The IRS has issued a flurry of recent rulings that expand what constitutes qualifying income under Section 7704(d)(1)(E) for Master Limited Partnerships (“MLPs”). MLPs are a subset of Publicly Traded Partnerships (“PTPs”) that receive more favorable tax treatment. Unlike most PTPs, which are taxed as corporations, MLPs that earn a sufficient amount of “qualifying income” remain partnerships for federal income tax purposes.
Qualifying income includes 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). The House Conference Report explains that “[f]or this purpose, fertilizer includes plant nutrients such as sulphur, phosphate, potash, and nitrogen that are used for the production of crops and phosphate-based livestock feed.”
In Letter Ruling 201331002, the IRS found that income from the sale of liquid urea to petroleum products distributors constitutes qualifying income to the extent the liquid urea would otherwise be marketable as fertilizer for agricultural purposes. This ruling is interesting because the purchasers did not intend to use the liquid urea as a fertilizer, but instead would dilute the liquid urea and resell it as diesel exhaust fluid.
In addition to Letter Ruling 201331002, the IRS has issued several recent rulings expanding the scope of qualifying income. In these rulings, the IRS found that the following income is qualifying income:
- Income from the mining, processing and marketing of sedentary kaolin and bauxite for use as proppants in the fracturing of oil and gas deposits. Ltr. Rul. 201330027 (Apr. 18, 2013).
- Income from mining, processing and marketing sand and ceramic products for use as proppants in the fracturing of oil and gas deposits. Ltr. Rul. 201330026 (Apr. 18, 2013).
- Income from the supply, transportation, and storage of production fluids used in the fracturing process of oil and natural gas, and the removal, treatment and disposal of flowback generated in the fracturing process and naturally produced water. Ltr. Rul. 201330024 (Apr. 10, 2013); Ltr. Rul. 201330023 (Apr. 22, 2013); Ltr. Rul. 201336016 (May 7, 2013).
- Income from the removal, transportation, storage, treatment and disposal of brine, water and other waste produced in connection with the fracturing of oil and gas wells, and the marketing of oil recovered in the treatment of brine, water, and other residual waste produced in connection with the fracturing of oil and gas wells. Ltr. Rul. 201336006 (Apr. 22, 2013).
- Income from providing fractionation fluid heating services during and after the extraction and production of oil and natural gas. Ltr. Rul. 201330023 (Apr. 22, 2013).
- Income from relocating, constructing, installing, maintaining, and operating pipelines and related facilities used to transport minerals or natural resources; and income from the sale of condensate collected from pipelines used to transport minerals or natural resources. Ltr. Rul. 201328005 (Apr. 2, 2013).
- Income from the processing and marketing of gasoline, liquefied petroleum gas, methanol and synthesis gas produced through the processing of natural gas. Ltr. Rul. 201324002 (Feb. 21, 2013).
For more information on this topic, see Todd Keator’s recent article, which looks at the exponential growth of energy-related MLPs. If you have any questions about these issues, please contact one of the undersigned or any of the other Tax lawyers at Thompson & Knight.