PLR 1233010: IRS approves natural gas gathering and processing income as qualifying partnership income

Plain-English summary

The IRS ruled that income from several natural gas gathering and processing activities would be qualifying income for a proposed publicly traded partnership. The partnership would gather gas through pipeline systems, manage a natural gas processing plant and related storage facilities, and operate an amine regeneration unit. The IRS concluded that gross income from those operations fell within the qualifying-income rules for processing, transportation, and related activities involving natural resources. The ruling did not determine whether the partnership would meet the separate 90 percent gross-income test or whether the described ownership structures were partnerships for federal tax purposes.

Ruling snapshot

• Question: Would income from the proposed partnership's natural gas gathering and processing operations qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved, to the extent the income comes from the described operations.
• Key authorities: IRC §§ 7701(a), 7704(a), (b), (c), and (d)(1)(E); Rev. Proc. 2011-1, §§ 11.04 and 11.06.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201233010 Third Party Communication: None
Release Date: 8/17/2012 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------------------------------------------------ ----------------------, ID No. -------------
----------------------- Telephone Number:
--------------------------------------------- ---------------------
------------------------------------------- Refer Reply To:
--------------------------------------- CC:PSI:B02
PLR-145538-11
Date:
April 20, 2012

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

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

M = --------------------------------

N = -------------------------------

O = ------------------------------------------------------------------------------

P = -----------------------------------------------------------------------------

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

This letter responds to a letter dated October 28, 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.

X is a limited liability company organized under the laws of State. X and a related party
intend to form a new limited partnership, Y. X represents that Y will be a “publicly
traded partnership” within the meaning of § 7704(b). Y, directly or through affiliated
operating entities, will be engaged in the activity of gathering and processing natural
gas and operating natural gas processing facilities.

X has requested a ruling that the gross income that Y derives from gathering and
processing natural gas and operating natural gas processing facilities, as described
below, constitute qualifying income under § 7704(d)(1)(E).

PLR-145538-11 2

Y will own, and provide gathering services to third parties on M gathering system and N
gathering system. Gathering systems generally consist of a network of small-diameter
pipelines that collect natural gas from producing wells and transport it to main pipelines
for further transmission. Y or a contract operator will perform all of the functions
associated with the movement of natural gas through the systems.

Y will own an interest in O, a natural gas processing plant and related facilities,
including a natural gas liquids (NGLs) storage facility. O contains processing equipment
that chills natural gas streams in order to recover significant amounts of NGLs from
such streams. Y serves as the manager of O and receives a management fee for Y’s
management services. Y’s management duties include: (i) employing all personnel
necessary for conducting operations of the facility; (ii) maintaining all accounting
records, billing, financial reporting and treasury functions (including paying accounts of
contractors and suppliers, and maintaining accounts for the owners; and (iii) filing all
necessary operational notices and reports required by governmental agencies or
authorities.

Y will own P, an amine regeneration unit and related equipment within a third-party
natural gas processing plant. Amine gas treating, also known as gas sweetening and
acid gas removal, refers to a group of processes that use aqueous solutions of various
alkylamines (commonly referred to as amines) to remove hydrogen sulfide and carbon
dioxide from gases.

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 partnership are readily tradable on a secondary market
(or substantial equivalent thereof).

Section 7704(c)(1) provides that section 7701(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” 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

PLR-145538-11 3

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 to the
extent Y derives gross income from the operations of M, N, O and P, such gross income
will be qualifying income within the meaning of § 7704(d)(1)(E).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, including whether Y meets the 90 percent gross income requirement of
§ 7704(c)(1) in any taxable year for which this ruling may apply. In addition, no opinion
is expressed or implied concerning whether any of the ownership structures discussed
or referenced in this letter constitute partnerships for federal tax purposes.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

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 § 11.04 of Rev. Proc. 2011-1,
2011-1 I.R.B. 1, 50. However, when the criteria in § 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.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

PLR-145538-11 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,



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

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