[Federal Register Volume 62, Number 244 (Friday, December 19, 1997)]
[Proposed Rules]
[Pages 66575-66576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33105]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-105163-97]
RIN 1545-AV15
Certain Investment Income
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
treatment of certain investment income under the qualifying income
provisions of section 7704(d) and the application of the passive
activity loss rules to publicly traded partnerships. The regulations
would affect the classification of certain partnerships for federal tax
purposes and would also affect the passive activity loss limitations
with respect to items attributable to publicly traded partnerships.
This document also contains a notice of public hearing on these
proposed regulations.
DATES: Written comments must be received by March 19, 1998. Requests to
speak (with outlines of oral comments) at a public hearing scheduled
for April 28, 1998, at 10 a.m., must be received by April 7, 1998.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-105163-97), room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG-105163-97), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may
submit comments electronically via the Internet by selecting the ``Tax
Regs'' option of the IRS Home Page, or by submitting comments directly
to the IRS Internet site at: http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in Room 2615, Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations,
Christopher Kelley, (202) 622-3080; concerning submissions and the
hearing, Evangelista Lee, (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Introduction
This document proposes to add Sec. 1.7704-3 to the Income Tax
Regulations (26 CFR part 1) relating to the definition of qualifying
income for publicly traded partnerships under section 7704(d) of the
Internal Revenue Code (Code). This document also proposes to amend
Sec. 1.469-10 of the Income Tax Regulations relating to the application
of section 469 of the Code to publicly traded partnerships.
Explanation of Provisions
Qualifying Income
Section 7704 of the Code provides that a publicly traded
partnership is generally treated as a corporation for federal tax
purposes unless 90 percent or more of the gross income of the
partnership consists of qualifying income. Section 7704(d) defines
qualifying income to include certain types of passive investment
income, such as interest, dividends, real property rents, and income
that would qualify under the regulated investment company provisions in
section 851(b)(2) or the real estate investment trust provisions in
section 856(c)(2). Since section 7704 was enacted, however, several new
types of financial instruments have been developed that generate
passive-type investment income similar to interest and dividends. The
preamble to the regulations under Sec. 1.7704-1, issued December 4,
1995, (regarding the definition of public trading) requested comments
from the public on the definition of qualifying income for investment
partnerships and other partnerships engaged in various types of
securities transactions.
In response to comments received, the proposed regulations provide
that qualifying income for purposes of section 7704(c) includes income
from holding annuities, income from notional principal contracts (as
defined in Sec. 1.446-3), and other substantially similar income from
ordinary and routine investments to the extent determined by the
Commissioner. Qualifying income, however, includes income from a
notional principal contract only if the property, income, or cash flow
that measures the amounts to which the partnership is entitled under
the contract would give rise to qualifying income if held or received
directly by the partnership. The proposed regulations also confirm that
capital gain from the sale of stock is qualifying income, regardless of
whether the stock pays dividends. The proposed regulations also provide
that qualifying income (as defined in the proposed regulations) does
not include income derived in the ordinary course of a trade or
business by a broker, dealer, or market maker. Income derived by
traders and investors can be qualifying income under the proposed
regulations. The proposed regulations, including the trade or business
restriction, are consistent with the legislative history of section
7704, which indicates that the exception for passive investment income
was intended to distinguish between partnerships engaged in investment
activities and those partnerships engaged in active business activities
that are more typically conducted in corporate form. See H.R. Rep. No.
391 (Part 2), 100th Cong., 1st Sess. 1066-69 (House Report). The IRS
also requests comments on the appropriate way to determine how gains
should be measured for purposes of determining whether 90 percent or
more of the partnership's gross income is qualifying income when a
partnership makes a mixed straddle account election under
Sec. 1.1092(b)-4T. The IRS believes that use of the daily mark-to-
market method provided for by Sec. 1.1092(b)-4T would be inconsistent
with the congressional purpose behind section 7704.
Passive Activity Loss Rules
Section 469(a) generally provides that if for any taxable year the
taxpayer is an individual, estate, trust, closely held C corporation,
or personal service corporation, neither the passive activity loss nor
the passive activity credit for the taxable year is allowed. Section
[[Page 66576]]
469(k) provides that section 469 applies separately with respect to
items attributable to each publicly traded partnership. Section
469(k)(2) defines a publicly traded partnership in the same manner as
section 7704(b). The legislative history of section 469(k) indicates
that the term publicly traded partnership has the same meaning for
purposes of section 469(k) as it does for purposes of section 7704. See
H.R. Rep. No. 495, 100th Cong., 1st Sess. 952-53 (1987) (Conference
Report). In addition, Notice 88-75 (1988-2 C.B. 386) provided the same
guidance on the definition of a publicly traded partnership for
purposes of both sections 469(k) and 7704.
The recently issued regulations under Sec. 1.7704-1, however,
define a publicly traded partnership only for purposes of section 7704.
The proposed regulations implement the legislative history of section
469(k) by providing that the definition of a publicly traded
partnership for purposes of section 469(k) is the same as the
definition of publicly traded partnership under section 7704.
Proposed Effective Date
These regulations are proposed to apply for taxable years of a
partnership beginning on or after the date the final regulations are
published in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because the
regulations do not impose a collection of information on small
entities, a Regulatory Flexibility Analysis is not required. Pursuant
to section 7805(f) of the Internal Revenue Code, this notice of
proposed rulemaking will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (preferably a
signed original and eight (8) copies) that are submitted timely to the
IRS. All comments will be available for public inspection and copying.
A public hearing has been scheduled for Tuesday, April 28, 1998, at
10 a.m., in Room 2615, Internal Revenue Building, 1111 Constitution
Avenue NW., Washington, DC. Because of access restrictions, visitors
will not be admitted beyond the Internal Revenue Building lobby more
than 15 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons
that wish to present oral comments at the hearing must submit timely
written comments (preferably a signed original and eight (8) copies) by
March 19, 1998 and submit an outline of the topics to be discussed and
the time to be devoted to each topic by April 7, 1998.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information: The principal author of these regulations is
Christopher Kelley, Office of Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *.
Par. 2. Section 1.469-10 is revised to read as follows:
Sec. 1.469-10 Application of section 469 to publicly traded
partnerships.
(a) [Reserved].
(b) Publicly traded partnership--(1) In general. For purposes of
section 469(k), a partnership is a publicly traded partnership only if
the partnership is a publicly traded partnership as defined in
Sec. 1.7704-1.
(2) Effective date. This section applies for taxable years of a
partnership beginning on or after the date final regulations are
published in the Federal Register.
Par. 3. Section 1.7704-3 is added to read as follows:
Sec. 1.7704-3 Qualifying income.
(a) Certain investment income--(1) In general. For purposes of
section 7704(d)(1), qualifying income includes capital gain from the
sale of stock, income from holding annuities, income from notional
principal contracts (as defined in Sec. 1.446-3), and other
substantially similar income from ordinary and routine investments to
the extent determined by the Commissioner. Income from a notional
principal contract is included in qualifying income only if the
property, income, or cash flow that measures the amounts to which the
partnership is entitled under the contract would give rise to
qualifying income if held or received directly by the partnership.
(2) Limitations. Qualifying income as defined in paragraph (a)(1)
of this section does not include income derived in the ordinary course
of a trade or business. For purposes of the preceding sentence, income
derived from an asset with respect to which the partnership is a
broker, market maker, or dealer is treated as income derived in the
ordinary course of a trade or business; income derived from an asset
with respect to which the taxpayer is a trader or investor is not
treated as income derived in the ordinary course of a trade or
business.
(b) Effective date. This section applies for taxable years of a
partnership beginning on or after the date final regulations are
published in the Federal Register.
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 97-33105 Filed 12-18-97; 8:45 am]
BILLING CODE 4830-01-P
