The Internal Revenue Service (IRS) recently issued proposed regulations addressing master limited partnership (MLP) qualifying income under Section 7704(d)(1)(E) of the Internal Revenue Code. This Locke Lord QuickStudy briefly summarizes the proposed regulations. 


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 ninety percent of its gross income from qualifying sources such as natural resources, real estate, or commodities. Historically, 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 private letter rulings (PLRs) to the IRS for clarity. The IRS announced in March 2015 that the agency would resume issuing PLRs concerning qualifying income. Although many MLPs welcomed this announcement, the PLR process is not an ideal mechanism for resolving qualifying income questions because it is a time consuming and expensive process. The proposed regulations should alleviate this problem and help MLPs more easily determine if they are generating qualifying income.

Proposed Regulations

The proposed regulations provide that qualifying income relating to minerals and natural resources includes only income and gains from “qualifying activities” with respect to minerals or natural resources. The proposed regulations establish two categories of qualifying activities: (1) “Section 7704(d)(1)(E) activities” and (2) “intrinsic activities” (i.e., those activities that support Section 7704(d)(1)(E) activities). 

Section 7704(d)(1)(E) Activities: The proposed regulations provide an exclusive list of six MLP operations that constitute Section 7704(d)(1)(E) activities: (i) exploration, (ii) development, (iii) mining or production, (iv) processing or refining, (v) transportation, and (vi) marketing. These activities represent different stages in the extraction of minerals or natural resources and the eventual offering of products for sale. Although the IRS intends for this list to be an exclusive one, the Agency recognizes that it may need to expand the list by published guidance. The table below highlights how the proposed regulations define each Section 7704(d)(1)(E) activity:

Click here to view table.

Intrinsic Activities: The proposed regulations provide that certain activities that support Section 7704(d)(1)(E) activities give rise to qualifying income because this income is “derived from” the Section 7704(d)(1)(E) activities. An intrinsic activity is one that (i) is specialized to support a Section 7704(d)(1)(E) activity, (ii) is essential to the completion of that activity, and (iii) requires the provision of significant services to the activity. The proposed regulations define each of these elements as follows:

  • Specialization—an activity is specialized if the MLP provides personnel to perform or support the Section 7704(d)(1)(E) activity and those personnel have received training unique to the mineral or natural resource industry that is of otherwise limited use. If the activity also involves the sale, provision, or use of property, then the property must be (i) used only in connection with a Section 7704(d)(1)(E) activity and have limited use outside of that activity, or (ii) used as an injectant to perform a Section 7704(d)(1)(E) activity and, as part of that activity, the MLP must collect and clean, recycle, or otherwise dispose of the injectant in accordance with applicable law.
  • Essential—an activity is essential if it is necessary to (i) physically complete the Section 7704(d)(1)(E) activity or (ii) comply with the applicable laws regulating the Section 7704(d)(1)(E) activity.
  • Significant Services—an MLP provides significant services if its personnel have an ongoing or frequent presence at the site of the Section 7704(d)(1)(E) activity and the activities of those personnel are necessary for the MLP to provide its services or to support the Section 7704(d)(1)(E) activity.

The proposed regulations include a ten-year transition period for MLPs that received a PLR from the IRS holding that the income from the activity is qualifying income or took a reasonable position under the statute, and prior to the issuance of the proposed regulations, that their activities generated qualifying income. 


The proposed regulations represent a much needed modernization of the qualifying income definition and present MLPs with a clearer framework for determining whether or not their operations generate qualified income. The proposed regulations will not be universally welcomed, however, and may force some firms to substantially reorganize their operations. In fact, the proposed regulations may actually terminate the MLP status of several firms, particularly those involved in the processing of petrochemicals. For instance, Westlake Chemical Partners LP may lose its MLP status at the end of the regulatory transition period despite having obtained a favorable PLR from the IRS in 2012. According to a Westlake Chemical Partners LP press release, the proposed regulations “would make it difficult or impossible for the [company’s] production, transportation and marketing of ethylene and its co-products to continue to qualify as ‘qualifying income’ after the proposed ten-year transition period.” The proposed regulations also close the door on the paper industries’ recent attempts to form MLPs for their operations.

The IRS is accepting comments and public hearing requests until August 4, 2015. MLPs should carefully review the proposed regulations with their tax advisors. It is also worth noting that the proposed regulations contain detailed examples that demonstrate the application of the principles discussed in this QuickStudy. We will continue to closely monitor this issue and will provide future client updates once the final regulations are published.