September 2009 PTP NEWSBYTES* In This Issue: Tax Year 2009 Kickoff Meetings Tax Corner 2009 MLP User Conference. *connectedthinking Pwc

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1 September 2009 PTP NEWSBYTES* In This Issue: Tax Year 2009 Kickoff Meetings Tax Corner 2009 MLP User Conference *connectedthinking Pwc

2 Kickoff Meetings Tax Year 2009 Kickoff Meetings are underway. The Kickoff Meeting is an important part of our project planning. The meeting allows us to discuss your partnership s new business operations, partnership events (i.e. unit issuances, mergers), system and application modifications, applicable tax law changes, project workplan with client tasks and investor tax package mail dates. The kickoff agenda is as follows: Partnership Update Investor Tax Schedules Workplan Review MLP Group Update Tax Package Support Services Partnership Information The agenda allows us to identify any issues that may have special processing or application modifications. A vital part of the meeting is each client s Workplan Review. The project workplan displays the unique tasks and responsibilities of the Partnerships and PwC. It is important that you understand each of your tasks and its due date, as these deadlines will determine the mail date for the K-1s. Any changes to the due dates, may affect the K-1 mail date. If you have any concerns about any task or date, please notify your client team immediately so we can reschedule resources to determine revised dates. For those clients who have not already had their Tax Year 2009 Kickoff Meeting, you should be contacted soon to schedule an on-site visit or conference call to discuss your specific processing requirements and mail date. We are looking forward to a successfull Tax Year 2009 Processing Season! 1

3 Tax Corner National Association of Publicly Traded Partnerships ( NAPTP ) comments on Proposed Regulations related to the determination of a partner s distributive share when an interest changes In the spring of 2009, the IRS issued and requested comments on proposed regulations related to Section 706(d)(1) which determines the appropriate distributive share of the partnership s tax items for the year in which there is a change in a partner s interest (the Varying Interests Rule ). The Proposed Regulations set forth specific guidance in applying the Varying Interests Rule to allocate tax items amongst partners. Summary of Proposed Regulations: The Proposed Regulations provide that a partnership determine a partner s distributive share of tax items by using one of two options: 1) the interim closing method; or 2) the proration method, if agreed upon by the partners. The interim closing method provides that in the case of a disposition of a partner s entire interest in a partnership the partner s distributive share of partnership items for the taxable year of the partnership in which the disposition occurs may be determined by a closing of the partnership s books as of the date of disposition. Under the interim closing method, a partnership can choose either the calendar day convention or the semi-monthly convention for closing of the partnership books. The calendar day convention requires that any change in a partner s interest is deemed to occur as of the close of the day. The semi-monthly convention requires that any change in a partner s interest occurring during the first through the 15th day of the month is deemed to occur at the beginning of the first day of that month, and any variation in a partner s interest occurring during the 16th through the last day of the calendar month is deemed to occur at the beginning of the 16th day of that month. Under the proration method, a partnership may take into account any change in a partner s interest in the partnership during the year by allocating the distributive share of partnership items among the partners according to their pro rata shares of such items for the entire taxable year. In determining a partner s pro rata share of partnership items, the partnership takes into account that partner s proportionate interest in such items during each segment. Under the proration method, a partnership must use the calendar day convention. Furthermore, under this method, a partnership must identify certain extraordinary items as identified in the Proposed Regulations, and allocate those items among the partners in proportion to their interests as of the beginning of the day on which the extraordinary item is taken into account. Importantly, a safe harbor is available for certain unit transfers for PTPs that use either the interim closing method or the proration method. The safe harbor generally allows the use of a monthly or semi-monthly convention. The safe harbor does not apply to block transfers of PTP units or transfers that are not traded on a national securities exchange registered under section 6 of the Securities Exchange Act of The monthly convention requires that all transfers of a PTP s units during a calendar month be deemed as occurring on the first day of the following month under a method consistently applied by that partnership. 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. 2

