IRS approves qualifying income from processing and transporting olefins

Plain-English summary

The IRS ruled for a publicly traded limited partnership that planned to process ethane and propane into olefins. It concluded that income from processing the natural gas liquids into olefins would be qualifying income under IRC § 7704(d)(1)(E). The IRS also approved qualifying-income treatment for the partnership's planned marketing, transportation, and storage of olefins. The ruling was based solely on the submitted facts and representations, and it did not decide whether the partnership would satisfy the separate 90-percent gross-income requirement.

Ruling snapshot

• Question: Does income from processing, marketing, transporting, and storing olefins qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved
• Key authorities: IRC §§ 7704(a), 7704(b), 7704(c)(1), 7704(c)(2), and 7704(d)(1)(E)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201241004 Third Party Communication: None
Release Date: 10/12/2012 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------------------------------------ - ----- ----------------------, ID No. -----------------
---------------------------------------- Telephone Number:
----------------------------------------- ---------------------
---------------------------- Refer Reply To:
CC:PSI:B01
PLR-117587-12
Date:
July 02, 2012

Legend

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

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

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

This letter responds to a letter, dated April 23, 2012, and subsequent correspondence,
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 intends to acquire and operate a facility that processes ethane and propane (“NGLs”)
into olefins through a cracking process. The facility uses a gas fired cracking furnace
which applies heat and pressure to decrease the size of the NGL molecules by
removing hydrogen atoms. Olefins are produced as a byproduct of the cracking
process and are sold to third parties for use as feedstocks in the production of chemical
derivatives. X also intends to acquired and operate olefin storage facilities and
pipelines to transport olefins. X will then provide olefin storage and transportation
services to third parties. X represents that olefins produced and sold by the facility will
not be sold to users at the retail level.

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

PLR-117587-12 2

                              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 tradable 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, in relevant part, 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
income derived by X from processing NGLs into olefins will constitute qualifying income
within the meaning of § 7704(d)(1)(E). We further conclude that income derived by X
from marketing, transporting, and storing olefins 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.

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.

PLR-117587-12 3

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
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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