PLR 1324002: IRS approves qualifying income from processing natural gas products

Plain-English summary

The IRS ruled that income earned by a publicly traded partnership from processing and marketing gasoline, liquefied petroleum gas, methanol, and synthesis gas made from natural gas would be qualifying income. The partnership planned to operate a facility using an integrated process that converts natural gas into those products. The ruling allows the income to be considered under the qualifying-income exception in IRC § 7704, subject to the facts and representations submitted. The IRS did not rule on whether the partnership would otherwise be taxed as a partnership.

Ruling snapshot

• Question: Would the partnership's income from processing and marketing specified natural gas products qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved.
• Key authorities: IRC §§ 7704(a), (b), (c), and (d)(1)(E); § 708(b)(1)(B).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201324002 Third Party Communication: None
Release Date: 6/14/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------------------- ------------------, ID No. -----------------
----------------- Telephone Number:
-------------------- ---------------------
------------------------------------ Refer Reply To:
CC:PSI:B02
PLR-104549-13
Date:
February 21, 2013

Legend:

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

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

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

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

This letter responds to a letter dated January 23, 2013, 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 processes natural gas into methanol and synthesis gas
and that, with the addition of certain specialized refinery components, will further
process the methanol and synthesis gas into gasoline and liquefied petroleum gas
(LPG). Gasoline and LPG are produced from natural gas through a three step
integrated process; synthesis gas and methanol are produced in the first and second
steps of this process, respectively. First, the natural gas enters a steam methane
reformer where under high heat the natural gas is combined with steam to produce
PLR-104549-13 2

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 sell gasoline, LPG, methanol, and synthesis gas to third-party
distributors, who will then further distribute or process the resources.

X requests a ruling that income derived from processing and marketing of gasoline,
LPG, methanol and synthesis gas produced through the processing of natural gas 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 and marketing of gasoline, LPG, methanol,
and synthesis gas produced through the processing of natural gas 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-104549-13 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 representatives.

                                   Sincerely,



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

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