[Congressional Record Volume 143, Number 83 (Monday, June 16, 1997)]
[Senate]
[Pages S5698-S5699]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. D'AMATO (for himself and Mr. Baucus):

  S. 907. A bill to amend the Revenue Act of 1987 to provide a 
permanent extension of the transition rule for certain publicly traded 
partnerships; to the Committee on Finance.


                          TAX CODE LEGISLATION

  Mr. D'AMATO. Mr. President, I rise today to join Senator Baucus in 
introducing legislation that will amend the Tax Code to provide a 
permanent extension of a grandfather provision contained in the Omnibus 
Budget Reconciliation Act of 1987. This 10 year grandfather provision 
was provided for publicly traded partnerships [PTP's] that were in 
existence as of December 17, 1987. A PTP is a partnership whose 
interests are traded on established securities exchanges or are readily 
tradable in secondary markets.
  Included in the Omnibus Budget Reconciliation Act of 1987 is section 
7704 of the Internal Revenue Code. The section provides that PTP's will 
generally be taxed as corporations; income or loss does not pass 
through to the partners. Section 7704 does not apply, however, to PTP's 
where 90 percent or more of their income is qualifying income, such as 
from interest, dividends, real estate, timber, oil, and gas. This 
exception applies regardless when the PTP was formed. Other PTP's in 
existence when section 7704 was enacted were grandfathered, but only 
for 10 years, through 1997. Our legislation would extend the 
grandfather provision permanently.
  The purpose of section 7704 according to the committee reports was 
intended to stop the long term erosion of the corporate tax base. There 
was a concern that much of corporate America would convert to PTP's 
resulting in a decline of corporate tax revenues.
  This purpose has been achieved because of the prospective application 
of that section. There were approximately 120 PTP's in existence in 
1987 and because of the legislation the number of PTP's did not 
snowball. Permanently grandfathering PTP's would not defeat the purpose 
of the 1987 legislation since the grandfather applies only to those 
PTP's that were in existence at the time of the 1987 legislation.
  Fairness to the owners of the PTP's that were grandfathered during 
the Omnibus Budget Reconciliation Act of 1987 is an important issue. 
The conversion from a corporation to a PTP was a costly and time-
consuming process. The companies that converted to PTP form relied on 
the expectation that they would be able to operate as partnerships as 
long as they wanted. The conversion process involved consultation with 
investment bankers, appraisals, planning by corporate finance, 
securities and tax lawyers, multiple filings with the Securities and 
Exchange Commission and State securities agencies, proxy statements and 
shareholder votes, et cetera. 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. Failure to pass this legislation will be punishing PTPs that 
played by the rules.

  If the grandfather is not made permanent many of these same costs 
will be incurred once again. Grandfathered PTP's will be forced to 
convert to corporate form by January 1998. To do so 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. These PTP's relied on 
the law in effect before passage of the 1987 act and it is unreasonable 
and unfair to now force these PTP's to undergo this expensive, time 
consuming process to convert to corporate form. No public purpose will 
be served by such forced conversions.
  The loss of the grandfather will hurt PTP investors and employees of 
the companies. The value of PTP units will decline if the grandfather 
is not permanently implemented. Most of these investors are average, 
middle-class taxpayers who have invested in PTP units oftentimes 
through an individual retirement account, because of the desire for a 
safe, liquid investment. As PTP units decline in value, a company's 
ability to expand will be negatively affected and the employees will 
suffer.
  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 not making the 
grandfather provision permanent would be harm to these PTP's and their 
investors. The PTP's operate in all 50 States affecting many of our 
districts and include a wide variety of industries, from motels and 
restaurants to chemicals and financial advising. The most recent count 
indicates that there are well over 300,000 individual investors.
  Mr. President, I urge my colleagues on both sides of the aisle to 
join me and Senator Baucus in cosponsoring this important legislation.
  Mr. President, I ask unanimous consent that the complete text of the 
bill be placed in the Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 907

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. PERMANENT EXTENSION OF TRANSITION RULE FOR CERTAIN 
                   PUBLICLY TRADED PARTNERSHIPS.

       (a) In General.--Paragraph (1) of section 10211(c) of the 
     Revenue Act of 1987 (Public Law 100-203) is amended to read 
     as follows:
       ``(1) In general.--The amendments made by this section 
     shall apply to taxable years beginning after December 31, 
     1987, except that such amendments shall not apply to any 
     existing partnership.''
       (b) Effective Date.--The amendment made by this section 
     shall take effect as if included in the provisions of section 
     10211 of the Revenue Act of 1987.

  Mr. BAUCUS. Mr. President, I am pleased to join with my colleague, 
Senator D'Amato, in introducing this legislation, which would 
permanently extend the 10-year grandfather for publicly traded 
partnerships [PTP's].
  PTP's were first created in the early 1980's for the purpose of 
combining the traditional limited partnership form with the ability to 
have the partnership units freely traded on established securities or 
secondary markets. When Congress enacted the Omnibus Budget 
Reconciliation Act of 1987, it included a

[[Page S5699]]

provision which reversed existing law at the time by requiring that 
PTP's would generally be treated as corporations for income tax 
purposes. The act completely exempted certain types of PTP's from the 
law, primarily those whose income is derived from resources such as 
timber, oil and gas, minerals, and real estate. PTP's which did not 
meet the criteria were given a 10-year transition period, after which 
they would no longer be exempted from the new requirements. This 
transition period, the grandfather, expires at the end of 1997. Our 
bill would extend it permanently.
  Mr. President, there is no public or tax policy reason for treating 
the grandfathered PTP's differently than those completely exempted from 
the law. All of the PTP's relied upon the law that was in effect when 
they were created. They are all similarly structured and deserve the 
same right to preserve their partnership status, regardless of the line 
of business in which they operate. There are only 27 of them remaining, 
and they are involved in a wide variety of industries, from motels and 
restaurants to chemicals, financial advising and macadamia nuts. They 
went through a costly and time-consuming process in order to convert 
from a corporation to a PTP in the first place, and will incur many of 
the same costs if they are now required to convert back to corporate 
form when the grandfather expires in January.
  More importantly, I am concerned about the effect that the loss of 
the grandfather will have on PTP investors. It is a virtual certainty 
that the value of PTP units will be adversely affected if the 
grandfather expires, reducing the value of the investor's holdings. 
Most of these investors are average, middle-class taxpayers, many of 
them elderly, who invested in PTP units because of their high yield. 
They are scattered throughout the country, and at last count numbered 
over 300,000. Many made this investment before the 1987 act was passed.
  There is no tax policy goal that will be achieved by allowing the 
grandfather to expire. That goal was fully achieved by making the law 
apply prospectively. All we accomplish is inflicting harm on these 
PTP's and their investors, without their having done anything illegal 
or improper when they were created. With this action, all remaining 
PTP's would be treated uniformly under the law. If the legislation is 
incorporated into this year's reconciliation bill, it will be as a 
revenue-neutral measure.
                                 ______