[Congressional Record Volume 141, Number 87 (Wednesday, May 24, 1995)]
[Extensions of Remarks]
[Page E1103]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

[[Page E1103]]

 AN AMENDMENT TO PROVIDE A PERMANENT EXTENSION OF THE TRANSITION RULE 
                FOR CERTAIN PUBLICLY TRADED PARTNERSHIPS

                                 ______


                           HON. AMO HOUGHTON

                              of new york

                    in the house of representatives

                         Tuesday, May 23, 1995
  Mr. HOUGHTON. Mr. Speaker, I am joined today by several of my 
colleagues, including Mr. Kleczka, Mr. Jacobs, Mr. Crane, Mrs. 
Kennelly, Mr. Shaw, Mr. Herger, Mr. Bunning, Mr. McCrery, and Mr. Neal, 
in introducing legislation to permanently extend the 10-year 
grandfather for publicly traded partnerships [PTP's]. This provision 
applies to those PTP's that were in existence at the time the Omnibus 
Budget Reconciliation Act of 1987 was passed.
  Publicly traded partnerships, sometimes called master limited 
partnerships, were first created in the early 1980's. PTP's combined 
the traditional limited partnership form with the ability to have the 
partnership units freely traded on a stock exchange or over the 
counter.
  In the 1987 act, Congress enacted section 7704 of the Internal 
Revenue Code. Section 7704 provides that PTP's generally will be taxed 
as corporations. Section 7704 does not apply, however, to PTP's where 
90 percent or more of their income is qualifying income, such as from 
timber, oil and gas, and real estate. In addition, other PTP's in 
existence when section 7704 was enacted were grandfathered, but only 
for 10 years, through 1997. Our bill would extend this grandfather 
provision permanently.


               appropriateness of the 10-year grandfather

  We believe the 10-year limit on the grandfather for existing PTP's 
was inappropriate and unnecessary given the purpose for which section 
7704 was enacted. According to the committee reports accompanying the 
1987 act, section 7704 was intended to stop the ``long-term erosion of 
the corporate tax base.'' Generally, the concern was that much of 
corporate America would convert to PTP's, thereby causing corporate tax 
revenues to decline. There appears to have been no serious debate in 
1987 over whether limiting the duration of the grandfather was 
necessary to address these concerns.
  There is no question that our purpose in enacting section 7704 was 
fully achieved by prospective application of that section. The movement 
toward use of PTP's had barely begun by 1987; there were only 
approximately 120 in existence at that time. It was the snowball effect 
of future conversions that we sought to prevent. Prospective 
application of section 7704 stopped that snowball effect dead in its 
tracks. Permanently grandfathering all existing PTP's would have had no 
effect on this goal whatsoever. Conversely, limiting the duration of 
the grandfather to 10 years was unnecessary to achieve our purpose.
  Since prospective application of section 7704 achieved our purpose, 
we believe Congress erred in 1987 by limiting the
 grandfather to 10 years. Unless we reverse that decision before it 
takes effect in 1998, those PTP's still in existence and their owners 
will face serious hardships with no corresponding benefit to the 
Government or the tax system. Our bill merely asks Congress to rethink 
its decision before any damage is done.

  I can foresee that some people might view this proposal as special 
interest legislation. I strongly disagree. Had we chosen in 1987 to 
provide a permanent grandfather for existing PTP's, no one would have 
batted an eye. Instead, a permanent grandfather in 1987 would have been 
an appropriate decision for Congress to make based on the extent to 
which existing PTP's relied on the law that was in effect when they 
were created. The fact that the decision was initially made in 1987 
should not stop us from revisiting the issue so long as the original 
decision has not yet taken effect.
  We in Congress are called on to make decisions about appropriate 
transition relief in virtually every tax bill. Indeed, these types of 
decisions are ones that are particularly suited for the Members of 
Congress to make, since they generally involve the balancing of 
competing interests rather than technicalities of tax law.
  Our proposal is different only because it is separate in time from 
the 1987 act. On the other hand, the proposal is generic in scope, 
applying to any PTP fitting the criteria. We believe that it is fair, 
before the 10-year grandfather expires, to determine whether that 
decision was the proper one or whether a permanent rule would be 
better.
  Generally, Congress does not place time limits on grandfather 
provisions, other than what might be called project-specific 
provisions. The reasoning behind this policy is that if taxpayers were 
justified in relying on the law in effect at the time the taxpayer took 
action, then the taxpayers deserve relief from the change in the law, 
not just for a limited period but as long as the taxpayer's 
circumstances do not change.


                  reasons for a permanent grandfather

  Some may wonder why these PTP's should be permanently grandfathered. 
After all, if they were taking advantage of so large a loophole that 
Congress had to shut it down, why should they benefit merely because 
they got in under the wire?
  The truth is that these PTP's did not take advantage of an egregious 
loophole. PTP's are structured no differently from other types of 
limited partnerships. They merely combined that basic limited 
partnership structure with the ability for the units to be readily 
traded. The problem was thus not a loophole in the tax code that needed 
to be closed retroactively.
  These PTP's relied on the law in effect before passage of the 1987 
act, and that reliance was completely reasonable.
 The first proposal directed toward PTP's surfaced in 1984, but 
President Reagan chose not to forward it to Congress in his tax reform 
recommendations and we did not independently take up the idea in 1986. 
It was only when Treasury proposed section 7704 in mid-1987 as part of 
a list of acceptable revenue raisers that the proposal received any 
official endorsement. By that time, most of the affected PTP's were 
already in existence.

  This raises what I believe is the most important issue in this 
debate: fairness to the PTP's and, more importantly, their owners. The 
process of converting from a corporation to a PTP is a costly and time-
consuming one, easily taking over 1 year. The conversion process 
involved consultation with investment bankers, appraisals, planning by 
corporate finance, securities and tax lawyers, multiple filings with 
the SEC and State securities agencies, proxy statements and shareholder 
votes, etc. This process would not have been started or completed had 
there been any reasonable prospect that a change in the tax law would 
have applied retroactively or after a limited period of time.
  To make matters worse, many of these same costs will be incurred once 
again if the 10-year grandfather is not made permanent. Grandfathered 
PTP's will be forced to convert to corporate form on January 1998. To 
do so, however, will require lengthy planning, and the same investment 
banking advice, appraisals, and attorney fees. The need for extensive, 
advance planning makes it essential that the matter be resolved this 
year.
  More important is the effect that loss of the grandfather will have 
on PTP investors. It is a virtual certainty that the value of PTP units 
will be affected adversely if the grandfather expires. So it will be 
the investors that suffer most. And who are these investors? Most are 
average, middle-class taxpayers who have invested in PTP units because 
of their high yield, many before the 1987 act was passed.
  We do not achieve any tax policy goal by retaining the 10-year 
grandfather. That goal was fully achieved by making section 7704 apply 
prospectively. Instead, all we would accomplish by retaining the 10-
year grandfather would be harm to these PTP's and their investors. 
There is no doubt what our decision should be.
  In conclusion I want to note the diversity of the PTP's that would 
benefit from permanent extension of the grandfather. The PTP's affected 
are involved in a wide variety of industries, from motels and 
restaurants to chemicals, financial advising, and macadamia nuts. 
Undoubtedly, these businesses operate in many of our districts. Of 
course, our districts are the homes to the individual investors in 
these PTP's. The most recent count indicates that there are well over 
300,000 individual investors.
  The 10-year grandfather hangs like a sword of Damocles over each one 
of these PTP's. We in Congress have the ability to remove that sword 
and there is no reason why we should not do so. We urge our colleagues 
to join with us to support this bill.
  Thank you, Mr. Speaker.
  

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