On March 6, 2015, the Internal Revenue Service (IRS) announced that the agency will once again issue private letter rulings (PLRs) concerning master limited partnership (MLP) qualifying income under Section 7704 of the Internal Revenue Code. This ends the moratorium the IRS instituted last year and reopens an avenue by which MLPs can mitigate the risks presented by Section 7704.
Section 7704 generally provides that an MLP—a special form of limited partnership that is publicly traded on a national securities exchange—is exempt from the corporate income tax so long as it derives at least 90 percent of its gross income from qualifying sources such as natural resources, real estate, or commodities. Unfortunately, the definition of qualifying income has not kept pace with the ever-evolving energy industry. As a result, many MLPs questioned whether certain activities generated qualifying income and, until the beginning of the 2014 moratorium, frequently submitted PLRs to the IRS for clarity. The IRS’s decision to resume issuing PLRs means that MLPs will once again be able to seek clarity on whether their income generating activities satisfy Section 7704.
In addition to restarting the PLR process, the IRS announced that the Treasury Department plans to issue proposed regulations that will provide guidance on Section 7704 concerning qualifying income from the exploration, development, mining and production, processing, refining, transportation, and marketing of minerals and natural resources. The proposed regulations will also address services provided by contractors in the oil and gas industry.