PLR 1236005: IRS approves qualifying income from natural-resource processing

Plain-English summary

The IRS ruled that income from a publicly traded partnership's conversion of a natural-resource feedstock into another product would be qualifying income under section 7704(d)(1)(E). The partnership operated a facility under long-term agreements and was engaged in processing or refining a mineral or natural resource. The conclusion was based solely on the submitted facts and representations. The IRS did not rule on whether the partnership met the separate 90 percent gross-income requirement for any taxable year.

Ruling snapshot

• Question: Is income from the partnership's conversion of a natural-resource feedstock into another product qualifying income?
• Outcome: Approved.
• Key authorities: IRC § 7704(a), (b), (c), and (d)(1)(E)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201236005 Third Party Communication: None
Release Date: 9/7/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 7704.03-00 ----------------------, ID No. -----------------
Telephone Number:
--------------------
------------------------------------------ Refer Reply To:
--------------------------------------------- CC:PSI:B01
-------------------------------------------- PLR-103824-12
--------------------------- Date:
June 05, 2012

Legend

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

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

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

This letter responds to a letter, dated January 23, 2012, submitted on behalf of X by X’s
authorized representative, requesting a ruling under § 7704(d)(1)(E) of the Internal
Revenue Code.

                                                  FACTS

X is a limited partnership organized under the laws of State. X is a publicly traded
partnership within the meaning of § 7704(b). X, through affiliated partnerships,
disregarded entities, and corporate subsidiaries, is principally engaged in the
transportation, processing, storage, and distribution of natural gas, natural gas liquids
(“NGL”), crude oil, and refined petrochemical and petroleum products.

X is building a facility (“Facility”) that will convert --------- into ------------- through
dehydrogenation or catalytic cracking. In addition to creating -------------- this process
will also create ------------------------------------------------------------------------------------------------
--------------- (“Byproducts”).

X will operate Facility pursuant to long-term -------- agreements (“Agreements”). Under
the terms of the Agreements, -------------- will deliver ---------------------- to Facility and will
receive ------------- in accordance with an agreed-upon yield ratio. -------------------may
purchase the --------- feedstock from X at --------------------------- or from third parties.
Customers will pay X a formula-based cash fee for --------------- on a monthly basis. X
PLR-103824-12 2

will retain --------------------as additional compensation and may, in its sole discretion,
retain any ------------- produced in excess of the yield ratio.

X requests a ruling that income derived from its conversion of --------- into ------------- will
constitute qualifying income under § 7704(d)(1)(E).

LAW AND ANALYSIS

Section 7704(a) provides that, except as provided in § 7704(c), a publicly traded
partnership will 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 tradeable on a secondary market
(or the substantial equivalent thereof).

Section 7704(c)(1) provides that § 7704(a) does not apply to a publicly traded
partnership for any taxable year if such partnership 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) provides that the term “qualifying income” includes 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).

                                    CONCLUSION

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

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. In particular, 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.
PLR-103824-12 3

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.

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,


                                   Laura C. Fields
                                   Laura C. Fields
                                   Senior Technician Reviewer, Branch 1
                                   (Passthroughs & Special Industries)

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