PLR 1137005: IRS rules that oilfield fluid services produce qualifying income

Plain-English summary

A limited partnership planned to provide fluids, storage, transportation, heating, and water treatment services for oil and natural gas wells. The partnership asked whether income from those activities would qualify for the exception to the publicly traded partnership rules. The IRS concluded that the specified income from supplying, transporting, and storing fluids, providing related heating services, and removing, treating, and disposing of flowback and produced water is qualifying income under section 7704(d)(1)(E). The ruling was limited to the stated facts and expressed no opinion on whether the taxpayer is otherwise taxable as a partnership.

Ruling snapshot

• Question: Whether income from the taxpayer's oilfield fluid and related services is qualifying income under section 7704.
• Outcome: Approved.
• Key authorities: IRC §§ 7704(a), 7704(b), 7704(c)(1), 7704(c)(2), and 7704(d)(1)(E).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201137005 Third Party Communication: None
Release Date: 9/16/2011 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
---------------------- ------------------, ID No. -------------
----------------------------------------------- Telephone Number:
------------------------------------------ ---------------------
--------------------------------- Refer Reply To:
CC:PSI:B02
PLR-115680-11
Date:
June 01, 2011

Legend:

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

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

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

This letter responds to a letter from your authorized representative dated April 6, 2011,
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 limited partnership organized under the laws of State. X, through affiliated
operating limited partnerships, limited liability companies or disregarded entities, will
earn income from providing services to customers engaged in the exploration for, and
the development and production of, oil and natural gas. Specifically, X will earn income
from the supply, transportation and storage of fractionation fluid and other fluids for oil
and natural gas wells, including any associated fractionation fluid heating services. X
will also earn income from the subsequent removal, treatment and disposal of fracturing
flowback and produced water, including, as part of its fluid handling services, the
provision of frac tanks and transportation services.

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, X will supply, and provide transportation and tank storage services with
respect to, production fluid appropriate for the fracturing process to operators of oil and
gas wells, as well as superheater services, whereby fracturing fluid is pre-heated prior
to it being pumped into the well. X will also remove, store and transport flowback
PLR-115680-11 2

generated in the fracturing process, as well as naturally occurring produced water
contained in the geological formation from which the oil and gas is produced. X will
treat the flowback and produced water so that it can be reused in a fracturing process or
be disposed of consistent with environmental regulations. X will also provide fluids for
use in drilling muds used in the drilling of oil and gas wells and casing cement used in
oil and gas wellbores. Finally, as part of the extraction and production of oil and natural
gas, X expects to provide hot oiler services, whereby heating units are used to remove
paraffin from drilling equipment and to provide heat-based produced water separation
services at crude oil stock tanks at a producer’s well site.

X will charge its customers fees for the provision of fractionation fluid (including fees for
the provision of fracturing fluid superheater services in certain of the geographic areas
in which X operates) and other fluids necessary for the drilling and completion of oil and
natural gas wells, which fees may include tank storage and transportation components.
X will also charge its customers fees for the removal, treatment and disposal of
flowback and produced water, which fees may include tank storage and transportation
components. In addition, X earns income from fees paid to provide hot oiler services
during and after the extraction and production of oil and natural gas.

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
gross income from the supply, transportation and storage of fractionation fluid and other
fluids for oil and natural gas wells, including any associated fractionation fluid heating
services, and from the removal, treatment and disposal of fracturing flowback and
PLR-115680-11 3

produced water, including the provision of frac tanks and transportation services, 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.

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

                                  Sincerely,




                                  Bradford R. Poston
                                  Senior Counsel, Branch 2
                                  (Passthroughs & Special Industries)

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