PLR 1314038: Natural gas processing and fuel marketing income qualifies under section 7704

Plain-English summary

A corporation planned to form a publicly traded partnership that would process natural gas into dimethyl ether, a fuel for diesel engines, and market the fuel through distributors. The IRS concluded that income from processing the natural gas into dimethyl ether and marketing the resulting fuel would be qualifying income under IRC § 7704(d)(1)(E). The ruling did not address whether the partnership would otherwise be treated as a partnership for federal tax purposes. If a technical termination occurred under the provision discussed in the letter, the resulting partnership could continue relying on the ruling for determining qualifying income.

Ruling snapshot

• Question: Will income from processing natural gas into dimethyl ether and marketing it qualify under IRC § 7704(d)(1)(E)?
• 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: 201314038 Third Party Communication: None
Release Date: 4/5/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------------------------------------ -------------------, ID No. ------------------
-------------------------- Telephone Number:
----------------------------------- ----------------------
-------------- Refer Reply To:
-------------------------------- CC:PSI:B02
PLR-148730-12
Date:
December 12, 2012

Legend:

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

LP = -------------------------
------------------------

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

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

This letter responds to a letter dated November 8, 2012, submitted on behalf of X,
requesting a ruling under § 7704(d)(1)(E) of the Internal Revenue Code.

X is a corporation organized under the laws of State. X intends to form a publicly-traded
partnership by organizing LP under the laws of State. The interests in LP will be listed
and traded on a nationally recognized exchange.

LP, through subsidiaries and disregarded entities, intends to build a facility that will
process natural gas into dimethyl ether (DME). DME is a premium diesel fuel with a
cetane number of 55 or higher, which is used as fuel for compression ignition diesel
engines. DME will be marketed by LP as fuel for use in diesel engines. DME is
produced using a three step integrated process. First, the natural gas enters a steam
methane reformer where under high heat the natural gas is combined with steam to
produce synthesis gas. Second, the synthesis gas is converted into methanol in the
presence of a catalyst. Third and finally, the methanol is converted into DME in a
reactive distillation column through methanol dehydration in the presence of a second
PLR-148730-12 2

catalyst. LP will then sell the DME to third-party distributors, who then further distribute
the DME to end-user customers.

X, on behalf of LP, requests a ruling that income derived from processing natural gas
into DME, and income from marketing DME, 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 the representations made, we conclude that
the income derived by LP from processing natural gas into DME and marketing the
DME will constitute qualifying income under § 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 LP is taxable as a
partnership for federal tax purposes.

This ruling is directed only to the taxpayer requesting it. However, in the event of a
technical termination of LP 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).
PLR-148730-12 3

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