PLR 1216022: IRS rules that excess hydrogen sales qualify as partnership income

Plain-English summary

A publicly traded partnership that produces fertilizer used a gasification process that generated hydrogen as a by-product. The partnership had an agreement with an adjacent refinery to exchange excess hydrogen, steam, and other products, with monthly netting of the transfers. The IRS ruled that income from the partnership's sale of excess hydrogen was qualifying income under IRC § 7704(d)(1)(E). The ruling addressed only that specific question and did not opine on whether the partnership was taxable as a partnership under other Code provisions.

Ruling snapshot

• Question: Does income from the sale of excess hydrogen qualify as qualifying income for a publicly traded partnership?
• Outcome: Approved
• Key authorities: IRC § 7704(a), (b), (c), and (d)(1)(E).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201216022 Third Party Communication: None
Release Date: 4/20/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 7704.03-00 -----------------, ID No. -----------------
Telephone Number:
---------------------
------------------------ Refer Reply To:
----------------------------------------------- CC:PSI:BR01
----------------------- PLR-138465-11
------------- Date:
------------------------------- December 02, 2011

      Legend:

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

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

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

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

   This letter is in response to your letter, dated September 15, 2011, on behalf of

X, seeking a ruling concerning the qualified income exception to the publicly traded
partnership under section 7704 of the Internal Revenue Code.

                                                   Facts

      Based on the materials submitted, we understand that X, organized under the

laws of State and as of Date, is a publicly traded partnership within the meaning of
section 7704(b) of the Code. X’s business is the production of fertilizer. The
fertilization production plant utilizes a gasification process to produce ammonia, some of
which is further processed into urea ammonium nitrate (UAN) fertilizer. The primary
feedstock for X’s gasification process is petroleum coke, a coal-like substance produced
as a byproduct of petroleum refining. X gets most of its petroleum coke from an
adjacent refinery. In the course of the fertilization production process, hydrogen is
produced as a by-product. X has entered into a services agreement with the adjacent
refinery; whereby both agree provide each other with excess hydrogen, steam and other
PLR-138465-11 2

products, to promote efficient operation of each facility. X is not obligated to provide
any hydrogen to the other refinery unless X has excess hydrogen. Under the
agreement, the transfers of hydrogen between the parties are netted and each party
makes payments only to the extent that the hydrogen it receives during a given month
exceeds the hydrogen it supplies during that same month. Thus, X may derive gross
income from the sale of hydrogen in some months.

                                 Law and Analysis

  Section 7704(a) provides 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 that partnership are traded on an established securities
market, or (2) interests in that partnerships are readily tradable on a secondary market
(or the substantial equivalent thereof).

   Section 7704(c)(1) provides that section 7704(a) shall not apply to any publicly

traded partnership for any taxable year if such partnership met the gross income
requirements of section 7704(c)(2) for such 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) explains that a partnership meets the gross income

requirements of section 7704(c) for any taxable year if 90 percent or more of the gross
income of such partnership for such taxable year is qualifying income.

     Section 7704(d)(1)(E) provides that the term qualifying income, among other

things, income or gains derived from the exploration, development, mining or
production, processing, refining, transportation (including pipelines transporting gas, oil,
or products thereof), or the marketing of any mineral or natural resource (including
fertilizer, geothermal energy or timber).

                                    Conclusion

  Based solely on the materials submitted, we conclude that the income derived by

X from the sale of excess hydrogen is qualifying income within the meaning of section
7704(d)(1)(E).

   Except for the specific ruling above, we express or imply no opinion concerning

the federal tax consequences of this case under any pother provision of the Code.
Specifically, we express or imply no opinion as to whether X is taxable as a partnership
for federal tax purposes.
PLR-138465-11 3

  Pursuant to the power of attorney on file with this office, a copy of this letter will

be sent to your authorized representative.

  This ruling is directed only to the taxpayer who requested it. According to section

6110(k), this ruling may not be used or cited as precedent.

                                               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 section 6110 purposes

cc: