PLR 1224023: IRS treats LNG sales income as qualifying income

Plain-English summary

The IRS ruled that a publicly traded partnership's income from selling liquefied natural gas, or LNG, would be qualifying income under IRC § 7704(d)(1)(E). The partnership planned to buy domestic natural gas, liquefy it, transport it to a marine dock, and sell it under a long-term contract. The ruling treats those sales as connected with the processing, transportation, or marketing of a natural resource. It does not decide whether the partnership met the separate 90 percent gross-income test for publicly traded partnerships.

Ruling snapshot

• Question: Would the partnership's income from LNG sales qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved, the described LNG sales income is qualifying income.
• Key authorities: IRC §§ 7704(a), 7704(b), 7704(c), 7704(d)(1)(E)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201224023 Third Party Communication: None
Release Date: 6/15/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 7704.03-00 -----------------, ID No. -----------------
Telephone Number:
---------------------
------------------------------------------ Refer Reply To:
----------------------------------------- CC:PSI:B01
--------------------------------- PLR-147786-11
-------------------------- Date:
March 08, 2012

LEGEND

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

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

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

Terminal = --------------------------------------------------

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

Month = ----------------

A = ------------------------------------

B = ----------------------------------

c = ----

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

This letter responds to a letter dated November 14, 2011, submitted on behalf of X,
requesting a ruling that income derived from sales of liquefied natural gas (LNG) is
qualifying income within the meaning of § 7704(d)(1)(E) of the Internal Revenue Code.
PLR-147786-11 2

FACTS

According to the information submitted and the representations made, we understand
the relevant facts to be as follows:

X is a limited partnership organized under the laws of State. In Month, upon
consummation of a public offering of X’s common units, X became a publicly traded
partnership within the meaning of § 7704(b). X indirectly owns 100% of the outstanding
equity interests in Y, a limited partnership organized under the laws of State.
Additionally, X owns 100 percent of the outstanding equity interests in Z, a limited
liability company organized under the laws of State. Y and Z are classified as
disregarded entities from X for federal tax purposes.

Y owns and operates Terminal, which is located in A. Terminal converts, on behalf of
its customers, LNG into natural gas in a process called “regasification.” LNG is natural
gas that has been cooled until it condenses into a liquid in a process called
“liquefaction.” The regasification process at Terminal involves receiving and unloading
LNG from LNG tankers, storing and blending the LNG in storage tanks, and warming
the LNG through a series of vaporizers until the LNG is converted into pipeline quality
natural gas.

Terminal is undergoing a capital improvement project to develop and construct
liquefaction capabilities. The liquefaction process reduces the natural gas to a volume
that is safer and more cost-effective to transport over long distances by ocean-going
LNG tankers. The goal of this project is to enable Terminal to both liquefy natural gas
into LNG for export and regasify LNG into natural gas for import.

X has entered into a long-term contract with B. Under this agreement, X will procure
domestically-produced natural gas, process the natural gas into LNG through
liquefaction at Terminal, transport the LNG to its marine docks for uploading onto an
LNG tanker, and sell the LNG to B over a c-year period for a contracted sales price. B
is contractually obligated to resell the LNG to third parties. The partnership expects to
enter into other similar long-term contracts to sell LNG.

X represents that, absent further processing, LNG does not have a commercial
application. For LNG to be delivered into transmission and distribution pipelines for
industrial use, power generation or residential applications, LNG must first be converted
to its gaseous state through the regasification process.

LAW

Section 7704(a) provides that, except as provided in § 7704(c), a publicly traded
partnership (PTP) will be treated as a corporation.
PLR-147786-11 3

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 PTP for any taxable year
if the PTP 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) defines the term qualifying income to include income and 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.

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
the income derived by X from sales of LNG will be qualifying income within the meaning
of § 7704(d)(1)(E).

Except as expressly provided herein, we express or imply no opinion concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. In particular, we express no opinion as to whether X meets the 90 percent gross
income requirement of § 7704(c) in any taxable year.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent.
PLR-147786-11 4

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                   Sincerely,


                                   Faith P. Colson
                                   Faith P. Colson
                                   Senior Counsel, Branch 1
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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

cc