PLR 1226018: IRS approves qualifying income for resource services

Plain-English summary

The IRS rules that specified income from a partnership's extractive logistics and refined products blending businesses is qualifying income under IRC § 7704(d)(1)(E). The ruling covers resource-related services and sales to customers engaged in drilling, exploration, production, or mining, as well as blending and sales of lubricants before delivery to end users. It excludes income from deliveries or sales to customers outside those activities and from sales to end users, and it does not rule on the partnership's overall 90 percent qualifying-income test or its classification as a partnership. The ruling is based on the taxpayer's facts and representations and may be modified by later regulations as described in the letter.

Ruling snapshot

• Question: Does specified income from extractive logistics and refined products blending activities qualify under the publicly traded partnership income exception?
• Outcome: Approved
• Key authorities: IRC §§ 7704, 6426, and 40A; Rev. Proc. 2011-1, section 11

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201226018 Third Party Communication: None
Release Date: 6/29/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 7704.03-00 --------------, ID No. -------------
Telephone Number:
---------------------
-------------------- Refer Reply To:
-------------------------------------------------- CC:PSI:B02
-------------------------- PLR-147803-11
------------------------------ Date:
December 07, 2011

LEGEND

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

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

a = ---------

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

This letter responds to a letter from your authorized representative dated November 15,
2011, and subsequent correspondence, 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 sources that include the extractive logistics business and the refined
products blending business.

X’s gross income from the extractive logistics business will be derived from delivery and
sale of refined petroleum products (principally diesel fuel and lubricating oil), antifreeze,
methanol and other chemicals to customers engaged in drilling, exploration and
production, and mining activities at the site of such activities, including real-time online
reporting of the fuel deliveries; on-site refueling of customers’ oil and gas drilling,
exploration and production, and mining equipment; removal, recycling, and disposal of
used oil, lubricants or other fluids and non-hazardous waste from drilling and mining
sites; maintenance and remote monitoring of drilling rig equipment, providing real-time
online alerts when there are critical equipment malfunctions or maintenance is required
PLR-147803-11 2

and maintaining a log of all recommendations and actions; inspecting customers’ drilling
and mining equipment and analysis of used lubricants to ensure optimal equipment
performance and to maximize equipment life, including through the use of an optical
device known as a borescope to capture digital images of internal components which
are then analyzed to provide specific service recommendations to the customer;
provision of storage tanks and other equipment to customers on a monthly fee basis
(though in most cases X provides on-site fuel and lubricant storage tanks without
charge); and in a contemplated expansion of the existing extractive logistics business,
supply and/or transportation of fracturing fluid to well sites, supply (with or without a
separately stated charge) of “frac tanks” to store fracturing fluid and production fluid and
flowback at the well site, removal of the production fluid and flowback generated in the
fracturing process, and the disposal or treatment of the production fluid and/or flowback
so it can be re-used or disposed of consistent with environmental regulations.

X represents that the extractive logistics services provided by X are integral to the
exploration, production and development of oil, gas and coal resources, because the
exploration, development and production of oil, gas and coal resources would be
significantly curtailed in the absence of such services. X further represents that
approximately a% of the extractive logistics services gross income is currently
attributable to drilling and well services with the remainder attributable to conventional
profit on the sale of fuel and fluids. X also represents that the substantial majority of the
vehicles used to provide the extractive logistics services are specially designed and
custom-built to deliver products to above-ground tanks and other non-conventional
delivery points in remote locations and that substantially all of the use of those vehicles
is to deliver products to customers who are engaged in drilling, exploration and
production, or mining activities. Those vehicles are ill-suited for (and normally not used
for) more conventional types of fuel and lubricant deliveries (e.g., deliveries to retail gas
stations).

