The Internal Revenue Service (the “IRS”) recently released a new private letter ruling (“PLR”) under the MLP “qualifying income” rules of Section 7704(d) of the Internal Revenue Code.
An “MLP” or “master limited partnership” is a publicly traded entity that qualifies for treatment as a partnership for federal income tax purposes. In order for an MLP to qualify for taxation as a partnership (rather than a corporation), at least 90% of its gross income each year must be “qualifying income” as defined in Section 7704(d). Qualifying income generally includes interest, dividends, real property rents and, most important for the MLP industry, income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber) or industrial source carbon dioxide, or the transportation or storage of certain alternative fuels.
This MLP update describes the IRS’s position in the recently issued PLR.
IRS Rules that MLP Income from Certain Relocation, Interconnect, and Condensate Activities Integral to the Pipeline Transportation of Minerals and Natural Resources Is Qualifying Income
On Friday, July 12, 2013, the IRS released PLR 201328005, holding that an MLP’s expected gross income derived from certain activities integral to the pipeline transportation of minerals and natural resources will be “qualifying income” under Section 7704(d) of the Internal Revenue Code.
The taxpayer in the PLR currently engages principally in activities that produce qualifying income from the pipeline transportation of minerals or natural resources. The taxpayer expects to derive gross income from relocating pipelines and related facilities used by the taxpayer to transport minerals or other natural resources to accommodate requests from third parties (e.g., to accommodate surface construction or subsurface development). Additionally, the taxpayer expects to derive gross income from the construction, installation, maintenance, and operation of, and transfer by customers to the taxpayer of, interconnects to pipelines used by the taxpayer to transport minerals or natural resources. Finally, the taxpayer expects to derive gross income from the sale of condensate collected from pipelines used by the taxpayer to transport minerals or natural resources.
The taxpayer represented to the IRS that these activities are integral to the pipeline transportation of minerals and natural resources.
The IRS held that the income the taxpayer derives from these activities is qualifying income to the taxpayer MLP under section 7704(d)(1)(E).
A PLR may be relied upon only by the taxpayer who requested it and may not be used or cited as precedent. If you have any questions regarding the information in this update, please contact one of the lawyers listed.