7769 / What income requirements must a master limited partnership (MLP) satisfy?
MLPs were not common real estate investment vehicles until Congress reduced individual tax rates below corporate tax rates pursuant to the Tax Reform Act of 1986 (TRA ’86).1 TRA ’86 lowered the individual tax rate from 50 percent to 28 percent, and the corporate tax rate was reduced from 46 percent to 34 percent (the highest individual income tax bracket is currently 37 percent and the highest corporate tax rate is 21 percent).2
The following year, to counter the threat of revenue erosion, Congress added IRC Section 7704 that provides that a publicly traded partnership will be taxed as a corporation unless the partnership meets certain gross income requirements.3
A partnership satisfies the gross income requirements of IRC Section 7704 when at least 90 percent of the partnership’s gross income is “qualified income.”4 Some forms of qualified income include interest, dividends, real property rents, income and gains derived from the exploration, development, mining or production, processing, refining, transportation (pipelines, ships, trucks), or the marketing of any mineral or natural resource.5