Ninth Annual Domestic Tax Conference. 24 April 2014 New York City

Transcription

1 Ninth Annual Domestic Tax Conference 24 April 2014 New York City

2 Recent developments in partnership taxation

3 IRS Circular 230 disclosure Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions. These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice. Page 3

4 Disclaimer EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited located in the US. This presentation is 2014 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP. Page 4

5 Today s presenters Robert Crnkovich Dawn Duncan Franny Wang Page 5

6 Agenda Taking partnerships public Up-Cs Master limited partnerships (MLPs) Recent developments Jobs Act proposed regulations Disguised sale proposed regulations Section 752 debt allocations proposed regulations Camp tax reform proposals Page 6

7 Taking partnerships public Page 7

8 Partnership initial public offerings (IPOs) Objectives Monetization of legacy owners (i.e., sponsor s) investment Equity capital for growth/acquisitions Long-term, stable shareholder profile Acquisition currency Significant market activity At least six Up-C IPOs in MLP IPOs in 2013 Nearly 70 MLPs have gone public in the last five years 30 MLP private letter rulings in 2013 Page 8

9 Partnership IPO structures UP-C vs. PTP (Publicly Traded Partnerships)/MLP Up-C PTP/MLP Sponsors Golden shares Public Sponsors Public PubCo OpCo PTP/MLP Qualifying and non-qualifying income Nonqualifying income Qualifying income Page 9

10 Up-C Transactional steps: Step 1: Sponsors acquire high vote stock (golden shares) in a newly formed C corporation (PubCo). Step 2: PubCo issues regular common stock to the Public in an initial public offering. Step 3: Cash proceeds from the IPO are invested into OpCo in exchange for a managing interest (a portion of the proceeds may be used to purchase interests in OpCo from the Sponsors). Step 4: The sponsors interests in OpCo are made exchangeable for stock in PubCo. Sponsors Limited partnership interest 4 1 Golden shares Cash Cash OpCo Public Cash 2 Stock PubCo 3 Page 10

11 Up-C Issues to consider Tax receivable agreement (TRA) Compensation arrangements Section 704(c) methods Section 197 anti-churning Retain benefits of flow-through taxation on earnings Opportunity for tax-deferred IPO proceeds extraction Page 11

12 MLP Transactional steps: Step 1: Sponsors form a new MLP. Step 2: Sponsors transfer entire interest in OpCo to MLP in exchange for a general partner interest (GP interest), subordinated limited partner interests (subordinated units), limited partner units (common units), and incentive distribution rights (IDRs) in MLP. Step 3: MLP issues common units to the public in an IPO. Sponsors 2 100% interest in OpCo 1 Cash GP interest + subordinated + common units + IDRs MLP Public 3 Common Units OpCo Page 12

13 MLP Issues to consider Qualifying Income requirements IRS ruling moratorium Compensation arrangements Disguised sale considerations Fungibility Tax shield to public Retain benefits of flow-through taxation on earnings Opportunity for tax-deferred IPO proceeds extraction Economic benefits of IDR interest Valuation premium in the market for MLPs can provide an immediate uplift in the value of the sponsor's assets Page 13

14 Recent developments Page 14

15 Recent developments Topics Proposed Jobs Act regulations Proposed regulations 707 and 752 Camp tax reform proposal Page 15

16 Proposed Jobs Act regulations Page 16

17 Items from the Jobs Act regulations On 16 January 2014, proposed regulations providing guidance on certain provisions of the American Jobs Creation Act of 2004 were published Four main topics Section 704(c)(1)(C) contributions of built-in loss property Mandatory basis adjustments Allocation of basis adjustments under Section 755 Section 704(c) Effective date Generally, regulations to be effective when finalized But Section 755 changes proposed to be effective immediately Page 17

18 Section 704(c)(1)(C) Contribution of built-in loss property Regulations do not apply to: Reverse Section 704(c) items TR Section liabilities (contingent liabilities) Technical terminations Operative rules Only transferor is entitled to loss Tax basis = FMV for determining allocations to other partners Proposed regulations treat the tax basis in excess of FMV at contribution in a manner similar to Section 743 adjustments Page 18

19 Section 704(c)(1)(C) Transfer of property Taxable transfer (i.e., sale of Section 704 (c)(1)(c) property) Section 704(c)(1)(C) partner s basis adjustment is taken into account in determining the impact on such partner s income, gain, loss or deduction. Non-recognition transfer (i.e., Sections 721, 351 or 1031 transactions) Section 704(c)(1)(C) partner s basis adjustment is generally transferred to the partnership s exchanged property. Special tracking rules are created for Section 721 transfers between upper-tier and lower-tier partnerships. Page 19

20 Mandatory basis adjustments Significant guidance on the application of the mandatory basis adjustment rules under Section 734 (in the case of substantial basis reductions) and Section 743 (in the case of substantial built-in losses) Clarify manner in which applied Tiered partnerships; request for comments Page 20

21 Section 755(c) Section 755(c) from Enron No downward Section 734 adjustments to stock of partner (or related party) Otherwise, Section 1032 eliminates the cost of the downward adjustment Reallocate that adjustment to other property If insufficient other basis the gain recognition Page 21

