Transition-tax income will not end partnership treatment if it alone causes failure

Plain-English summary

A publicly traded partnership indirectly controlled several foreign corporations. The one-time Section 965 inclusion enacted in 2017 could cause the partnership to miss Section 7704's requirement that at least 90 percent of gross income be qualifying income. Apart from the possible Section 965 inclusion, the partnership represented that more than a redacted percentage of its income was qualifying income. The IRS ruled that any failure caused solely by the Section 965 inclusion would be inadvertent, so the partnership would continue to satisfy the gross-income requirement. The ruling did not decide whether the Section 965 inclusion itself was qualifying income or whether the partnership otherwise met the 90 percent test.

Ruling snapshot

• Question: Would a publicly traded partnership lose partnership treatment if a one-time Section 965 inclusion alone caused it to miss the 90 percent qualifying-income test?
• Outcome: Approved; a failure caused solely by that inclusion would be treated as inadvertent.
• Key authorities: IRC §§ 951, 965, and 7704(c), (e)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201822002 Third Party Communication: None
Release Date: 6/1/2018 Date of Communication: Not Applicable
Index Number: 7704.00-00, 7704.04-00
Person To Contact:
--------------------------- ------------------------------, ID No. ------------
-------------------------------- ----------------
------------------------- Telephone Number:
------------------------------------------ ----------------------
Refer Reply To:
CC:PSI:B01
PLR-105058-18
Date:
February 28, 2018

                                              LEGEND

X = --------------------------------------------------------------------------------------------------

A = ----------------------------------

B = ----------------------------------------

C = ----------------------------------------------

D = -----------------------------------------------------

E = --------------------------------------------------------------------------

State = --------------

n = ----

Date 1 = --------------------------

Date 2 = ---------------------------

Dear --------------:

    This letter responds to a letter dated February 13, 2018, submitted on behalf of X

by its authorized representative, requesting a ruling under § 7704(e) of the Internal
Revenue Code (Code).

                                       FACTS

   The information submitted states that X 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. X is a publicly traded partnership.

   X has a controlling indirect equity interest in A, B, C, D, and E, entities organized

under the laws of a foreign country that are classified as corporations for U.S. federal
tax purposes (the “Foreign Entities”). X represents that the Foreign Entities are
controlled foreign corporations and recent changes to § 965(a) (discussed below) could
cause a one-time subpart F income inclusion for X’s taxable year ending Date 2 that
may cause X to fail to satisfy the 90 percent qualifying income test in § 7704(c). X
further represents that, without regard to any potential income inclusions pursuant to
§ 965, over n% of X’s income is considered qualifying income under § 7704(d).

                               LAW AND ANALYSIS

    Section 951 provides, in pertinent part, that if a foreign corporation is a controlled

foreign corporation for an uninterrupted period of 30 days or more during any taxable
year, every person who is a United States shareholder (as defined in § 951(b)) of such
corporation and who owns (within the meaning of § 958(a)) stock in such corporation on
the last day, in such year, on which such corporation is a controlled foreign corporation
shall include in his gross income, for his taxable year in which or with which such
taxable year of the corporation ends, his pro-rata share of the corporation’s subpart F
income.

    On December 22, 2017, § 965 was amended by “An Act to provide for

reconciliation pursuant to titles II and V of the concurrent resolution on the budget for
fiscal year 2018,” P.L. 115-97, to provide that, for the last taxable year of a deferred
foreign income corporation that begins before January 1, 2018, the subpart F income of
the corporation (as otherwise determined for such taxable year under § 952) shall be
increased by the greater of (1) the accumulated post-1986 deferred foreign income of
such corporation determined as of November 2, 2017, or (2) the accumulated post-1986
deferred foreign income of such corporation determined as of December 31, 2017.

  Section 7704(a) provides that, except as provided in § 7704(c), a publicly traded

partnership will be treated as a corporation.

   Section 7704(b) provides that the term “publicly traded partnership” means any

partnership if (1) interests in that partnership are traded on an established securities
market, or (2) interests in that partnership are readily tradable on a secondary market
(or the substantial equivalent thereof).

  Section 7704(c)(1) provides that § 7704(a) does not apply to a publicly traded

partnership for any taxable year if such partnership meets the gross income

requirements of § 7704(c)(2) for the taxable year and each preceding taxable year
beginning after December 31, 1987, during which the partnership (or any predecessor)
was in existence.

   Section 7704(c)(2) provides, in relevant part, that a partnership meets the gross

income requirements of § 7704(c)(2) for any taxable year if 90 percent or more of the
gross income of the partnership for the taxable year consists of qualifying income.

   Section 7704(e) provides that if a partnership fails to meet the gross income

requirements of § 7704(c)(2), the Secretary determines that such failure was
inadvertent, 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
such partnership agrees to make such adjustments (including adjustments with respect
to the partners) or to pay such amounts as may be required by the Secretary with
respect to such period, then, notwithstanding such failure, such entity shall be treated
as continuing to meet such gross income requirements for such period.

                                 CONCLUSION

   Based on the facts submitted and the representations made, we conclude that if

X failed to meet the gross income requirements of § 7704(c)(2) for its period ending
Date 2 solely because of the § 965 subpart F income inclusion, then such failure was
inadvertent within the meaning of § 7704(e). Therefore, pursuant to § 7704(e), X will be
treated as continuing to meet such gross income requirements for the period ending
Date 2, and thereafter, provided X otherwise does not fail the requirements of
§ 7704(c)(2).

   Except as expressly provided herein, no opinion is expressed or implied

concerning the Federal tax consequences of any aspect of any transaction or item
discussed or referenced in this letter. In particular, no opinion is expressed as to
whether X otherwise meets the 90 percent gross income requirement of § 7704(c)(2) in
any taxable year for which this ruling may apply. Furthermore, no opinion is expressed
as to whether the § 965 subpart F income inclusion is qualifying income under
§ 7704(d).

   The ruling contained in this letter is based upon information and representations

submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for ruling, it is subject to verification on examination.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that this letter may not be used or cited as precedent.

     In accordance with the Power of Attorney on file with this office, a copy of this

letter is being sent to your authorized representatives.

                                   Sincerely,

                                   /s/

                                   ______________________________
                                   Caroline E. Hay
                                   Assistant to the Branch Chief, Branch 3
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2):
Copy of this letter
Copy for § 6110 purposes