One-time foreign income inclusion would not end partnership treatment

Plain-English summary

A publicly traded partnership indirectly owned a substantial noncontrolling interest in a foreign partnership whose group included foreign corporations. The partnership expected the newly amended Section 965 rules might create a one-time subpart F income inclusion and cause it to miss the rule requiring at least 90 percent qualifying income. It represented that more than a redacted percentage of its income qualified when the possible Section 965 inclusion was ignored. The IRS ruled that any resulting failure for the specified period would be inadvertent and that the entity would continue to satisfy the qualifying-income test, provided it otherwise met the test. The IRS did not decide whether the Section 965 inclusion itself was qualifying income.

Ruling snapshot

• Question: Would a possible Section 965 inclusion cause the publicly traded partnership to lose partnership treatment under Section 7704?
• Outcome: Approved conditionally, any failure for the stated period was 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: 201818001 Third Party Communication: None
Release Date: 5/4/2018 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:B03
PLR-101590-18
Date:
February 01, 2018

                                                LEGEND

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

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

a = ---

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

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

Date 3 = --------------------------

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

    This letter responds to a letter dated January 18, 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.

   On Date 2, X acquired a substantial but non-controlling indirect equity interest in

an entity organized under the laws of a foreign country that is treated as a partnership
for U.S. federal income tax purposes (the “Foreign Partnership”). Foreign Partnership
owns, operates, develops, and acquires terminal and storage facilities (and related
PLR-101590-18 2

assets) with respect to refined petroleum products, liquefied petroleum gas, crude oil,
natural gas, liquefied natural gas, 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. X represents recent changes to § 965(a) (discussed below) could cause a
one time subpart F income inclusion for X’s taxable year ending Date 3 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 a% 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.
PLR-101590-18 3

   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 3, 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 3, 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)(1) 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.
PLR-101590-18 4

     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,


                                   ______________________________
                                   Bradford R. Poston
                                   Special Counsel
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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