Originally published in V&E MLP Tax Update E-communication, October 17, 2011
The Internal Revenue Service (IRS) has released seven private letter rulings (PLRs) regarding qualifying income for publicly traded partnerships (MLPs) so far this year — more than in any prior year. Several of the recent PLRs reaffirm prior IRS positions, while others strengthen concepts from prior PLRs or expand the scope of activities that the IRS is known to treat as generating qualifying income for MLPs.
The Internal Revenue Code of 1986, as amended (the Code), generally treats an MLP as a corporation, rather than a partnership, for federal income tax purposes unless 90 percent or more of the MLP's gross income for every taxable year consists of "qualifying income." For this purpose, qualifying income includes income derived from the exploration, development, mining, production, processing, refining, transportation, or marketing of minerals, natural resources, or industrial source carbon dioxide, and the transportation and storage of certain renewable fuels. Other types of qualifying income include dividends, interest (other than interest generated by a financial or insurance business), and certain income that would be qualifying to a real estate investment trust (a REIT) or a regulated investment company (a RIC).
Although only the taxpayer who receives a PLR may rely upon its holding, PLRs provide guidance with respect to the IRS's interpretation of the boundaries of qualifying income. This update describes the IRS's conclusions in several of this year's PLRs and their implications for the future.
Oilfield Services — Fracturing and Fluid Handling
In PLR 201137005 (June 1, 2011), the IRS reaffirms its treatment of certain services that are integral to the exploration, development, and production of oil and gas as generating qualifying income and expands the list of fluid handling activities that generate qualifying income. In prior rulings (PLR 200827014 (Feb. 8, 2008) and PLR 201137005 (July 12, 2010)), the IRS concluded that income from the supply and transportation of fracturing fluid and removal, treatment, and disposal of fracturing flowback from a well and acid mine discharge constitutes qualifying income. In PLR 201137005, the IRS also treats as qualifying: (i) income from the storage and heating of fracturing fluids and other production fluids for oil and natural gas wells, (ii) income from the removal, treatment, and disposal of naturally occurring produced water, and (iii) income from the provision of frac tanks. This PLR illustrates the IRS's somewhat expanded view of qualifying income as it relates to oilfield services that are integral to the exploration, development, and production of oil and gas — natural resources for purposes of the qualifying income rule.
Refinery Services
In PLR 201141013 (April 7, 2011), the IRS treats income from services provided to refineries and transportation of certain non-natural resource products to and from refineries as qualifying income. Although the services and products addressed in the PLR are redacted, the IRS concludes that these activities are integral to the refining of crude oil. This PLR is the first of its kind, applying the rationale used in the oilfield services rulings discussed above to treat income from the provision of a service that is integral to the qualifying income activity of refining as qualifying income. Accordingly, this PLR provides further illustration of the IRS's notion that qualifying income is generated by services provided by a third party if those services are integral to the service recipient's qualifying income activity and indicates that the IRS may be willing to treat additional services in support of natural resource activities as generating qualifying income.
Subpart F Income
In PLR 201113018 (Dec. 8, 2010), the IRS concludes that an MLP's subpart F income from a controlled foreign corporation (CFC) is qualifying income. The MLP is engaged in the storage and marketing of natural gas through its operating subsidiaries, including non-U.S. corporations treated as CFCs for U.S. tax purposes. The MLP may be required to include in its income the CFCs' subpart F income from certain commodities transactions without regard to whether the CFCs make any distributions to the MLP. Because the PLR considers the subpart F income as dividends for qualifying income purposes (without regard to the activity that generates the income), the rationale suggests that MLPs may generate qualifying income from the ownership of stock in CFCs that conduct activities that do not generate qualifying income.
Management and Operation of Qualifying Income Generating Assets
In PLR 201132012 (April 29, 2011), the IRS concludes that an MLP's management fee for the operation of gas processing plants, a natural gas fractionator, and natural gas storage facilities owned by others is qualifying income to that MLP. This ruling reaffirms prior IRS rulings treating gross income from the operation of qualifying income generating assets (such as pipelines or natural gas processing facilities) owned by others as qualifying income.
Butane Blending Services
In PLR 201132020 (May 6, 2011), the IRS concludes that income derived by an MLP from certain butane blending activities will be qualifying income. The MLP sells butane and also blends butane into gasoline using proprietary, automated equipment and control systems at terminals owned by third parties. While blending butane with gasoline clearly generates qualifying income, this PLR treats as qualifying certain related income, including income from the provision of proprietary equipment and technology. This is consistent with, and builds upon, an existing concept within other PLRs that income from activities that are integral to a qualifying income generating business is itself qualifying income.
Conclusion
This year has been an active year for PLRs related to MLP qualifying income, and the IRS's willingness to issue the PLRs described in this update is a positive sign for MLPs considering expanding into new or different business activities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
