PLR 200939016: Marine transportation income qualified for publicly traded partnership rules

Plain-English summary

The IRS considered a publicly traded limited partnership engaged in marine transportation, distribution, and logistics services. The partnership used vessels to transport crude oil, refined petroleum products, ethanol, biodiesel, and other qualifying products under time charters, consecutive and single voyage charters, and contracts of affreightment, excluding bunkering services. The IRS ruled that income from transporting those products under those charters was qualifying income under section 7704(d)(1)(E), allowing the partnership to avoid corporate treatment under the publicly traded partnership rules if it met the applicable gross-income requirements. The ruling was based solely on the submitted facts and representations.

Ruling snapshot

• Question: Did income from transporting listed mineral and natural-resource products under the described charters qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved.
• Key authorities: IRC §§ 7704(a), (b), (c), and (d)(1)(E).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200939016
Third Party Communication: None
Release Date: 9/25/2009
Date of Communication: Not Applicable
Person To Contact:
Index Number: 7704.03-00
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Telephone Number:
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Refer Reply To:
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Date:
June 25, 2009

LEGEND

X = -----------------------------------------------

Y = ---------------------------------------------

State = -------------

a = --------

b = ----

c = -----

d = ---

e = ---

f = ---

Year 1 = -------

Agreement = -----------------------------------------------------------------------------------------
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Dear ----------:

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This letter responds to a letter from your authorized representative dated May 28, 2009 submitted on behalf of X requesting a ruling under the publicly traded partnership rules of § 7704 of the Internal Revenue Code.

X was organized as a limited partnership under the laws of State. It is a publicly traded partnership within the meaning of § 7704(b). X is engaged through its operating partnership, Y, and through Y’s subsidiaries (hereinafter, any references to X include a reference to Y and Y’s subsidiaries), in marine transportation, distribution, and logistics services for crude oil, refined petroleum products, ethanol and certain other products for a wide range of charterers, including major oil companies, oil traders and refiners. During fiscal Year 1, approximately a percent of X’s income was from time charters, consecutive voyage charters, contracts of affreightment, and bareboat charters, all of which are generally for periods of one year or more, with the remainder of its gross income from single voyage charters. Time charters, consecutive voyage charters, contracts of affreightment and single voyage charters (excluding contracts for bunkering services) as currently in effect and as may be entered into in the future are referred to herein as the “Charters”.

Approximately b percent of X’s gross income is derived from services rendered by X under the terms of the Agreement and similar agreements with the same customer. The term of the Agreement (including possible extensions at the option of the charterer) is c years. The amounts payable to X under the Agreement are based on a daily rate.

Under the Agreement, X will provide the master and crew for the vessel and is responsible for all aspects of the operation and maintenance of the vessel. X is responsible for the cost of maintaining and repairing the vessel. X’s crews regularly inspect each vessel, both at sea and in port. Selected vessels are inspected each year by independent consultants, at X’s expense. X maintains insurance coverage consistent with industry practice to protect against risks related to accidents involved in the conduct of its business and risks of liability for environmental damage and pollution. If the vessel is lost, the charterer has the right to terminate the charter if X does not provide a suitable substitute vessel.

The charterer has the right to specify the destination of the vessel (subject to geographic restrictions), to have its representatives visit the vessel, to point out operating deficiencies and to terminate the agreement if the deficiencies are not rectified and to install additional pumps or equipment for loading cargoes. However, the charterer is not permitted to order or direct the taking of any particular action aboard the vessel or interfere with the master’s exercise of his authority. The charterer is responsible for fuel costs and port, tug and pilot charges. The charterer, subject to X’s approval which will not be unreasonably withheld, may fit any additional pumps or gear for loading or discharging cargo as it may require at the charterer’s expense. Subject to small tolerances, the charterer is not required to pay for any period that the vessel is unavailable to provide services and has a right to terminate the agreement if the vessel

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is unavailable for service. The charterer shall have the option of laying-up the vessel for all or any portion of the agreement term. During the lay-up period, the daily rate payable under the agreement will be less than the normal daily rate. The charterer may exercise the lay-up option any number of times during the term of the agreement. X represented that it currently has approximately d Charters. Although the general terms of the Agreement are representative of the general terms of X’s existing and future Charters, there are certain distinctions in terms. X represents that the common terms of the Charters include (or will include) the following: (1) X designates the master and the crew for the vessel; (2) X is responsible for the navigation, operation and maintenance of the vessel; (3) the term of each Charter, including extensions at the option of the customer, is less than e years; (4) X bears the risk of damage to and of loss of the vessel; (5) the customer does not have an option to acquire the vessel; (6) X is not entitled to material compensation for any period during which the vessel is not available for service for more than f consecutive days or if the customer does not exercise an option to renew the Charter; (7) X bears the cost of crewing, insuring, maintaining and repairing the vessel; and (8) amounts that are payable under the Charter are not stated by reference to the cost of the vessel or as separate charges for services and for use of the vessel.

X requests a ruling that its income derived from the transportation of crude oil, refined petroleum products, ethanol, biodiesel, and other products qualifying under
§ 7704(d)(1)(E) pursuant to the Charters is qualifying income under § 7704(d)(1).

Section 7704(a) provides generally that a publicly traded partnership shall be treated as a corporation.

According to § 7704(b), the term "publicly traded partnership" means any partnership if (1) interests in the partnership are traded on an established securities market, or (2) interests in the partnership are readily tradable on a secondary market (or its substantial equivalent).

Section 7704(c)(1) exempts from treatment as a corporation any publicly traded partnership for any tax year if the partnership meets the gross income requirements of
§ 7704(c)(2) for that year and each preceding tax year beginning after December 31, 1987, during which the partnership (or any predecessor) was in existence. Section 7704(c)(2) provides that a partnership meets the gross income requirements of § 7704 for any tax year if 90% or more of the partnership's gross income for that year consists of qualifying income.

Section 7704(d)(1)(E) defines "qualifying income" to include income and gains derived from the exploration, development, mining or production, processing, refining, transportation, or marketing of any mineral or natural resource.

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Based solely on the facts and representations submitted, we conclude that the income X derives from transporting crude oil, refined petroleum products, ethanol, biodiesel, and other products qualifying under § 7704(d)(1)(E) pursuant to the Charters is qualifying income within the meaning of § 7704(d)(1)(E).

Except for the specific ruling above, we express or imply no opinion concerning the federal tax consequences of the facts of this case under any other provision of the Code. Specifically, we express or imply no opinion as to whether X is taxable as a partnership for federal tax purposes.

Under a power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.

This ruling is directed only to the taxpayer who requested it. According to § 6110(k)(3), this ruling may not be used or cited as precedent.

Sincerely,

Bradford R. Poston
Senior Counsel, Branch 2
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosure (2)
Copy of this letter
Copy for § 6110 purposes

cc: