Marine services for an LNG terminal produced qualifying income

Plain-English summary

The IRS considered a publicly traded partnership that indirectly owned an LNG receiving terminal and provided marine services for LNG tankers using the terminal. The services included escorting vessels, assisting with berthing, emergency response, salvage, and related tasks. The IRS ruled that income from those services was qualifying income under IRC § 7704(d)(1)(E), which covers income from processing and transporting natural resources. The ruling did not determine whether the partnership met the separate 90 percent gross-income requirement under IRC § 7704(c).

Ruling snapshot

• Question: Is income from marine services supporting an LNG receiving terminal qualifying income under IRC § 7704(d)(1)(E)?
• Outcome: Approved
• Key authorities: IRC §§ 7704(a), 7704(b), 7704(c), and 7704(d)(1)(E)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201025037 Third Party Communication: None
Release Date: 6/25/2010 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------------------------- -----------------, ID No. -------------
------------------------------------------ Telephone Number:
--------------------------------- ---------------------
-------------------------------- Refer Reply To:
CC:PSI:B01
PLR-146095-09
Date: March 12, 2010

LEGEND

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

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

Z = ---------------------------------------------

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

Date = ---------------------

A = ---------------------------------------------------

n = --

p = --

Dear -------------:

This letter responds to a letter dated ----------------------, submitted on behalf of X,
requesting a ruling that income derived from providing marine services to facilitate the
berthing of liquefied natural gas (LNG) tankers that call on X’s LNG receiving terminal is
qualifying income within the meaning of § 7704(d)(1)(E) of the Internal Revenue Code.

FACTS
PLR-146095-09 2

According to the information submitted and the representations made, we understand
the relevant facts to be as follows:

X is a limited partnership organized under the laws of State. On Date, upon
consummation of a public offering of X’s common units, X became a publicly traded
partnership within the meaning of § 7704(b). X indirectly owns 100% of the outstanding
equity interests in Y, a limited partnership organized under the laws of State. Y owns
100 percent of the outstanding equity interests in Z, a limited liability company
organized under the laws of State. Z is classified as a disregarded entity for federal tax
purposes.

Y owns and operates a LNG receiving terminal (the terminal) located in A. The terminal
includes marine docks for ocean-going LNG tankers to offload imported LNG onshore,
LNG storage/blending tanks, LNG vaporizers, and other equipment required to return
LNG to its gaseous state in a process called regasification. Natural gas that is
processed at the terminal is delivered to the owners of the natural gas at the tailgate of
the terminal for transportation by regulated interstate pipelines.

The capacity of the terminal has been fully reserved under n long-term terminal use
agreements (TUAs). Z has entered into contracts with each of the TUA customers to
provide, in exchange for certain fees, marine services to the customers’ vessels that call
on the terminal. The marine services Z provides to the TUA customers include:

  (1) Escorting LNG vessels that have been chartered by the TUA customers;
  (2) Assisting in berthing and unberthing of LNG vessels calling on the terminal;
  (3) Standing-by the LNG vessels at all times while an LNG vessel is in berth;
  (4) Performing fire fighting, life-saving, and other emergency response services;
  (5) Conducting salvage and/or marine wreckage removal activities;
  (6) Providing picket boat services to an LNG vessel berthed at the terminal; and
  (7) Performing other related or ancillary tasks required under applicable
      regulatory guidelines.

Z utilizes p specially-designed tug boats to provide the marine services. X represents
that these tug boats were designed specifically for these services and are not readily
adaptable to other uses. X also represents that the marine services provided by Z to
the TUA customers are an integral and necessary part of the terminal’s operations of
transporting and processing the LNG delivered to the terminal.

LAW AND ANALYSIS

Section 7704(a) provides that, except as provided in § 7704(c), a publicly traded
partnership (PTP) will be treated as a corporation.
PLR-146095-09 3

Section 7704(b) provides that, for purposes of § 7704, 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 the substantial equivalent thereof).

Section 7704(c)(1) provides that § 7704(a) does not apply to a PTP for any taxable year
if the PTP meets the gross income requirements of § 7704(c)(2) for the taxable year
and each preceding taxable 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(c)(2) for any taxable year if 90 percent or more of the gross income of the
partnership for the taxable year consists of qualifying income.

Section 7704(d)(1)(E) defines the term qualifying income to include 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.

CONCLUSIONS

Based solely on the facts submitted and the representations made, we conclude that
the income derived by X from the marine services provided by Z to the TUA customers
is qualifying income within the meaning of § 7704(d)(1)(E).

Except as expressly provided herein, we express or imply no opinion concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. In particular, we express no opinion as to whether X meets the 90 percent gross
income requirement of § 7704(c) in any taxable year.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-146095-09 4

                       Sincerely,

                         /s/

                       Faith P. Colson
                       Senior Counsel, Branch 1
                       Office of the Associate Chief Counsel
                       (Passthroughs & Special Industries)

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