X’s gross income from the refined products blending business will be derived from
blending and sale of private label automotive lubricants, as well as the sale of branded
lubricants and related products, to automotive dealerships, “quick lube” stores and
commercial and industrial end users; in a contemplated expansion of the business
described immediately above, blending and storing (at terminals) lubricants owned by
third parties, which third parties will sell the lubricants to their own customers; and
blending and sale of marine lubricants to major oil companies for resale to the major oil
companies’ customers and delivery of lubricants by vessel to the customers of the major
oil companies.

Section 7704(a) provides generally that a publicly traded partnership shall be treated as
a corporation.
According to § 7704(b), the term "publicly traded partnership" means any partnership if
(1) interests in the partnership are traded on an established securities market, or (2)
PLR-147803-11 3

interests in the partnership are readily tradable on a secondary market (or its substantial
equivalent).

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 (including pipelines transporting gas, oil, or products thereof), or the
marketing of any mineral or natural resource (including fertilizer, geothermal energy,
and timber) industrial source carbon dioxide, or the transportation or storage of any fuel
described in subsection (b), (c), (d), or (e) of § 6426, or any alcohol fuel defined in
§ 6426(b)(4)(A) or any biodiesel fuel as defined in § 40A(d)(1),

The Senate Report accompanying the Technical and Miscellaneous Revenue Act of
1988 states:

   With respect to marketing of minerals and natural resources (e.g., oil and gas
   and products thereof), the Committee intends that qualifying income be income
   from marketing at the level of exploration, development, processing or refining
   the mineral or natural resource. By contrast, income from marketing minerals
   and natural resources to end users at the retail level is not intended to be
   qualifying income. For example, income from retail marketing with respect to
   refined petroleum products (e.g., gas station operations) is not intended to be
   treated as qualifying income.

S.Rep. No. 445, 100th Cong., 2nd Sess. 424 (1988).

Based solely on the facts submitted and representations made, we conclude that X's
gross income from (1) the extractive logistics business (excluding any portion of such
income derived from the delivery or sale of products to customers who are not engaged
in drilling, exploration and production, or mining activities) and (2) the refined products
blending business (excluding any portion of such income derived from the delivery or
sale of products to end users of the products) 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
PLR-147803-11 4

partnership for federal tax purposes. In addition, no opinion is expressed as to whether
X meets the 90 percent gross income requirement of § 7704(c)(1) in any taxable year
for which this ruling may apply. To the extent that X's gross income from its extractive
logistics business is not attributable its customers’ § 7704(d)(1)(E) activities (i.e., to
activities of the customer, such as drilling, exploration and production, or mining of a
mineral or natural resources, that would generally be expected to produce gross income
that is qualifying income under § 7704(d)(1)(E) regardless of the customer’s Federal tax
classification), this letter ruling will not apply in determining whether the income that
may be derived by X from such other uses constitutes qualifying income under
§ 7704(d)(1)(E). For purposes of our ruling regarding the extractive logistics business
and the preceding sentence, X’s “customers” include mine operators to which X makes
sales or deliveries pursuant to buy-back agreements with lubricating oil suppliers that
call for part, or all, of the payment to X to be made by the supplier. However, examples
of such gross income from the extractive logistics business not attributable a customer’s
§ 7704(d)(1)(E) activities include, but are not limited to, delivery and sale of refined
petroleum products and antifreeze to farms and construction sites.

Temporary or final regulations pertaining to one or more of the issues addressed in this
ruling have not yet been adopted. Therefore, this ruling will be modified or revoked by
the adoption of temporary or final regulations, to the extent the regulations are
inconsistent with any conclusion in the letter ruling. See section 11.04 of Rev. Proc.
2011-1, 2011-1 I.R.B. 1, 50. However, when the criteria in section 11.06 of Rev. Proc.
2011-1, 2011-1 I.R.B. 1, 50 are satisfied, a ruling is not revoked or modified retroactively
except in rare or unusual circumstances.

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 representative.

                                  Sincerely,



                                  Bradford R. Poston
                                  Senior Counsel, Branch 2
                                  Office of the Associate Chief Counsel
                                  (Passthroughs & Special Industries)

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

cc: