PLR 1313015: Transportation and storage service income qualified under section 7704

Plain-English summary

A publicly traded partnership asked whether income from agreements to provide transportation and storage operating services would be qualifying income. The services included moving products through assets, metering and monitoring them, staffing and maintaining operations, purchasing supplies, and handling billing and related administration. The IRS ruled that the partnership's gross income from the agreements, including related cost reimbursements, qualified under IRC § 7704(d)(1)(E) as income from transporting or marketing a mineral or natural resource. The ruling did not address whether the partnership was otherwise taxable as a partnership for federal tax purposes.

Ruling snapshot

• Question: Does income from transportation and storage operating services qualify as qualifying income for a publicly traded partnership?
• Outcome: Approved, the income from the agreements qualified under IRC § 7704(d)(1)(E).
• Key authorities: IRC §§ 7704(a), 7704(b), 7704(c), and 7704(d)(1)(E)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201313015 Third Party Communication: None
Release Date: 3/29/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
---------------------- -------------------, ID No. ------------------
-------------- Telephone Number:
---------------------------- ----------------------
-------------------------------- Refer Reply To:
CC:PSI:B02
PLR-148302-12
Date:
December 18, 2012

Legend:

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

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

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

Z = ------------------------------
------------------------

A = ----------------------------------
------------------------

n = ----

Products = ------------------------------------------------------------------------------------------------------------

Existing = -------------------------------------------------------------------------------------------------------------
Agreements -------------------------------------------------------------------------------------------------------------
---------------------

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

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

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

PLR-148302-12 2

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

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

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

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

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

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

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

This letter responds to a letter dated November 5, 2012, submitted on behalf of X,
requesting a ruling under § 7704(d)(1)(E) of the Internal Revenue Code.

X is a limited partnership organized under the laws of State. X represents that it is a
“publicly traded partnership” within the meaning of § 7704(b). Y, a limited liability
company organized under the laws of State, is the general partner and the tax matters
partner of X. Y is wholly owned by Z. X, through affiliated operating entities, is
principally engaged in the transportation and storage of Products, as well as performing
operating services relating to the transportation and storage of Products.

X owns an indirect n% ownership interest in A and will be allocated a distributive share
of certain operating services fee income and related cost reimbursements earned by A
from related parties and from third parties. These amounts arise from the Existing
Agreements and similar agreements that may be entered into in the future (together, the
Agreements). Although the terms of each Agreement vary, in general, A agrees to
provide to the service recipient the services necessary to manage the day-to-day
PLR-148302-12 3

operations of specified assets owned by the service recipient. These services generally
include both general and administrative services and direct operating and maintenance
services with respect to such assets. Specifically, each of the Agreements
encompasses the following activities: where relevant, contracting with customers for the
use of the assets; taking delivery from customers; performing the tasks necessary to
physically move the Products through the assets; metering the quantity of Products;
monitoring the specification of the Products; offloading the Products to customers;
staffing the operations of the assets; conducting routine maintenance; identifying and
purchasing supplies; and handling all commercial transactions (including the billing,
accounting, and financial reporting) for the assets. In addition to fee income received by
A under the terms of the Agreements, pursuant to the Agreements, A also receives cost
reimbursements for employee costs for activities performed under these agreements.

X has requested a ruling that the gross income it derives from the Agreements will
constitute qualifying income under § 7704(d)(1)(E).

Section 7704(a) provides generally 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 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).

Section 7704(c)(1) exempts from treatment as a corporation any publicly traded
partnership for any tax year if the partnership meets the gross income requirements of
§ 7704(c)(2) for that year and each preceding tax 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
for any tax year if 90% or more of the partnership's gross income for that year consists
of qualifying income.

Section 7704(d)(1)(E) defines "qualifying income" to include income and gains derived
from the exploration, development, mining or production, processing, refining,
transportation, or marketing of any mineral or natural resource.

Based solely on the facts submitted and representations made, we conclude that to the
extent X derives gross income from the Agreements, such gross income will be
qualifying income within the meaning of § 7704(d)(1)(E).

Except for the specific ruling above, we express or imply no opinion concerning the
federal tax consequences of the facts 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 tax purposes.
PLR-148302-12 4

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).

According to § 6110(k)(3), this ruling may not be used or cited as precedent. Under a
power of attorney on file with this office, we are sending a copy of this letter to your
authorized representative.

                                  Sincerely,



                                  Bradford R. Poston
                                  Senior Counsel, Branch 2
                                  (Passthroughs & Special Industries)

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