Tax News
NY City Bar Requests Guidance Regarding Publicly Traded Partnerships
January 17, 2011
On January 10, 2011 the NY City Bar issued a report and request for guidance regarding publicly traded partnerships (PTPs). Most funds do not fall within the category of PTPs but some do. To name a few fund/PTPs - Fortress Investment Group (FIG), The Blackstone Group (BX) and KKR Financial Holdings LLC (KFN). Under Code Section 7704, PTPs are taxed as corporations unless they qualify for some of the safe harbors enumerated in that section. Most funds rely on the so called "90-10 safe harbor."  Under this safe harbor a PTP is not treated as a corporation if 90% of its income is qualifying income. Qualifying income generally includes certain categories of passive income such as interest, dividends, rents and gains from the disposition of capital assets. It also includes income and gains derived from the exploration, development, mining or production, processing, refining, transportation, or the marketing of any mineral or natural resources.  This latter exception is usually applicable to business development companies (BDCs) that specialize in the natural resources business such as the NGP Capital Resources Company (NGPC).   

The report has numerous suggestions that are generally pro-fund.  At least to me, the most notable recommendations were the following: (1) clarify that CODI should be treated as qualifying income. As of now there is no clear guidance regarding this issue and in light of the recent economic stagnation and the many workouts and bankruptcies that take place addressing the issue makes sense. The other suggestion deals with the open-end redemption plan safe harbor under Reg. § 1.7704-1(f).  This safe harbor provides that the transfer of an interest in a partnership pursuant to a redemption or repurchase agreement is disregarded in determining whether interests in the partnership are readily tradable on a secondary market or the substantial equivalent only if the sum of the percentage interests in partnership capital or profits transferred during the taxable year of the partnership does not exceed 10% of the total interests in partnership capital or profits.  Basically, this is a pretty low threshold. Considering the turnover for many of these PTP funds, the threshold is difficult to meet.  The report suggests that this 10% threshold should either be removed entirely or increased to say, 35%.  It is hard to surmise whether any of these suggestions will be accepted and come to fruition, but considering everything else Treasury has on its place, my guess would be that this will go nowhere.  Nevertheless, it is something to keep an eye on since if adopted, it would improve PTPs' standing vis-a-vis the Section 7704 safe harbors.  The report could currently be found on TNT (2011 TNT 11-97). The NYCBAR reports could also be found at the Bar’s website, but usually takes a while - http://www.nycbar.org/Publications/reports/reportsbycom.php?com=109
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Tags: NY City Bar, NYCBAR, PTP, PTP tax, PTP taxation, publicly traded partnership, publicly traded partnership taxation, Section 7704