IRS written determination 201523018

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 201523018
Release Date: 6/5/2015
Index Number: 7704.00-00, 7704.03-00
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Third Party Communication: None
Date of Communication: Not Applicable
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:PSI:03
PLR-147157-13
Date:
January 29, 2015
Company: --------------------------------
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State:---------
Dear ---------------:
This letter responds to a letter dated November 14, 2013, submitted on behalf of
Company, requesting that income derived from standard interest rate swaps, forward-
start interest rate swaps, interest rate caps and treasury locks is qualifying income
within the meaning of § 7704(d)(1) of the Internal Revenue Code.
FACTS
The information submitted states that Companyis a publicly-traded partnership
within the meaning of section 7704(b) organized under the laws of State. Companyhas
not elected to be taxed as an association for federaltax purposes. Companyis not
engaged in a “financial or insurance business” within the meaning of § 7704(d)(2)(A).
In order to finance asset acquisitions and conduct the operations of its business,
Companyperiodically issues both fixed-rate and floating-rate debt securities. The
interest Companypays on the debt securities is a function of two factors: (1) the market
reference interest rate (for example, U.S. Treasury Bonds for fixed-rate debt or London
Interbank Offer Rate (“LIBOR”) for floating-rate debt), and (2) Company’s credit risk.
Companyenters into Standard Interest Rate Swaps, Forward-Start Interest Rate
Swaps, Interest Rate Caps, and Treasury Locks (each defined below and, together, the

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“Financial Transactions”) to manage its exposure to thefirst interest rate factor, the
market reference rate on its fixed-rate and floating-rate debt.
In some cases, the Financial Transactions entered into by Companyare
integrated with the related debt instruments under § 1.1275-6 of the Income Tax
Regulations. Companyis requesting a ruling only on Financial Transactions that are not
integrated.
The Financial Transactions
Standard Interest Rate Swaps
A Standard Interest Rate Swap allows Companyto swap a fixed rate cash flow in
exchange for a floating rate cash flow (a “fixed for floating swap”) or a floating rate cash
flow for a fixed rate cash flow (a “floating for fixed swap”). In a fixed for floating swap,
Companyagrees to pay a counterparty a fixed interest rate on a notional principal
amount. The counterparty agrees to pay Companyan amount equal to a floating index
rate, such as LIBOR, multiplied by the notional principal amount. A floating for fixed
swap operates in the same manner, except that Companypays a counterparty a cash
flow equal to a floating rate multiplied by the notional amount, and would receive a cash
flow equal to a fixed rate on the notional amount.
Forward-Start Interest Rate Swaps
A Forward-Start Interest Rate Swap is a transaction whereby Companylocks in a
spot interest rate for a period prior to the issuance of its fixed-rate debt securities (a
“forward lock”) or to convert an expected floating-rate debt securities offering into a
fixed-rate instrument (a “forward floating for fixed swap”). In a forward lock, Company
agrees to pay a counterparty a fixed interest rate on a notional principal amount for a
fixed period that begins on the date of the anticipated debt issuance. The counterparty
agrees to pay Companyan amount equal to a floating-rate index, such as LIBOR,
multiplied by the notional principal amount for a fixed period that begins on the date of
the anticipated debt issuance. While periodic payments may be obligated once the
fixed period begins, a forward lock is typically settled on the expected date of the
anticipated debt issuance. The payment on the settlement date is determined by the
present value of net payment obligations under the forward lock. A forward floating for
fixed swap operates in the same manner as a floating for fixed swap except that its
effective date is in the future because its term coincides with an expected floating-rate
debt issuance and not an existing floating-rate debt issuance. As with a floating for
fixed swap, if Companyis owed money on a net basis by its counterparty, Company
realizes income on the swap.
Interest Rate Caps
In an Interest Rate Cap, Companyagrees to pay to a counterparty an upfront
fixed payment. The counterparty agrees to pay to Companyan amount equal to a