22 Section 755 Section 743 allocation Current Reg. Section (b)(5) allocates Section 743 adjustment to assets in a substituted basis transactions (e.g., Section 351 of partnership interest) If increase in basis, only to built-in gain property If decrease in basis, only to built-in loss property Partnership interest purchasers in taxable transactions may allocate upward Section 743 adjustments to built-in gain assets and downward Section 743 adjustments to built-in loss assets from the same transaction To some extent, this has provided electivity between the available allocation schemes Page 22

23 Section 755 Section 743 allocation Proposed change If a transferor has a purchased transaction Section 743 adjustment, a substitute basis transaction transferee succeeds to transferor s basis adjustment. It is limited to amounts attributable to the acquired interest. It is intended to prevent electivity in the allocation of Section 743 adjustment. Effective date proposed to be effective immediately Page 23

24 Section 704(c) Netting versus layering of Section 704(c) revaluation layers Government concerned with distortions Proposed regulations to require layering Allocation of tax items among layers Can use any reasonable method Subject to: Anti-abuse rule Single method for each item of contributed property Reasonableness Page 24

25 Proposed regulations Sections 707 and 752 Page 25

26 Overview On 30 January 2014, the IRS issued proposed regulations under Section 707 relating to disguised sales of property to or by a partnership and under Section 752 relating to the treatment of partnership liabilities (the proposed regulations). These proposed regulations were the subject of widespread speculation and public discussion relating to bottom-dollar guarantees, among other things. Page 26

27 Section 707 disguised sale rules Debt-financed distributions Capital expenditure reimbursements New category of qualified liability (QL) (category (E)) Anticipated reduction Tiered partnership rule Apply debt financed distribution to tiers Apply aggregate principles regarding lower-tier partnership debt for purposes of determining whether the upper-tier partnership s share of lower-tier debt is a QL New rule permitting netting in partnership mergers TR Section rules IRS considering a holding period requirement (e.g., lowest share of the debt within prior 12 months) Effective date proposed to be effective when regulations finalized Page 27

28 Section 752 economic risk of loss Recourse debt allocations Obligations recognized if certain factors are present ( to establish that the terms of the payment obligation are commercially reasonable ) if not met, treat as if obligation is nonrecourse Net worth requirement Periodic documentation Term coterminous with debt No money held Arm s-length consideration Liable up to full amount of payment obligation Recognized only to the extent of net value of obligor Anti-abuse rules modified to address intermediaries, tiers, etc. to avoid bottom-dollar guarantees Effective date proposed to be effective when regulations finalized subject to a seven-year grandfathering provision in limited circumstances Page 28

29 Section 752 nonrecourse debt allocations Nonrecourse revisions to Reg. Section (a)(3) (Tier 3) Tier 3 debt no longer permitted to be allocated based on deductions or any significant item Profits, for purpose of the Tier 3 debt allocation, defined by reference to liquidation value Effective date proposed to be effective when regulations finalized Page 29

30 Camp tax reform proposal Page 30

31 Overview On 26 February 2014, the House Ways and Means Committee Chairman Dave Camp (R-MI) released his long anticipated tax reform proposal. This proposal includes many provisions affecting partnerships. Passage of the bill is not expected this year. Its provisions could, however, become part of future comprehensive tax reform or be included as revenue raisers in other proposals. Page 31

32 Camp proposal significant partnership reforms Repeal the guaranteed payments rules and treat all payments as either part of a partner s distributive share of partnership income or as a payment made to a nonpartner Repeal rules relating to liquidating distributions under Section 736 Revise the treatment of inventory items under Section 751 so that any distributions of inventory items are treated as a sale or exchange between the partner and partnership Repeal the seven-year period in Sections 704(c)(1)(B) and 737 and require partners contributing property with built-in gains or losses to be subject to tax on the precontribution gain or loss when the partnership distributes that property, regardless of when the distribution occurs Require an adjustment in a partnership s basis in partnership property when a partner transfers his interest in a partnership or a partnership distributes property to a partner, making the application of Sections 734(b) and 743(b) mandatory in all cases and also requiring that the basis adjustments also apply through partnership tiers Require partners to take into account charitable contributions and foreign taxes paid by a partnership when determining the limitation on the partner s share of losses under Section 704(d) Page 32

33 Camp proposal significant partnership reforms Clarify Section 704(e) to treat as a partner a person receiving a partnership interest by gift from a family member, if capital is a material income-producing factor of the partnership Repeal the technical termination rule under Section 708(b)(1)(B) Modify the publicly traded partnership exception in Section 7704(d) so that publicly traded partnerships that do not receive 90% of their income from activities relating to mining and natural resources would be taxed as C corporations Tax a portion of the gain attributable to a partner s carried interest as ordinary income Repeal the current TEFRA and Electing Large Partnerships (ELP) rules Revise the due date of partnership filing Form 1065 to the 15 th day of the third month following the close of the fiscal year, with a maximum extension of six months Provide that the self-employment tax under Section 1401 applies to all individuals treated as partners for US federal tax purposes, regardless of whether the partner is a general partner, a limited partner or a limited liability company member Page 33

34 Questions Page 34

35 Thank you! Page 35

36 Ninth Annual Domestic Tax Conference 24 April 2014 New York City