December 2009 PTP NEWSBYTES* In This Issue: mymlp Where To Stay In Dallas Tax Corner 2009 MLP User Conference. *connectedthinking Pwc

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1 PTP NEWSBYTES* December 2009 In This Issue: mymlp Where To Stay In Dallas Tax Corner 2009 MLP User Conference *connectedthinking Pwc

2 mymlp PricewaterhouseCoopers LLP ( PwC ) is proud to unveil our new collaborative web portal site. This site represents our continued efforts to provide our clients, with the latest technologies, tax applications and business consulting services, while also providing a data sharing bridge, which connects you to our team, products and services. Designed specifically for your partnership, mymlp allows you and your team access to a unique and customized portal that provides single-logon access to PwC s many applications and services offerings. Highlights and Functionality of mymlp: Single point of access to PwC team, applications and services Access to your partnerships project information, critical project milestones and deliverable due dates Access to your partnerships asset, project and investor reports A robust document library, providing simple and secure file and report sharing and storage Application links providing one-click access to PARSWeb, TaxWeb and Nominee Bridge Single source for project team (client and PwC) information, such as names, phone numbers, and addresses Your PwC team will be contacting you to provide you access and training for this new portal in early January. Again, please know we value and appreciate our long-term business relationship with you and your team. You have our commitment that our only priority is to provide you with tangible value, now and in the future. If you should have any questions about mymlp or any of our Services, please do not hesitate to call on us. 1

3 Where To Stay in Dallas For those who are making your travel plans to Dallas, we have negotiated favorable rates with a few hotels located near the downtown PwC office. Please see the list below. For all hotels, mention that you are with PricewaterhouseCoopers. Please note: The week of February 7th - 14th, the NBA All Star Game will be in Dallas so many area hotels may be booked. If you will be in Dallas during this time period, please book your rooms as soon as possible. The Westin City Center Hotel - $ North Pearl Street Dallas, TX (214) Fairmont Hotel Dallas - $ (If you have problems with the hotel guaranteeing this rate 1717 North Akard Street [sold out of PwC rate] the next level rate may be $142) Dallas, TX (214) Ritz Carlton Hotel Dallas - $ (includes complimentary car service to the office and back 2121 McKinney Avenue to hotel) Dallas, TX (214) Rosewood Crescent Hotel - $ (includes complimentary car service to the office and 400 Crescent Court back to hotel) Dallas, TX (214)

4 Passive Activity Overview Tax Corner Under 469(k), a publicly traded partnership (PTP) is required to be treated as a separate passive activity by their unit holder and cannot be combined with other passive activities. This article provides some insight into what material participation in a passive activity implies for an individual taxpayer and how the treatment of passive activities differs from activities that generate active income, such as salaries. Congress enacted several provisions in the Tax Reform Act of 1986 to reduce the effectiveness of tax shields through passive investments. The primary step taken was the enactment of the passive loss rules contained in 469. Identifying Passive Activities A passive activity, defined under 469(c)(1), is: (A) any activity which involves the conduct of a trade or business and in which the taxpayer does not materially participate (discussed below) or (B) any rental activity, with an exception for real estate professionals ( 469(c)(7)). Conversely, nonpassive income is income received for services performed by the taxpayer, such as a salary, tips, or the business income of a sole proprietorship operated by the taxpayer. Passive activity income specifically excludes portfolio income (Treas. Reg T(c)(3)(i)). Portfolio income is all gross income, other than income earned in the ordinary course of a trade or a business that is attributable to: interest; dividends; annuities; royalties; income from a real estate investment trust, real estate mortgage investment conduit, common trust fund, controlled foreign corporation, qualified electing fund, and/or a cooperative; and gain or loss on the disposition of property that produces portfolio income. Taxpayers sometimes incorrectly classify portfolio income items as passive activity income, assuming that they should apply the material participation standard to portfolio income. The material participation standard is only applicable in determining whether a taxpayer is a passive or active participant in the conduct of a trade or business and does not change the character of portfolio income. In order to be considered a material participant in an activity, the taxpayer must be involved in the operations of the activity on a regular, continuous, and substantial basis ( 469(h)(1)). Seeking to make the material participation standard a more objective test, the IRS provided the following seven tests to make this determination (Treas. Reg T(a)): 1) The individual participates for more than 500 hours during the year, 2) The taxpayer does substantially all of the work in the activity, 3) The taxpayer works for more than 100 hours in the activity during the year and no one else works more than the taxpayer, This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. 3

