PLR 1250014: IRS rules that specified partnership income is qualifying income

Plain-English summary

The IRS ruled that income a limited partnership expected to earn from marketing certain redacted mineral or natural-resource products would be qualifying income under IRC section 7704(d)(1)(E). The partnership planned an initial public offering and expected to become a publicly traded partnership. Section 7704 generally treats publicly traded partnerships as corporations, but provides an exception when the partnership meets the qualifying-income rules. The IRS did not decide whether the partnership would satisfy the separate requirement that at least 90 percent of its gross income be qualifying income in any taxable year.

Ruling snapshot

• Question: Would income from the partnership's marketing of the redacted products qualify under IRC section 7704(d)(1)(E)?
• Outcome: Approved
• Key authorities: IRC §§ 7701, 7704, and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201250014 Third Party Communication: None
Release Date: 12/14/2012 Date of Communication: Not Applicable
Person To Contact:
Index Number: 7704.00-00 ---------------------------, ID No. -------------
Telephone Number:
---------------------
-------------------------------- Refer Reply To:
--------------------------------------------------------------- CC:PSI:B01
------------ PLR-121324-12

------------------------------- Date:
August 15, 2012

LEGEND

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

State 1 = -------------

State 2 = -----------------

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

This letter responds to a letter from X’s authorized representatives dated May 16, 2012,
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.

FACTS

According to the information submitted and representations made, X is a limited
partnership organized under the laws of State 1. X intends to consummate an initial
public offering (IPO). After consummation of the IPO, X expects to be a publicly traded
partnership within the meaning of § 7704(b).

X is an independent wholesale distributor of refined petroleum products and natural gas.
X makes bulk sales of refined petroleum products and natural gas to its customers,
which include dealers, distributors, ----------------------------------------------------------------------
------------------------------------- and ------------ businesses.

X purchases refined products, including gasoline, diesel fuel, and residual fuel oils, from
refineries, trading organizations, and various producers, conducts operations at its
PLR-121324-12 2

terminals, and makes sales of refined products to its customers. Approximately two-
thirds of X’s refined products sales are to dealers, distributors, and other purchasers for
--------. Nearly one-third of X’s refined product sales are bulk sales to ------------------------

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

The refined products subject to this ruling request are ---------------------------------------------

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

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

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

X purchases natural gas from producers and trading companies and generally resells it

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

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

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

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

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

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).
PLR-121324-12 3

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 X from the marketing of -----------------------------------------------------------
------------------------------------------------------------------ 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
letter. In particular, no opinion is expressed as to whether X 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

cc: