II. Comprehensive Review of § 7704

A. Enactment of § 7704

B. Overview of the Statutory Structure

C. Definition of “Publicly Traded Partnership”

1. Background and General Definitions

a. “Partnership” and Choice of State Law Entity

b. Definition of “Interest” in a Partnership

c. Definition of “Transfer”

d. Involvement of the Partnership

2. Definition of “Established Securities Market”

3. Readily Tradable on a Secondary Market or the Substantial Equivalent of a Secondary Market

a. Definition of “Readily Tradable on a Secondary Market” or the Substantial Equivalent of a Secondary Market

b. Safe Harbors

(1) Private Transfer — Generally

(2) Redemption and Repurchase Agreements

(3) Qualified Matching Services

(4) Private Placements

(5) De Minimis Trading

c. Determining Percentage Interests in Partnership Capital and Profits

d. Applying the “Readily Tradable” Definitions, Tests, and Safe Harbors in Practice

(1) UPREITs and Similar Operating Structures

(2) Non-Safe Harbor Trading Restrictions

D. Qualifying Income Exception

1. Background and General Definitions

a. The ’40 Act Exception

(1) Application to Advisor PTPs

(2) Application to Permanent Capital Funds

b. Supplemental Guidance on Qualifying Income

2. Categories of Qualifying Income

a. “Passive-Type Income” in General

b. Interest

(1) In General

(2) Financial or Insurance Business Exception

(3) Contingent Interest Exception

c. Dividends

d. Real Property Rents

(1) “Rents from Real Property”

(2) Exclusions from “Rents from Real Property”

(3) Modified Application of § 856(d) for PTPs

(4) Real vs. Personal Property

(a) Whether the Property Is Capable of Being Moved and Has in Fact Been Moved

(b) Whether the Property Is Designed or Constructed to Remain in Place Permanently

(c) Whether the Property Is Likely to Be Moved

(d) Effort Required to Remove the Property

(e) Damage to Property on Removal

(f) Manner of Affixation of the Property to Land

(5) PLRs and Other Guidance Addressing PTPs and Rents

e. Sale or Other Disposition of Assets

(1) Real Property

(2) Assets Held for the Production of Qualifying Income

f. Natural Resources

(1) In General

(2) Qualifying Resources

(a) Mineral or Natural Resource

(b) Industrial Source Carbon Dioxide

(c) Renewable and Alternative Fuels

(3) Qualifying Activities

(a) Exploration, Development, and Mining or Production

(b) Processing and Refining

(c) Transportation and Storage

(d) Marketing

g. Commodities

(1) Section 7704(c)(3) Exception

(2) Section 7704(d)(1)(G) Exception

(3) Other Commodities Income

h. Certain REIT and RIC Income

(1) RIC Income Described in § 851(b)(2)(A)

(2) REIT Income Described in § 856(c)(2)

(3) Comparison and Contrast between Qualifying Income Under the PTP, RIC, and REIT Regimes

i. Other Investment Income

(1) In General

(2) Swap Transactions

(3) Hedging Transactions

(4) Straddle Transactions

(5) Securities Lending and Other Transactions

j. Other Types of Income

(1) Fee Income

(2) Service Contract vs. Lease Under § 7701(e)

(a) Background

(b) Application to PTPs

(3) Lawsuit Settlements

(4) Management Fee Offsets

(5) Reimbursements, Rebates, and Deposits

(a) Reimbursements

(b) Rebates

(c) Deposits

(6) Subpart F and QEF Inclusions

(7) Cancellation of Debt Income

(8) Income Recognized Under § 755(c)

3. The Predecessor Rule

4. Inadvertent Failure to Satisfy Gross Income Requirement

E. Consequences of Treatment as a Corporation Under § 7704(a)

F. Consequences if a PTP That Has Been Classified as a Corporation Ceases to be Publicly Traded or Satisfies the 90% Test

