Section 1446 Tax for Fiscal Year Partnerships in 2013

Announcement 2013-30

Partnerships that have effectively connected taxable income (ECTI) allocable to a foreign partner must file a 2012 Form 8804, Annual Return for Partnership Withholding Tax (Section 1446), for any taxable year that begins in 2012. In all such cases, the 2012 Form 8804 continues to apply the tax rates in effect in 2012 for purposes of determining the amount of section 1446 withholding tax that partnerships must pay for taxable years beginning in 2012.

Foreign partners in a fiscal year partnership with a taxable year ending in 2013 nonetheless must pay tax on their distributive share of the partnership’s ECTI based on the tax rates in effect in the taxable year of their inclusion as determined under section 706(a).

This Announcement is effective for partnership taxable years beginning in 2012.

The principal author of this announcement is Ronald M. Gootzeit of the Office of Associate Chief Counsel (International). For further information regarding this announcement contact Ronald M. Gootzeit at (202) 622-3860 (not a toll-free call).

Qualifying Services under IRC 7704

IRS Private Letter Ruling 201213004

This letter responds to a letter dated May 25, 2011, and subsequent correspondence by X’s authorized representative, requesting rulings under § 7704 of the Internal Revenue Code on behalf of X.

The information submitted states that X is a State limited liability company that elected to be classified as an association for federal income tax purposes.  X is a registered broker-dealer.  X proposes to operate two separate matching services, the Qualifying Service and the NonQualifying Service (collectively, the “Services”), which facilitate the buying and selling of third party limited partnership interests.  Listings on the Qualifying Service are separate from listings on the NonQualifying Service.  The same interests in a partnership will not be simultaneously listed on both the Qualifying Service and the NonQualifying Service. The Qualifying Service operates in a manner designed to satisfy the qualified matching service requirements set forth in § 1.7704-1(g) of the Procedure and Administration Regulations.  The NonQualifying Service fails to satisfy one or more of the requirements in § 1.7704-1(g).

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Swap Income as Qualifying Income for a Publicly Traded Partnership under IRC 7704(d)(1)

IRS Private Letter Ruling 201208021

This letter responds to a letter dated August 22, 2011, submitted on behalf of Company, requesting that income derived from treasury locks, interest rate swaps, and forward-rate interest swaps is qualifying income within the meaning of § 7704(d)(1) of the Internal Revenue Code.

Company is a publicly-traded limited partnership organized under the laws of State.  Company has not elected to be taxed as an association for federal tax purposes.  Company conducts its business through affiliated operating limited partnerships and limited liability companies that are disregarded entities or partnerships for federal tax purposes.

Company is principally engaged in the transportation, storage and marketing of refined petroleum products and natural gas.  In order to obtain funds for asset acquisitions and to conduct its operations, Company periodically issues debt securities.  The interest rate payable on these securities is a function of the prevailing interest rate on a U.S. Treasury bond of the same maturity as Company’s proposed debt issue, and of Company’s credit rating.  In the time period between Company’s decision to issue debt and its actual issuance (the exposure period), Company is at risk that its cost for such debt capital will be increased by an increase in interest rates on U.S. Treasuries.  To minimize this risk, Company
enters into treasury locks – an arrangement in which an unrelated party agrees to purchase U.S. Treasury bonds from Company at a price certain and with an interest rate equal to the rate in effect on the date of agreement.  If the prevailing rate on Treasury bonds increases during the exposure period, Company then can purchase Treasuries at a lower market price for sale to the counterparty, thus realizing a gain that offsets Company’s increased cost of debt capital.  If, however, the prevailing Treasury rate decreases during the exposure period, upon settlement of the treasury lock Company realizes a loss that offsets the lower cost of issuing its debt.  (Generally, no Treasury bonds are actually purchased and delivered; the parties settle on a net basis.)

Company’s capital structure includes both fixed and floating rate debt.  At a given time, Company may determine that market conditions favor paying a floating rate when it has a fixed rate debt outstanding.  At other times, Company may determine that market conditions favor paying a fixed rate when it has a floating rate debt outstanding.

In either case, Company may engage in an interest rate swap.

To obtain a cash flow at a floating rate in exchange for one at a fixed rate, Company will agree to pay to an unrelated party, typically a financial institution, a fixed interest rate on a notional principal amount.

In return, the counterparty agrees to pay Company a floating index rate, determined by reference to some established index, on the notional principal amount.  If the index rate for a given month exceeds the fixed rate, the counterparty owes Company an amount equal to the excess interest rate multiplied by the notional principal amount.  If, however, the fixed rate exceeds the index rate in a month, Company owes the counterparty.  Amounts owing are netted at settlement, which occurs at the end of the interest rate swap’s term.

Exchanging a floating rate cash flow for a fixed rate flow operates in a similar manner, except that Company will pay the counterparty a floating interest rate on a notional principal amount, and it will receive fixed rate payments in return.

