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:
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------------------, ID No. -------------
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Refer Reply To:
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CC:PSI:B02
PLR-124461-10
Date:
July 12, 2010

Legend:

X = -----------------------------------------
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Y = --------------------------------------------------------
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Z = -------------------------------
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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).

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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