1. Ceasing to be Publicly Traded

2. Qualifying Under § 7704(c)

III. Operational Issues

Introductory Material

A. Section 704(c)

1. In General

2. Reverse § 704(c) Allocations

a. In General

b. Revaluations by PTPs

(1) In General

(2) Incentive Distribution Rights

(3) Subordinated Units

3. Tiered Partnerships

B. Fungibility

1. Section 754

2. Remedial Allocation Method

a. Ceiling Rule

b. Recovery Periods Under § 704(c) and § 743(b)

c. Contributions of § 197 Intangibles

3. Summary

C. Other Technical and Reporting Issues

1. Section 706

a. In General

b. 2009 Proposed Regulations

c. Application of § 706(d) to PTPs

2. Technical Terminations Under § 708(b)(1)(B)

a. In General

b. Application to PTPs

3. Basis Adjustments Under § 734(b) and 743(b)

a. In General

b. Section 734(b) Adjustments

c. Section 743(b) Adjustments

4. Section 751

5. Holding Periods and Outside Basis

a. Holding Periods

b. Outside Basis

6. Reporting Uncertain Tax Positions

7. Amended Returns

8. Wash Sale Rules

9. Installment Sale Rules

10. Short Sales of PTP Interests

a. Tax Treatment of Lender

b. Tax Treatment of Borrower

11. PTPs with More than One Class of Interests

a. Incentive Distribution Rights

b. Subordinated Units

c. Common Units with Different Rights to Cash Distributions

d. Preferred Units

D. Issues for Investors

1. Individuals (and Other Taxpayers Subject to the At-Risk Limitations, the Passive Activity Loss Rules, and Investment Interest Expense Limitations)

a. At-Risk Limitations

b. Passive Activity Loss Rules

(1) General Application

(2) Material Participation

c. Limitations on Deductions for Expenses for Production of Income

d. Investment Interest Expense Limitations

e. Medicare Contribution Tax on Net Investment Income

2. Tax-Exempt Organizations — Unrelated Business Taxable Income

a. In General

b. Debt-Financed Property

c. Sale of a Partnership Interest

3. Securities Partnerships

4. RICs

5. REITs

6. Foreign Investors

a. U.S. Trade or Business and Effectively Connected Income

b. Fixed or Determinable Annual or Periodic Income

c. Backup Withholding

d. Foreign Investment in Real Property Tax Act

e. Branch Profits Tax on Foreign Corporations

f. Investments by Foreign Governments

(1) In General

(2) Commercial Activity

(3) Controlled Commercial Entities

(a) 1988 Temporary Regulations

(b) 2011 Proposed Regulations

7. S Corporations

a. Tax on Built-In Gains

b. Passive Investment Income

8. Marking PTP Interests to Market

a. Dealers

b. Traders

9. FBAR Filing Requirements for PTPs

E. Section 7874 — Surrogate Foreign Corporations

F. Potential Methods of Simplifying PTP Returns

1. Electing Large Partnerships

2. Trusts Formed to Hold PTP Interests

IV. Significant Developments

Introductory Material

A. New Uses of PTPs

B. Legislative Activity

1. Carried Interest Legislation

2. Advisor PTP Legislation

3. Obama Administration's 2012 Proposal

4. Master Limited Partnerships Parity Act

Working Papers

Working Papers

Table of Worksheets  

Worksheet 1 H.R. Rep. No. 391, 100th Cong., 1st Sess. (1987)

Worksheet 2 S. Rep. No. 63, 100th Cong., 1st Sess. (1987)

Worksheet 3 H.R. Conf. Rep. No. 495, 100th Cong., 1st Sess. (1987)

Worksheet 4 Taxation of Master Limited Partnerships (JCS 19-87) (July 20, 1987), published in S. Hrg. No. 485, 100th Cong., 1st Sess. (1987)

Worksheet 5 § 7704(d) Qualifying Income Flowchart

Worksheet 6 § 7704(d)(1)(A) Interest Flowchart

Worksheet 7 § 7704(d)(1)(C) Real Property Rents Flowchart

Worksheet 8 Advisor PTP

Worksheet 9 Advisor PTP — Qualifying Income

Worksheet 10 Advisor PTP — Non-Qualifying Income

Worksheet 11 Advisor PTP — Exchange Rights

Worksheet 12 Permanent Capital Fund

Worksheet 13 Tax Disclosure — Language for Disclosing Using Monthly Purchase Price Convention for Purposes of Calculating a Purchasing Partner's Section 743 Adjustment and a Selling Partner's Share Of Ordinary Income Upon Sale of Interest

Worksheet 14 Tax Disclosure — Language for Disclosing Use of Aggregation Method Contrary to Treas. Reg. § 1.704-3(a)(2)

Worksheet 15 Sample SEC Disclosure

Worksheet 16 Technical Termination Guidance

Worksheet 17 IDR Examples

Worksheet 18 Qualifying Income Under § 7704(d)(1)(E)