As an alternative to interest rate swaps, Company may desire to lock in a current rate with respect to a future issuance, in which case, one of its available options is to enter into a forward-start interest rate swap.  To lock in a spot interest rate for a period prior to the issuance of its fixed-debt securities (a forward lock), Company will agree to pay a counterparty a fixed interest rate on a notional principal amount.  The counterparty, typically a financial institution, would agree to pay Company an amount equal to a floating index rate, determined by reference to some established index, multiplied by the notional principal amount for a fixed period that begins on the date of the anticipated debt issuance.  If the index rate exceeds the fixed interest rate on the date of issuance of the debt securities, the counterparty owes Company an amount equal to the excess of the excess interest rate multiplied by the notional principal amount over the term of the forward lock.

Converting an expected floating-rate debt securities offering into a fixed rate instrument operates in a similar manner as exchanging a floating rate cash flow for a fixed rate flow, except its effective date is in the future because its term coincides with an expected floating-rate debt issuance and not an existing floating-rate debt issuance.

In some cases, the treasury locks, interest rate swaps, and forward-start interest rate swaps entered into by Company may be integrated with the related debt instruments under § 1.1275-6 of the Income Tax Regulations.  Company is requesting a ruling to apply only where a treasury lock, interest rate swap, or forward-rate interest swap can not be so integrated.

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Qualifying Income of a Publicly Traded Partnership under IRC 7704

Private Letter Ruling 201206004

This responds to a letter dated June 3, 2011, submitted on behalf of Company, and subsequent correspondence, requesting a ruling concerning the qualifying income exception to the publicly traded partnership rules of § 7704 of the Internal Revenue Code.

Company is a limited partnership organized under the laws of State.  Company is a “publicly traded partnership” within the meaning of § 7704(b).  Company, through affiliated limited partnerships or disregarded entities, is principally engaged in the transportation, storage and distribution of refined petroleum products.  This ruling request involves fees Company charges as part of its fuel additization and ethanol blending activities at its refined product terminals.

Company owns X refined product terminals.  Company’s refined product terminals receive petroleum products from refineries, major common-carrier pipelines or other vessels.  Company stores these products at its refined product terminals which it then loads onto delivery vehicles for transportation to the next point in the fuel supply chain.  Company charges a fee for receiving and loading fuels onto delivery vehicles for transportation.  During the loading process, Company also injects fuel additives and blends ethanol into the petroleum products.  Company represents that it acts as a wholesale distributor of refined petroleum products and is not engaged in retail activity

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Michigan: Revised Notice on Michigan Business Tax Treatment of Disregarded Entities Reflects Recently Enacted Legislation

State Tax Matters:

Notice to Taxpayers Regarding Federally Disregarded Entities and the Michigan Business Tax, Mich. Dept. of Treas. (issued 11/29/10; revised 4/30/11; revised 10/3/11; revised 11/15/11; revised 1/26/12). The department has once again updated its notice on the Michigan Business Tax (MBT) treatment of federally disregarded entities to include legislative amendments that were enacted on December 27, 2011 [See previously issued Multistate Tax Alert for more details on this new law], which clarified the manner in which a federally disregarded entity is treated for MBT purposes. The new law clarification is retroactive to January 1, 2008, and provides that a “person” that is a disregarded entity for federal income tax purposes under the Internal Revenue Code shall be classified as a disregarded entity for MBT purposes.

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SEC Issues No-Action Letter Clarifying Position w/r/t Registration Requirements of Special Purpose Vehicles and Affiliated Investment Advisers

On January 18, 2012, the Division of Investment Management (Staff) of the Securities
and Exchange Commission (SEC) issued a no-action letter reaffirming its position that
certain special purpose vehicles (SPVs) created by a registered investment adviser are not
required to separately register as an investment adviser (No-Action Letter).

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Michigan Enacts Legislation Clarifying Treatment of Disregarded Entities for Michigan Business Tax Purposes

State Tax Matters:

Multistate Tax Alerts:

Recently enacted legislation clarifies the manner in which a federally disregarded entity is treated for Michigan Business Tax (MBT) purposes. This clarification, which is retroactive to January 1, 2008, provides that a “person” that is a disregarded entity for federal income tax purposes under the Internal Revenue Code shall be classified as a disregarded entity for purposes of the MBT Act.

This Multistate Tax Alert discusses this new law.

“Multistate Tax Alerts: Michigan Enacts Changes to Corporate Income Tax

State Tax Matters:

On December 27, 2011, Michigan Governor Snyder signed a series of bills amending the Corporate Income Tax (CIT) effective January 1, 2012. The enacted provisions clarify the treatment of a disregarded entity and change the manner in which ownership in a unitary partnership or limited liability company (LLC) affects a taxpayer’s apportionment factor and CIT base.

This Multistate Tax Alert summarizes these law changes.”

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Part III – Administrative, Procedural, and Miscellaneous

This notice provides a safe harbor reporting method that an eligible real estate mortgage investment conduit (REMIC) may use to satisfy its reporting obligations under § 1.860F-4(e)(1)(ii) of the Income Tax Regulations with respect to information regarding REMIC assets that the REMIC must report to residual interest holders on a Schedule Q (Form 1066), Quarterly Notice to Residual Interest Holder of REMIC Taxable Income or Net Loss Allocation (Schedule Q).

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