Partnerships trading or in registration on or before December 31, 1987 were given a ten-year transition period during which they did not have to earn “qualifying” income as long as they did not enter a substantial new line of business. In 1997, when the transition period was about to expire, Congress enacted legislation allowing these “grandfathered” PTPs to continue their status if they elect to pay a small (3.5 percent) tax on their gross income from partnership business activities. As of August 2005, all but two of these PTPs (Cedar Fair and ML Macadamia Orchards) had either restructured to change the nature of their income or had ceased being PTPs.

If a partnership inadvertently (as determined by the IRS) fails to meet the qualifying income requirements for any period, it may cure the failure by agreeing to make any adjustments or pay any amounts that the IRS may require. If the PTP does become a corporation due to failure to meet the income requirements, it will be treated as having transferred all of its assets (subject to liabilities) to a newly formed corporation in exchange for corporate stock and distributing the stock to the partners in liquidation of their partnership interests.

I.R.C. §7704(e)-(f)

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