[Congressional Record Volume 143, Number 50 (Thursday, April 24, 1997)]
[Extensions of Remarks]
[Pages E744-E745]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




  INTRODUCTION OF LEGISLATION 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

                        Thursday, April 24, 1997

  Mr. HOUGHTON. Mr. Speaker, I am joined by my colleagues, including 
Mr. Kleczka, Mr. Crane, Mrs. Kennelly, Mr. Bunning, Mr. Neal, and Mr. 
Herger, in introducing legislation to permanently extend the 10-year 
grandfather for publicly traded partnerships [PTP's]. This legislation 
applies to those PTP's that were in existence at the time the Omnibus 
Budget Reconciliation Act of 1987 was passed.
  Publicly traded partnerships were first created in the early 1980's 
for the purpose of combining the traditional limited partnership form 
with the ability to still have the partnership units freely traded on 
an established securities market or are readily tradable on a secondary 
market.
  Section 7704, which was enacted as part of the Omnibus Budget 
Reconciliation Act of 1987, provides that certain publicly traded 
partnerships shall be taxed as corporations. However, the 1987 act 
completely exempted certain types of PTP's from the reach of section 
7704. To be an exempt PTP, 90 percent or more of the partnerships gross 
income must be qualifying income. In other words, income derived from 
resources such as timber, oil and gas, minerals and real estate. 
Further, an exempt PTP need not have been in existence in 1987 when 
section 7704 was enacted. 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.
  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 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 the 
previous decision was proper or whether a permanent rule is a better 
choice.
  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

[[Page E745]]

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 important, 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. Thus, the 
investor will suffer the most. 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 honoring 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 court 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.

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