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April 1, 2014
IRS Has Stopped Ruling on Publicly Traded Partnership Qualifying Income
by Amy S. Elliott

Full Text Published by Tax Analysts®

This document appeared in the March 31, 2014 edition of Tax Notes Today.

The IRS has temporarily stopped considering private letter ruling requests on whether a publicly traded partnership (PTP) satisfies the qualifying income requirements of section 7704, according to Clifford Warren, special counsel to the IRS associate chief counsel (passthroughs and special industries).

At an American Law Institute Continuing Legal Education corporate taxation conference in Washington on March 28, Robert J. Crnkovich of EY said he'd heard rumors that the IRS had issued a moratorium on letter rulings involving PTPs in the natural resources area.

"'Issued a moratorium' I think overstates it. It's nothing that formal. But we have what officially we call a pause," Warren said. "We're regrouping. We're speaking with our counterparts at Treasury. We're trying to decide what the rules should be."

Warren indicated that the pause came about because prior rulings might have gone too far, although he said no such conclusion has yet been reached.

The pause comes following a recent flurry of favorable letter rulings that expanded some taxpayers' notions of what constitutes qualifying income under section 7704, particularly in the areas of natural gas hydraulic fracturing (fracking) and real property rents.

It also comes after the IRS instituted a similar ruling pause regarding real estate investment trusts. For several months during the summer and fall of 2013, the IRS halted work on letter rulings addressing whether nontraditional assets constituted real property for purposes of section 856 while a working group studied the issue. The Service has since resumed issuing those rulings.

Analogizing the IRS's thinking to golf, Warren said that while some PTP rulings might be straight down the fairway, others are in the rough or the woods.

Also, in golf, "it's all fairly well delineated and you know when you're in those three territories," Warren said. "In this metaphysical world of tax that we live in, things are not so clearly delineated. . . . So it's just really sometimes not clear where the lines ought to be drawn in PTPs." He added that there are also significant tax policy considerations at stake.

Crnkovich asked whether the moratorium applies only to PTP rulings in the natural resources area. Warren responded that while most PTP rulings tend to be in that area, the pause is not limited to it.

Crnkovich asked whether the IRS will make a public announcement about the moratorium.

"We're still studying it, so we're not sure when this pause will end," Warren said. "We may, at some point, begin issuing more down-the-fairway rulings . . . and maybe just think more about the rulings that might be in the rough."

Crnkovich said the IRS has issued some letter rulings that it might now consider to be in the rough or the woods. "Would there be the possibility of revoking those private rulings?" he asked.

"It's a possibility. I don't think it's likely, but at this point everything is on the table," Warren said. "We are aware of the commercial realities, the marketplace realities of doing something like that, but there is precedent of similar issues and similar games of classification that happened in the REIT world."

Crnkovich cautioned that although revoking a ruling for a public entity would have significant implications, "the flip side is if you would not revoke it, then those that received the private rulings would be at a competitive advantage."

"We're well aware of that," Warren replied. "That makes this that much more sensitive and difficult."

Warren wouldn't speculate on how long the pause will last, but he said it isn't simply a function of the tax law. "The industry has changed," he said, pointing to fracking and the increase in domestic production.

Warren reiterated that for now, ruling holders shouldn't be concerned that their rulings might be revoked. "No decisions have been made," he told Tax Analysts.

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