PLR 1233009: IRS approves oil and gas activities as generating qualifying partnership income

Plain-English summary

An LLC planned to become, or contribute its interests to, a publicly traded partnership that would develop reserves and sell crude oil and natural gas. The partnership's activities would include extracting natural resources, transporting them to the point of shipment, and selling them in large quantities to industrial users. The IRS ruled that income from the described crude oil and natural gas activities would be qualifying income under IRC § 7704(d)(1)(E). The ruling did not decide whether the partnership would satisfy the separate 90 percent gross-income requirement.

Ruling snapshot

• Question: Would income from the partnership's described crude oil and natural gas activities qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved, for the described income.
• Key authorities: IRC §§ 7701(a), 7704(a), (b), (c), and (d)(1)(E).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

                                                         Third Party Communication: None

Number: 201233009 Date of Communication: Not Applicable
Release Date: 8/17/2012 Person To Contact:
---------------------------, ID No. -------------
Index Number: 7704.00-00 Telephone Number:
---------------------
---------------------------------- Refer Reply To:
---------------------------------------- CC:PSI:B01
------------------------------------- PLR-141802-11

                                                           February 10, 2012

LEGEND

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

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

Dear -----------------

This letter responds to a letter from X’s authorized representatives dated October 4,
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 (the Code).

FACTS

According to the information submitted and representations made, X is a limited liability
company organized under the laws of State. The owners of X intend to contribute the
equity interests in X to a new partnership or convert X into a partnership under
applicable state law (in either case, the partnership is referred to as the “Partnership”).
The owners of X believe that, after it consummates an initial public offering, the
Partnership will be a publicly traded partnership within the meaning of § 7704(b).

The Partnership will own and develop ------- reserves, and ------------ market ------- to -----
----------------------------------. The ---------------------------------- will -------------------- crude oil
and natural gas -----------------------------------------------------------------------------------------------
-----------------------------------------------------.
PLR-141802-11 2

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

--------------. The ------- sold by the Partnership -------------------------------------------------------

----------------------------------------------------------------- oil and natural gas -------------------------

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

The Partnership’s income-generating activities include extracting the ------- from the -----
---------------------------------------------------------------------------------------------------------,
transporting the ---------------- to the point of shipment and selling the ------- in large
quantities to industrial users, --------------------------------------------------.

LAW AND ANALYSIS

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

Section 7704(b) provides that, for the 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 substantial equivalent thereof).

Section 7704(c)(1) provides that § 7701(a) shall not apply to any publicly traded
partnership for any taxable year if such partnership met the gross income requirements
of § 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 § 7704(c)(2) 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” means 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).

Based solely on the facts submitted and representations made, we conclude that
income derived by the Partnership from the ----------------------------------------------------------
-----------------------------------------------------------------------------------------------crude oil and
natural gas constitutes 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
PLR-141802-11 3

letter. In particular, no opinion is expressed as to whether the Partnership meets the 90
percent gross income requirement of § 7704(c) in any taxable year.

The ruling is directed only to the taxpayer who requested 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 & Special Industries)

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