PLR 1027003: Marine transportation income qualified as publicly traded partnership income

Plain-English summary

The IRS ruled that income earned by a publicly traded limited partnership from transporting crude oil, refined petroleum products, ethanol, biodiesel, and other qualifying products was qualifying income under section 7704(d)(1)(E). The partnership provided marine transportation through fully found charters, under which it supplied the vessel's master and crew and remained responsible for navigation, operation, maintenance, insurance, and repairs. The ruling concluded that the described charter income qualified for the publicly traded partnership exception from corporate treatment. It did not rule on whether the partnership was otherwise taxable as a partnership for federal tax purposes.

Ruling snapshot

• Question: Did income from the partnership's marine transportation charters qualify under the publicly traded partnership rules?
• Outcome: approved
• Key authorities: IRC §§ 7704(a), 7704(b), 7704(c), and 7704(d)(1)(E); IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201027003 Third Party Communication: None
Release Date: 7/9/2010 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
---------------------------- ------------------, ID No. -------------
---------------------------------------------- Telephone Number:
----------------------------------- ---------------------
------------------------------------------------------------ Refer Reply To:
----- CC:PSI:B02
------------------------ PLR-108099-10
------------------------------ Date:
March 05, 2010

Legend:

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

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

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

a = --------------

b = -------------

c = ----

d = ------------

e = ----

f = ----

g = ----

Agreement = -----------------------------------------------------------------------------------------
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Dear -------------------:
PLR-108099-10 2

This letter responds to a letter from your authorized representative dated February 16,
2010 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 a variety of activities, including the marine
transportation of crude oil, refined petroleum products and other products for a variety of
charterers, including major and independent oil and gas refining companies and
petroleum marketing companies. X currently provides its marine transportation services
under (i) spot contracts covering a single voyage and (ii) term contracts that range from
a to b in length. Vessel charters, including fully found charters, time charters,
consecutive voyage charters, contracts of affreightment and single voyage charters, as
currently in effect and as may be entered into in the future, are referred to herein as the
“Charters”.

Approximately c percent of X's current gross income from its marine transportation
segment is derived from services rendered by X under the terms of the Agreement. The
term of the Agreement is d, after which either party can terminate the Agreement. The
amounts payable to X under the Agreement are based on a daily rate.

The Agreement is a fully found charter, which means that X must 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 in transit 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 no
obligation to continue to make payments under the charter unless and until X provides a
suitable substitute vessel.

The charterer has the right to specify the destination of the vessel (subject to
geographic restrictions). The charterer has no rights to install additional pumps or
equipment for loading cargoes, to order or direct the taking of any particular action
aboard the vessel or to interfere with the master's exercise of his authority. The
charterer is responsible for fuel costs, port, tug and pilot charges and any new taxes.
The amount payable by the charterer is adjusted under a wage escalation/de-escalation
provision for variations in crew wages from a benchmark wage. Subject to small
tolerances, the charterer is not required to pay for any period that the vessel is
unavailable to provide services.
PLR-108099-10 3

X represented that it currently has approximately e term 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), expressly or implicitly, 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 f 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 g 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 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.

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).
PLR-108099-10 4

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
                                   (Passthroughs & Special Industries)

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