PLR-147157-13
floating index, such as LIBOR, multiplied by the notional principal amount, if, and only if,
the floating index rate exceeds a specified cap rate on a specified payment date.
Treasury Locks
A Treasury Lock is an arrangement where an unrelated party agrees to purchase
at a fixed price a U.S. Treasurybond with an interest rate equal to the rate in effect on
the date of the agreement. The purchase is generally consummated on the date
Companyexpects to be able to issue debt securities. While not the intended result,
Companymay settle a Treasury Lockprior to the issue date for its debt securities if, in
its judgment, the risk of an unfavorable movement in interest rates had declined or
doing so would maximize its income from the Treasury Lock and thereby effectively
minimize the interest cost of the anticipated issuance of debt securities.
LAW AND ANALYSIS
Section 7704(a) provides generally that a publicly traded partnership shall be
treated as a corporation.
Section 7704(b) provides that the term “publicly traded partnership” means any
partnership if (1) interests in such partnership are traded on an established securities
market, or (2) interests in such partnership are readily tradable on a secondary market
(or the substantial equivalent thereof).
Section 7704(c)(1) provides, in part, that§ 7704(a) shall not apply to any publicly
traded partnership for any taxable year if such partnership met the gross income
requirements of § 7704(c)(2) for such taxable year and each preceding taxable year
beginning after December 31, 1987, during which the partnership (or any predecessor)
was in existence.
Section 7704(c)(2) provides that a partnership meets the gross income
requirements of § 7704(c)(2) for any taxable year if 90% or more of the gross income of
such partnership for such taxable year consists of qualifying income.
Section 7704(d)(1)(A) provides that, except as otherwise provided in § 7704(d),
the term “qualifying income” includes interest.
Section 7704(d)(2) provides that interest shall not be treated as qualifying income
if (A) suchinterest is derived in the conduct of a financial or insurance business, or (B)
such interest would be excluded from the term “interest” under § 856(f).
Section 1.7704-3(a)(1) provides, in part, that for purposes of § 7704(d)(1),
qualifying income includes income from notional principal contracts (as defined in
§ 1.446-3) and other substantially similar income from ordinary and routine investments
to the extent determined by the Commissioner. Income from a notional principal

PLR-147157-13
contract is included in qualifying income only if the property, income, or cash flow that
measures the amounts to which the partnership is entitled under the contract would give
rise to qualifying income if held or received directly by the partnership.
Section 1.7704-3(a)(2) provides, in part, that qualifying income described in
§ 1.7704-3(a)(1) does not include income derived in the ordinary course of a trade or
business.
Section 1.446-3(c)(1) defines a notional principal contract as a financial
instrument that provides for the payment of amounts by one party to another at
specified intervals calculated by reference to a specified index upon a notional principal
amount in exchange for specified consideration or a promise to pay similar amounts.
Section 1.446-3(c)(1) further provides that this definition of a notional principal contract
includes interest rate swaps and interest rate caps.
In order to qualify under section 1.7704-3(a)(1), the Financial Transactions must
qualify as income from a notional principal contract as defined in § 1.446-3 or as other
substantially similar income.
The Standard Interest Rate Swaps and Interest Rate Caps are specifically
included in the definition of a notional principal contract in § 1.446-3 and therefore
produce income froma notional principal contract. However, income from a notional
principal contract is included in qualifying income only if the property, income, or cash
flow that measures the amounts to which the partnership is entitled under the contract
would give rise to qualifying income if held or received directly by the partnership.
Payments due under a Standard Interest Rate Swap or an Interest Rate Cap are
measured by reference to an interest rate or interest rate index and would give rise to
interest incomeif held or received directly by Company.
Although the Forward-Start Interest Rate Swaps and the Treasury Locks are not
among the instruments specifically listed in the definition of a notional principal contract,
they are both ordinary and routine transactions and, in this case, were entered into for
the same purpose as a notional principal contract, that is to lock in an interest rate or
manage the risk of interest rate movements on Company’s borrowings. Section 1.7704-
3(a)(1) provides that the Commissioner may determine that income and gain from
ordinary and routine investments substantially similar to notional principal contracts may
also constitute qualifying income for purposes of § 7704(d)(1). It is therefore
unnecessary to determine whether the Forward-Start Interest Rate Swaps and the
Treasury Locks meet the definition of a notional principal contract in § 1.446-3.
CONCLUSION
Based solely on the facts and representations submitted, we conclude that the
income Companyderives from each of the four types of Financial Transactions is

PLR-147157-13
qualifying income within the meaning of § 7704(d)(1) and § 1.7704-3(a)(1).
Except for the specific ruling above, we express or imply no opinion concerning
the federal tax consequences of the facts of this case under any other provision of the
Code. Specifically, we express or imply no opinion as to whether Company's Financial
Transactions can be integrated with the related debt instruments under § 1.1275-6, as
well as to whether Companyis taxable as a partnership for federal tax purposes. We
also express or imply no opinion as to whether the Forward-Start Interest Rate Swaps
or the Treasury Locks meet the definition of a notional principal contract in § 1.446-3.
Finally, no opinion is expressed or implied as to whether Companymeets the 90
percent gross income requirement of § 7704(c) in any taxable year.
The ruling contained in this letter is based upon information and representations
submitted by Companyand accompanied by a penalty of perjury statement executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the ruling request, it is subject to verification on examination.
This ruling is directed only to the taxpayer requesting it. However, in the event of
a technical termination of Companyunder § 708(b)(1)(B), the resulting partnership may
continue to rely on this ruling in determining its qualifying income under § 7704(d)(1)(E).
Section 6110(k)(3) of the Code provides that it may not be used or citedas precedent.
In accordance with a power of attorney on file with this office, we are sending a copy of
this letter to Company’s authorized representatives.
Sincerely,

Holly A. Porter
Chief, Branch 3
Office of Associate Chief Counsel
(Passthroughs & Special Industries)
Enclosures (2):
Copy of this letter
Copy for § 6110 purposes