PLR 1308004: IRS treats specified fertilizer-related product income as qualifying income

Plain-English summary

The IRS ruled for a publicly traded partnership that produces and markets nitrogen-based products. It concluded that income from producing and marketing ammonia, urea, UAN fertilizer, nitric acid, and urea in solution for non-retail sale to non-agricultural customers would qualify under section 7704(d)(1)(E), to the extent the products would otherwise be marketable as fertilizer for agricultural purposes. The ruling relies on the partnership's representations about its products, customers, and intended uses. The IRS did not express an opinion on whether the partnership is taxable as a partnership for federal income tax purposes.

Ruling snapshot

• Question: Would income from producing and marketing specified nitrogen-based products qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved
• Key authorities: IRC §§ 7704(a), 7704(b), 7704(c), 7704(d)(1)(E), 708(b)(1)(B), and 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201308004 Third Party Communication: None
Release Date: 2/22/2013 Date of Communication: Not Applicable
Person To Contact:
Index Number: 7704.03-00 ----------------------, ID No. -----------------
Telephone Number:
--------------------
---------------- Refer Reply To:
---------------------------------------------------------- CC:PSI:B01
------------------------------------------ PLR-120389-12
------------------------------------------ Date:
-------------------------------- November 05, 2012

Legend

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

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

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

This letter responds to a letter dated May 9, 2012, submitted on behalf of X by X’s
authorized representative, requesting a ruling under § 7701(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 a subsidiary, is engaged in the
production and marketing of nitrogen fertilizer products.

X proposes selling its nitrogen fertilizer products, including ammonia, urea, and UAN
fertilizer, to customers operating in non-agricultural industries. X also intends to sell
nitric acid, produced as an intermediary step in the production of its direct-application
fertilizer products, to customers operating in non-agricultural industries.

In addition, X intends to expand its facility in order to enable it to produce and market
urea in solution. Urea in solution is a compound of urea, a nitrogen-based fertilizer, and
water or condensed steam. Urea in solution can be used to reduce nitrogen oxide
emissions in diesel engines. The urea in solution is processed within the vehicle where
it is injected into the exhaust upstream of a catalyst, where the urea in solution
vaporizes and decomposes to form ammonia and carbon dioxide. The ammonia works
with a catalyst to convert nitrogen oxides to nitrogen and water (steam), which are then
released in the vehicle’s exhaust.

X represents that each product will be sold for use in non-agricultural applications and
the potential customers will not constitute end users of the products.

X seeks a ruling that income from the production and marketing of ammonia, urea, UAN
fertilizer, nitric acid, and urea in solution to customers operating in non-agricultural
industries 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 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).

The Conference Report accompanying the Omnibus Budget Reconciliation Act of 1987
states:

   Income and gains from certain activities with respect to minerals or natural
   resources are treated as passive-type income. Specifically, natural
   resources include fertilizer, geothermal energy, and timber, as well as oil,
   gas or products thereof. For this purpose, fertilizer includes plant nutrients
   such as sulphur, phosphate, potash, and nitrogen that are used for the
   production of crops and phosphate-based livestock feed.

H.R. Rep. No. 495, 100th Cong., 1st Sess. 943 (1987), 1987-3 C.B. 946-947.

                                  CONCLUSION

Based solely on the materials submitted and the representations made, we conclude
that income derived by X from the production and marketing of ammonia, urea, UAN
fertilizer, nitric acid, and urea in solution for non-retail sale to customers operating in
non-agricultural industries will constitute qualifying income under § 7704(d)(1)(E) to the
extent that the products in question would otherwise be marketable as fertilizer for
agricultural purposes.

Except for the specific ruling above, we express or imply no opinion concerning the
federal tax consequences of this case under any other provision of the Code.
Specifically, we express or imply no opinion as to whether X is taxable as a partnership
for federal income tax purposes.

This ruling is directed only to the taxpayer requesting it. However, in the event of a
technical termination of X under § 708(b)(1)(B), the resulting partnership may continue
to rely on this ruling in determining its qualifying income under § 7704(d)(1)(E). 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
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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

cc: