PLR 201233009: 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:
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Refer Reply To:
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CC:PSI:B01
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PLR-141802-11
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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 -----------------------------------------------------------------------------------------------
-----------------------------------------------------.
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---------------------------------------------------------------------------------------------------------------------
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--------------. The ------- sold by the Partnership -------------------------------------------------------
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----------------------------------------------------------------- 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
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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