26 U.S.C. § 7704 — Certain publicly traded partnerships treated as corporations

(a) General rule: For this title — except as (c) allows — a "publicly traded partnership" is treated as a corporation, not a partnership. (b) Publicly traded partnership: This term means any partnership where either (1) interests are traded on an established securities market, or (2) interests are readily tradable on a secondary market (or something substantially equivalent to that). (c) Exception for partnerships with passive-type income: (1) In general: Subsection (a) doesn't apply to a publicly traded partnership for a tax year if it met the gross income test in paragraph (2) for that year and every earlier tax year after December 31, 1987, that the partnership (or an earlier version of it) existed. A partnership isn't counted as existing before the first year it (or an earlier version) became publicly traded. (2) Gross income requirement: A partnership meets this test for a year if 90% or more of its gross income that year is "qualifying income," as defined in (d). (3) Exception doesn't apply to partnerships that could qualify as regulated investment companies: This exception in (c) doesn't apply to a partnership that would count under section 851(a) if it were a domestic corporation. But regulations can say this rule doesn't block a partnership whose main business is buying and selling commodities (other than inventory-type property under section 1221(a)(1)) or commodity options, futures, or forwards. (d) Qualifying income: Unless this subsection says otherwise, "qualifying income" means: (1) (A) interest; (B) dividends; (C) real property rents, defined in (d)(3); (D) gain from selling real property, including inventory-type real property; (E) income and gains from: (i) finding, developing, mining, producing, processing, refining, transporting (including by pipeline), or marketing any mineral or natural resource — including fertilizer, geothermal energy, and timber — or industrial carbon dioxide; (ii) transporting or storing certain fuels listed in section 6426, certain alcohol or biodiesel fuel, sustainable aviation fuel, or liquefied or compressed hydrogen; (iii) for a qualifying carbon-capture facility under section 45Q, generating, making available, or storing electric power there, or capturing carbon dioxide there; (iv) producing electricity from an advanced nuclear facility; (v) producing electricity or heat using only certain qualified energy resources; or (vi) operating certain energy property described in section 48(a)(3)(A), regardless of when construction began; (F) gain from selling a capital asset, or certain business property, that was held to produce any of the income types above; and (G) for partnerships described in the second sentence of (c)(3), income and gains from commodities other than inventory-type property, or from commodity futures, forwards, and options. "Mineral or natural resource" means anything a taxpayer can claim a depletion deduction for under section 611, except for certain products under section 613(b)(7)(A) or (B). (2) Certain interest not qualifying: Interest doesn't count as qualifying income if it comes from running a financial or insurance business, or if it would be excluded from "interest" under section 856(f). (3) Real property rent: "Real property rent" means amounts that would count as rent from real property under section 856(d), except: (A) ignore the independent-contractor requirement in 856(d)(2)(C); and (B) a partner's indirectly owned stock only counts toward the partnership's ownership if that partner owns 5% or more, by value, of the partnership. (4) Certain regulated-investment-company or REIT income also qualifies: "Qualifying income" also includes income that would qualify under section 851(b)(2)(A) or 856(c)(2). (5) Special rule for gross income from certain real property sales: When selling real property that's inventory-type property under section 1221(a)(1), don't reduce gross income by inventory costs. (e) Inadvertent terminations: If a partnership fails the 90%-income test, and the Secretary decides the failure was accidental, and the partnership fixes it within a reasonable time, and the partnership agrees to make adjustments or pay amounts the Secretary requires — then the partnership is treated as if it never failed the test for that period. (f) Effect of becoming a corporation: On the first day a partnership becomes treated as a corporation under this section, for tax purposes it's treated as if it (1) transferred all its assets, still carrying its debts, to a brand-new corporation in exchange for that corporation's stock, and (2) then gave that stock to its partners to end their partnership interests. (g) Exception for electing 1987 partnerships: (1) In general: Subsection (a) doesn't apply to an "electing 1987 partnership." (2) Electing 1987 partnership: This means a publicly traded partnership that: (A) is an "existing partnership" as defined in a 1987 tax law; (B) subsection (a) never applied to it — and, ignoring (c)(1), wouldn't have applied — for tax years starting after December 31, 1987, and before January 1, 1998; and (C) elects this treatment, and agrees to the extra tax in paragraph (3), for its first tax year starting after December 31, 1997. A partnership stops counting as an "electing 1987 partnership," and its election ends, as of the first day after December 31, 1997 on which it adds a substantial new line of business. (3) Extra tax on electing partnerships: (A) The law imposes a tax each year equal to 3.5% of the electing partnership's gross income from actively running trades or businesses. (B) If the partnership is itself a partner in another partnership, its gross income for this tax includes its share of that other partnership's active-business gross income — and the same rule applies down through any lower-tier partnerships. (C) For tax purposes, this tax counts as imposed by chapter 1, except it isn't used to figure out any chapter 1 credit, and the partnership must pay it. Section 6655, about estimated tax, applies to the partnership as if it were a corporation, this were the regular corporate tax under section 11, and "taxable income" meant the gross income described in (A). (4) Election: An election under this subsection covers the year it's made and every year after, unless the partnership revokes it. The partnership can revoke it without the Secretary's permission — but once revoked, it can't be brought back.