Fracturing-fluid and mine-discharge services produce qualifying income

Plain-English summary

The IRS ruled that a publicly traded partnership's distributive share of income from providing, removing, treating, and disposing of fracturing fluid and acid mine discharge is qualifying income under IRC § 7704(d)(1)(E). The services support the exploration, development, production, processing, transportation, or environmental handling of oil, natural gas, and coal activities described in the ruling. The conclusion applies to the partnership's share of income from the specified joint venture activities. The IRS did not express an opinion on whether the publicly traded partnership is otherwise taxable as a partnership.

Ruling snapshot

• Question: Is the partnership's share of income from the specified fluid and mine-discharge services qualifying income under § 7704?
• Outcome: Approved
• Key authorities: IRC §§ 7704 and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201043024 Third Party Communication: None
Release Date: 10/29/2010 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
--------------------- ------------------, ID No. -------------
------------------------------------------------ Telephone Number:
----------------------------------------- --------------------
-------------------------------- Refer Reply To:
------------------------------ CC:PSI:B02
PLR-124461-10
Date:
July 12, 2010

Legend:

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

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

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

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

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

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

This letter responds to a letter from your authorized representative dated June 11, 2010,
submitted on behalf of X, requesting a ruling concerning the qualifying income exception
to the publicly traded partnership rules of § 7704 of the Internal Revenue Code.

X is a publicly traded limited partnership within the meaning of § 7704(b), organized
under the laws of State. X currently earns income from two separate businesses, the
transportation of natural gas and products thereof, and the retail sale of propane. X
conducts those businesses through subsidiary partnerships, dual-member limited
liability companies that are treated as partnerships for federal income tax reporting
purposes, and single-member limited liability companies that are disregarded for federal
income tax reporting purposes.

PLR-124461-10 2

On Date, X became a partner in Y, a joint venture with Z. X will serve as Y’s managing
member. Y will earn income from providing services to customers engaged in the
exploration for, and the development and production of oil and natural gas. Y will also
earn income from providing services to customers engaged in the exploration for, and
the development and production of coal. Specifically, Y will earn income from the
supply and transportation of fractionation fluid for oil and natural gas wells and
subsequent removal, treatment and disposal of spent fracturing flowback for such
customers. Fracturing is a technique by which fluids are pumped into an oil or gas well
at high pressure to fracture geologic formations and open up pathways for the oil or gas
to flow. To this end, Y will process and supply production fluid appropriate for the
fracturing process to operators of oil and gas wells and will remove flowback generated
in the fracturing process. Y will treat the flowback so that it can be reused in a fracturing
process or be disposed of consistent with environmental regulations. Y will also remove
acid mine discharges for customers that are engaged in the development and
production of coal. Y will treat the acid mine discharges so that they can be reused as
fractionation fluid or be disposed of consistent with environmental regulations. Y will
charge its customers a fee for the provision of fractionation fluid and a fee for the
process of treating flowback or acid mine discharges depending on the level of
processing required.

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

Section § 7704(b) provides that 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
substantial equivalent thereof).

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 submitted and representations made, we conclude that X’s
distributive share of the gross income derived by Y from providing, removing, treating
and disposing of fracturing fluid and from removing, treating and disposing of acid mine
discharge is qualifying income within the meaning of § 7704(d)(1)(E).

PLR-124461-10 3

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 representatives.

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,




                                   Richard T. Probst
                                   Branch Reviewer, Branch 2
                                   (Passthroughs & Special Industries)

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