5 Tax Corner (cont.) 4) The activity is a significant participation activity, and the sum of such activities in which the taxpayer works hours on each activity exceeds 500 hours for the year, 5) The taxpayer materially participated in the activity in any 5 of the previous 10 years, 6) The activity is a personal service activity and the taxpayer materially participated in the activity for any of the 3 prior years, and 7) Based on all of the facts and circumstances, the taxpayer participates in the activity on a regular, continuous, and substantial basis during such year. (However, this test only applies if the taxpayer works at least 100 hours in the activity, no one else works more hours than the taxpayer in the activity, and no one else receives compensation for managing the activity.) If the taxpayer is a limited partner in the activity being tested, only tests 1, 5, or 6 above may be used to determine if the taxpayer satisfies the material participation test. The other four tests are not applicable to a limited partner. Computation of Passive Income Each activity in which a taxpayer has an interest must be identified and classified as passive or nonpassive. An activity is not necessarily limited to an individual entity nor is one entity that performs multiple activities limited to one activity. Treas. Reg (c)(1) indicates that as long as the activities constitute an appropriate economic unit of measurement for gain or loss for the purposes of 469, they can be classified into particular activity groupings. Treas. Reg outlines five factors to determine which activities form an appropriate economic unit: 1) Similarities and differences in types of trades or businesses; 2) The extent of common control; 3) The extent of common ownership; 4) Geographical Location; and 5) Interdependencies between or among the activities. For example, a taxpayer may own neighbouring restaurants, Pizza Palace and Burger Barn, in both New York City and Houston. Depending on the facts and circumstances, the taxpayer may classify the activities as: (1) a single activity; (2) a Pizza Palace activity and a Burger Barn activity; (3) a Houston activity and a New York City activity; or (4) four different activities. The Regulations explicitly prohibit the grouping of rental activities with other trade or business activities (Treas. Reg (d)(1)). Two significant tax issues to consider when planning activity groupings are 1) qualifying as a material participant and 2) using suspended losses on the disposition of an interest. The requirements of material participation are measured on a grouped activity by grouped activity basis; therefore if two entities are considered one activity, the taxpayer may more readily satisfy the material participation requirement. However, the taxpayer should consider that in order to realize a suspended loss upon disposition, the law requires the disposition be of the entire grouped activity and not a partial disposition. This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. 4

6 Tax Corner (cont.) Furthermore, it should be noted that the IRS just released Rev. Proc which will require taxpayers to report the following in their timely filed tax return: 1. New passive activity groupings, 2. Regroupings of activities from prior years, and 3. Additions of specific activities within their existing groupings of activities. More information regarding the disclosures requirements are included below. For each passive activity, deductions related to that activity must be matched against the passive activity gross income to determine if that activity resulted in income or loss. Once net income or loss has been determined for each passive activity, the sums are aggregated for all passive activities, with the exception of PTPs ( 469(k)), which are tracked separately. Outside of the special rules for PTPs (discussed later), a passive activity loss is the amount by which the total of losses from all passive activities for the taxable year exceeds the aggregate income from all passive activities for the taxable year. Passive activity income is included in adjusted gross income, and passive activity losses are suspended and carried forward until they can be used to offset passive activity income generated in future tax years or upon the complete disposition of an activity. When recognizing a suspended passive activity loss in a future tax year, taxpayers must allocate the suspended losses among the passive activities ( 469(b)). This allocation is made pro rata by determining the ratio of net losses from that activity to the total net losses from all passive activities for the year (S. Rep. No. 313, 99th Cong., 2d Sess. 722 (1986)). The allocation is required in order to properly account for loss on the disposition of an activity. Note that the rules for treatment of suspended losses are different in the case of an interest(s) in a PTP. Upon disposition of an interest in passive activity, the taxpayer may deduct the suspended losses allocable to that activity if: the disposition is of the taxpayer s entire interest in the activity; the disposition is in the form of a fully taxable transaction; and the person acquiring the interest is not related to the taxpayer. A disposition of less than the entire interest in the passive activity has no effect on the suspended losses of that activity. Also, a disposition of the entire interest in the activity requires a disposition of the taxpayer s interest in all entities that the taxpayer has grouped into the activity. Revenue Procedure and Disclosure of Passive Activity Groupings Rev. Proc was released in response to Notice , which proposed a disclosure regime for taxpayer s passive activity groupings. Comments were requested and received on the initial Notice and the result is the release of this ruling. This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. 5

7 Tax Corner (cont.) For tax years beginning on or after January 25, 2010, the IRS requires a written statement to be included with the taxpayer s original income tax return for the first taxable year in which two or more activities are originally grouped as a single activity or if a taxpayer adds a new activity to an existing grouping. The disclosure statement must identify the names, addresses, and employer identification numbers, if applicable, for activities that are being grouped as a single activity. In addition, the statement must include a declaration that the grouped activities constitute an appropriate economic unit for the measurement of gain or loss for purposes of 469. In the case of a regrouping of activities, the disclosure statement should include the information noted above as well as an explanation of why the taxpayer s original grouping was determined to be clearly inappropriate or the nature of the material change in the facts and circumstances that makes the original grouping clearly inappropriate. Lastly, reporting of pre-existing groupings are only required to the extent there was a change during the taxable year to the original grouping. In general, partnerships and S corporations are not subject to the requirements in Sections 4.02 through 4.04 of Notice , but are instead required to comply with the disclosure requirements on the entity level tax return. Separate disclosures under Rev. Proc by partnerships and S corporations are only required in specific situations that are beyond the scope of this discussion. Finally, Rev. Proc indicates that a failure to comply with the disclosure rules set forth above and the discovery of this failure by the IRS will lead to the treatment of each activity as a separate activity for purposes of applying the passive activity loss rules of 469. If, however, in subsequent years the taxpayer discovers the failure to disclose the information in the original return in which the activities were grouped, the taxpayer should include the disclosures in the tax return in which the failure was first discovered. Treatment of Publicly Traded Partnerships Passive loss rules apply separately to each PTP in which the taxpayer owns an interest and income and loss related to an interest in a PTP are tracked separately from other passive activities of the taxpayer. Therefore, if taxpayer has an interest in PTP A and PTP B, as well as an investment in a non PTP passive activity, all three interests are preferred to be treated as separate activities under the passive loss rules. Therefore, net income from an interest in PTP A could not be sheltered by losses in PTP B or other any passive activity. For more information about the information discussed in this article, please contact Tim Watkins at timothy.r.watkins@us.pwc.com or at If you have suggestions for future topics, please contact Mark Flemmer at mark.e.flemmer@us.pwc.com or at This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding U.S. federal, state or local tax penalties. 6

8 2009 MLP User Conference The 2009 MLP User Conference was a huge success with 275 in attendance! We are always excited to visit with our clients. We hope the topics that were covered at the conference were informative and if you are in need of additional materials, let us know and we will forward them to you. Golf Winners: Closest to the Pin (Men) #5 - Mike Casciato Closest to the Pin (Women) #13 - Fran Benoit Longest Drive (Men) #11 - Rob Baldwin Longest Drive (Women) #6 - Peggy Rebstock 1st Place Team (60) 2nd Place Team (63) 3rd Place Team (65) Chris Buckalew Jimmy Davis Patrick Hagen Mike Knesek Larry Bachman Ty McAden Glenn Carter Tom Rainbow Fran Benoit Mike Casciato Fernando Sandoval Divesh Mehra Sportsfishing Winner: Ellen Grossman caught the largest fish. Congratulations to all of the Winners!!! We look forward to seeing you during processing season and at the 2010 MLP User Conference. *connectedthinking 7

9 EDITORS Tim Ward Mark Flemmer Tim Watkins Penny Wolf DESIGN AND LAYOUT Liz Walton 2010 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US).