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Income inclusion resulting from TCJA law change won’t cause PTP to lose status

May 14, 2018

In a Private Letter Ruling (PLR), IRS has concluded that a publicly traded partnership (PTP)’s subpart F income inclusion under Code Sec. 965, as recently amended by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017), would not cause it to fail to qualify as a PTP, provided that other requirements are met.

Background—CFCs. Under Code Sec. 951, if a foreign corporation is a controlled foreign corporation (CFC) for an uninterrupted period of 30 days or more during any tax year, its U.S. shareholders (as defined in Code Sec. 951(b)) who own (within the meaning of Code Sec. 958(a)) stock in such corporation on the last day of the tax year are required to include in income their pro rata share of the CFC’s subpart F income.

Code Sec. 965 was amended by the TCJA to provide that, for the last tax year of a “deferred foreign income corporation” that begins before Jan. 1, 2018, the subpart F income of the corporation (as otherwise determined for such tax year under Code Sec. 952) is increased by the accumulated post-1986 deferred foreign income of such corporation as of Nov. 2, 2017, or Dec. 31, 2017 (the measurement dates), whichever is greater. A deferred foreign income corporation is, as to any U.S. Shareholder, any specified foreign corporation (generally, any CFC or foreign corporation as to which one or more domestic corporations is a U.S. shareholder) of the U.S. Shareholder which has accumulated post-1986 deferred foreign income (as of one of the above measurement dates) greater than zero. (Code Sec. 965(d)(1))

Background—PTPs. Under Code Sec. 7704(a), except as provided in Code Sec. 7704(c), a PTP is generally treated as a corporation. A PTP includes any partnership the interests of which are either traded on an established securities market or readily tradeable on a secondary market or the substantial equivalent thereof. (Code Sec. 7704(b))

However, Code Sec. 7704(a) does not apply to a PTP for any tax year if such partnership meets the gross income requirements of Code Sec. 7704(c)(2) for the tax year and each preceding tax year beginning after Dec. 31, ’87 during which the partnership (or any predecessor) was in existence. (Code Sec. 7704(c)(1)) Under those requirements, a PTP won’t be treated as a corporation if at least 90% of its gross income for the tax year is “qualifying income.” (Code Sec. 7704(c)(2))

If: (i) a partnership fails to meet the gross income requirements of Code Sec. 7704(c)(2); (ii) IRS determines that the failure was inadvertent; (iii) no later than a reasonable time after the discovery of such failure, steps are taken so that such partnership once more meets such gross income requirements; and (iv) such partnership agrees to make such adjustments (including adjustments with respect to the partners) or to pay such amounts as may be required by IRS with respect to such period, then, notwithstanding such failure, such entity shall be treated as continuing to meet such gross income requirements for the period.

Facts. X, a PTP, was organized on Date 1 as a limited partnership under the laws of State and is classified as a partnership for federal income tax purposes.

On Date 2, X acquired a substantial but non-controlling indirect equity interest in a foreign entity that is treated as a partnership for U.S. federal income tax purposes (“Foreign Partnership”). Foreign Partnership owns, operates, develops, and acquires terminal and storage facilities and related assets with respect to various petroleum and similar products (the “Business”).

Foreign Partnership owns many of the assets related to the Business indirectly through other wholly and partially owned entities (collectively with Foreign Partnership, the “Foreign Entities”). Certain Foreign Entities are classified as corporations for U.S. federal tax purposes.

According to X, changes made by the TCJA to Code Sec. 965(a) would cause a one-time subpart F income inclusion for X’s tax year ending Date 3 that may cause X to fail to satisfy the 90% qualifying income test in Code Sec. 7704(c)) (which it would otherwise satisfy).

Failure to meet gross income requirements was inadvertent. The PLR concluded that, if X failed to meet the gross income requirements of Code Sec. 7704(c)(2) for its period ending Date 3, then such failure will be considered inadvertent within the meaning of Code Sec. 7704(e). Therefore, X will be treated as continuing to meet such gross income requirements for the period ending Date 3, and thereafter, provided X otherwise does not fail the requirements of Code Sec. 7704(c)(2).

References: For the “qualifying income” exception for publicly traded partnerships, see FTC 2d/FIN ¶ D-1369 ; United States Tax Reporter ¶ 77,044.01.

PLR 201818001

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