PLR 1201002: IRS treats specified natural-resource processing income as qualifying income

Plain-English summary

The IRS ruled that a planned publicly traded partnership's income from processing, transporting, storing, marketing, and distributing specified natural resources would be qualifying income under IRC § 7704(d)(1)(E). The partnership would conduct those activities through subsidiaries and disregarded entities, and its interests would be listed and traded on a nationally recognized exchange. The ruling addressed whether the described income qualified under the natural-resource income exception. It did not decide whether the partnership would satisfy the separate 90 percent gross income test for any taxable year.

Ruling snapshot

• Question: Would income from the partnership's described natural-resource activities qualify under § 7704(d)(1)(E)?
• Outcome: Approved, based on the submitted facts and representations
• Key authorities: IRC §§ 7704 and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201201002 Third Party Communication: None
Release Date: 1/6/2012 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------------------ -------------------, ID No. -----------
--------------------------- Telephone Number:
-------------------------------------------- --------------------
---------------------------------- Refer Reply To:
CC:PSI:B01
PLR-105995-11
Date:
July 07, 2011

Legend:

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

Partnership = ---------------------------

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

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

This letter responds to a letter dated February 8, 2011, submitted on behalf of X,
requesting a ruling under § 7704(d)(1)(E) of the Internal Revenue Code.

Facts

X is a limited liability company organized under the laws of State. X intends to form a
publicly-traded partnership either by creating a new entity or by consummating an initial
public offering itself, hereinafter Partnership. The interests in Partnership will be listed
and traded on a nationally recognized exchange.

Partnership, through subsidiaries and disregarded entities, will process ----------------------
------------------------------------- and transport, store, market and distribute ----------------------
to a variety of customers -------------------.

Partnership acquires multiple types of ------------------------------------------------------------------
----------------------------------------------------------------------- for processing -------------------------
------------------------------------------------------------------------------------------------------------------.
PLR-105995-11 2

In some cases, Partnership ---------------------for its own account for use as a feedstock in
----------------------------. Partnership owns an interest in or is in the process of
constructing --------------------facilities, where the ------------------------are ------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

-----------------------------------------------------------------------.

Partnership also transports, stores, markets and distributes -------------------------------------

----------------------------------------------------------------. Partnership owns a direct or indirect
interest in or is in the process of constructing --------------------------------------. Partnership
markets ---------------------------------------------------------------------------------------------------------
----------------------------------------------------------.

X requests a ruling that income derived from processing ------------------------------------------
and transporting, storing, marketing and distributing -----------------------------------------------
will constitute qualifying income under § 7704(d)(1)(E).

Law and Analysis

Section 7704(a) provides that, except as provided in § 7704(c), a publicly traded
partnership, will be treated as a corporation.

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 publicly traded
partnership for any taxable year if such partnership 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) provides that the term “qualifying income” includes income and
gains derived from the exploration, development, mining or production, processing,
refining, transportation (including pipelines transporting gas, oil, or products thereof), or
PLR-105995-11 3

the marketing of any mineral or natural resources (including fertilizer, geothermal
energy, and timber).

Conclusion

Based solely on the facts submitted and the representations made, we conclude that
the income derived by Partnership from processing ------------------------------------------------
------------------------------------------------------------------------------------------------------------and
transporting, storing, marketing and distributing -----------------------------------------------------
---------------------------------------------------------------------------------------------------------------will
constitute qualifying income under § 7704(d)(1)(E).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. In particular, no opinion is expressed or implied as to whether Partnership
meets the 90 percent gross income requirement of § 7704(c)(1) in any taxable year for
which this ruling may apply.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
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 X’s authorized representative.

                                                 Sincerely,



                                                 David R. Haglund
                                                 David R. Haglund
                                                 Chief, Branch 1
                                                 Office of the Associate Chief Counsel
                                                 (Passthroughs and Special Industries)

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