PLR 1315015: Gasoline and LPG processing income is qualifying partnership income

Plain-English summary

The IRS ruled that income from processing natural gas into gasoline and liquefied petroleum gas, and from marketing those products, would be qualifying income for a publicly traded partnership under section 7704(d)(1)(E). The partnership would operate an integrated facility that converts natural gas through several stages into gasoline and LPG. The ruling was limited to the specific request and did not decide whether the entity was taxable as a partnership for federal tax purposes. It could continue to apply after a technical termination under the condition stated in the letter.

Ruling snapshot

• Question: What did the IRS decide under the facts presented?
• Outcome: Approved, on the stated facts and representations.
• Key authorities: IRC § 7704; IRC § 708; IRC § 6110.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201315015 Third Party Communication: None
Release Date: 4/12/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
---------------------------------------------- -------------------, ID No. ------------------
------------------------ Telephone Number:
---------------------------------------- ----------------------
--------------------------------- Refer Reply To:
CC:PSI:B02
PLR-151302-12
Date:
January 03, 2013

Legend:

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

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

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

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

This letter responds to a letter dated November 29, 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 has formed 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.

X will convey to LP a facility that will process natural gas into gasoline and liquefied
petroleum gas (LPG). Gasoline and LPG are produced from natural gas through 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, hydrogen and water in the
presence of a copper-based catalyst. Third and finally, the methanol is converted into a
mixture of methanol, dimethyl ether and water, which is then passed over a catalyst to
produce gasoline, LPG and water (which is recycled through the facility). LP will then
sell the gasoline and LPG to third-party distributors, who then further distribute the
gasoline and LPG to end-user customers.
PLR-151302-12 2

X, on behalf of LP, requests a ruling that income derived from processing natural gas
into gasoline and LPG, and income from marketing gasoline and LPG, 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 gasoline and LPG and
marketing the gasoline and LPG 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).

According to § 6110(k)(3), this ruling may not be used or cited as precedent.
PLR-151302-12 3

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