4 Tax Corner (cont.) NAPTP comments: In response to the Proposed Regulations set forth by the IRS, the NAPTP made the following recommendations: 1) The final regulations include a quarterly convention as an additional safe harbor convention. This would allow PTPs that make quarterly distributions to allocate their tax items for a quarter to their unitholders who are record holders on the date the quarterly distribution is declared. The quarterly convention would link a unitholder s distributive share of tax items to the related cash distribution. 2) The final regulations allow PTPs that use the proration method to prorate their annual aggregate tax items by the number of months (instead of by the number of days). In practice and for administrative convenience, PTPs that use the proration method divide their tax items by 12 and assign that amount to each month as opposed to dividing their tax items by 365 and assigning the amount to each day. 3) The final regulations remove the block transfer exclusion and expand the safe harbor to transfers of all PTP units regardless of the market on which the transfer occurred. The safe harbor should not be limited to exchanges of PTP units on a national securities exchange registered under section 6 of the Securities and Exchange Act of PTP units that are traded on a secondary market or a substantial equivalent, as described in Treas. Reg (c)(2), or on an established securities market not registered under section 6 of the Securities and Exchange Act of 1934, as described in Treas. Reg (b)(2), (3), (4) and (5),, should be considered publicly traded units for purposes of the safe harbor. If not, the NAPTP recommends that the final regulations apply the safe harbor conventions to transfers of all publicly traded units (using the above-noted expanded definition) and limit the block transfer exclusion only to transfers of non-publicly traded units. 4) The final regulations provide that existing PTPs continue to be grandfathered from having to apply the conventions provided in the Proposed Regulations even if they have one or more technical terminations on or after April 14, Please note that the response of the NAPTP to the Proposed Regulations only provides suggestions from the industry to the IRS. Final regulations have not been issued. 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.) Cancellation of Debt Income Earlier in the year, this column discussed cancellation of debt ( COD ) income and a letter submitted to the IRS requesting additional guidance related to the proper characterization of cancellation of debt income for purposes of the qualifying income test. While there has been no public IRS response to date on this matter, the IRS has released additional information about the deferral of COD income as originally enacted on February 17, 2009 as part of the American Recovery and Reinvestment Act of Section 108(i) was enacted in February and establishes a provision for the deferral of COD income. In August, the IRS released Rev. Proc which establishes procedures on how to make the 108(i) election for the deferral of COD income and guidance on certain related issues. The law allows certain debt issuers an election to defer inclusion of COD income realized in the taxpayer s 2009 or 2010 calendar year. The election can be made instrument-by-instrument and once made is irrevocable. The mechanics of the deferral are complex, but in its simplest form the deferred COD income must be included in taxable income ratably over a five year period beginning four or five years after the event that originally created the COD income. For example, a calendar-year taxpayer that realizes COD income in either 2009 or 2010 will amortize that income and include it in taxable income ratably over a five year period beginning in Other complicating factors include entities with a fiscal year end, entities with short tax years, certain acceleration events as defined by the law, and reacquisition transactions that give rise to the COD income that are funded (directly or indirectly) through the issuance of a debt instrument having original issue discount. Partnership Considerations The election is made at the partnership level. However, a partnership that defers less than 100% of its COD income may treat one partner as having a different amount of deferred COD and another partner as having a different amount of included COD income. In practice, different treatment (deferral versus immediate recognition) on a partner-by-partner basis for a publicly traded partnership would be administratively burdensome and would also cause issues with fungibility of units. Note that the allocation is subject to Section 704(b), however it is not entirely clear how the application of these rules will conform with the requirements for computing net book income or loss. Additionally, if a partner sells his entire interest in a partnership, publicly traded or otherwise, any remaining balance of unrecognized COD income is accelerated and recognized immediately. (A partial sale or presumably would result in a partial acceleration of the deferred COD income.) Recently, the IRS issued draft K-1s for the 2009 taxable year. In these draft K-1s, they require that COD income be reported on a separate line, Line 20x. 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.) Please note that under the Section 706 Proposed Regulations mentioned previously, COD income is treated as an extraordinary item for which the allocation among the partners is determined immediately prior to the COD event. Unitholders that do not hold units immediately prior to the COD event are not allocated COD income. If you have COD income for the 2009 tax year and are electing to defer the COD income under Section 108(i), please be sure to contact your partnership reporting team as a number of complications could arise. For more information about these topics, please contact Tim Watkins at timothy.r.watkins@us.pwc. com. 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 2009 MLP User Conference We are excited and looking forward to seeing everyone at the 2009 MLP User Conference! In the wake of change* Reminder! The conference will be held at: The Ritz-Carlton-Laguna Niguel Dana Point, CA November 9-11, 2009 What you will learn: Integrate new federal and state tax laws that pertain to your PTP Recognize and adapt to current legislative matters Identify key performance measures within the industry Understanding of PwC MLP applications Build relationships with peers in similar organizations If you have any questions prior to your arrival, please call Carla Hull at (214) *connectedthinking 6

8 EDITORS Tim Ward Mark Flemmer DESIGN AND LAYOUT Liz Walton 2009 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).