PLR 1330023 treats oilfield fluid handling services as qualifying income

Plain-English summary

The IRS rules that a planned publicly traded partnership's income from supplying, transporting, storing, and heating fluids for oil and natural gas wells qualifies under IRC § 7704(d)(1)(E). The ruling also covers removing, treating, and disposing of fracturing flowback, produced water, and salt water, including related tank and transportation services. The conclusion applies to the described services provided to oil and natural gas producers for use in exploration and production. The ruling does not express an opinion on whether the entity is taxable as a partnership for federal income tax purposes.

Ruling snapshot

• Question: Does income from the described oilfield fluid handling services qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved, the described gross income qualifies.
• Key authorities: IRC §§ 7704(a), (b), (c), and (d)(1)(E); IRC § 708(b)(1)(B).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201330023 Third Party Communication: None
Release Date: 7/26/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------------------------------------ -----------------------, ID No. -------------------
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----------------------------------------- Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-147292-12
Date:
April 22, 2013

Legend

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

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

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

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

This responds to a letter dated October 31, 2012, submitted on behalf of X by X’s
authorized representative, requesting a ruling under § 7704(d)(1)(E) of the Internal
Revenue Code.

                                                 FACTS

X is a corporation organized under the laws of State. X intends to form a new entity, Y.
After an initial public offering, Y will be organized as a limited partnership in State and
will be a publicly traded partnership within the meaning of § 7704(b). Y’s employer
identification number will be applied for at the time of its organization.

Y, through affiliated operating limited partnerships, limited liabilities companies, or
disregarded entities, will earn income from the provision of essential fluid handing
services to oil and gas producers engaged in the exploration, development, and
production of oil and natural gas. Specifically, Y will earn income from the supply,
transportation, storage, and disposal of a variety of fluids, including any associated
fractionation fluid heating services. Y will also earn income from the subsequent
removal, treatment, and disposal of fracturing flowback, produced water, and salt water,
PLR-147292-12 2

including, as part of its fluid handling services, the provision of frac tanks and
transportation services.

Fracturing is a technique by which fluids are pumped into an oil or gas well at high
pressure to fracture geologic formations and open up pathways for the oil or gas to flow.
To this end, Y will supply, and provide transportation and tank storage services with
respect to, production fluid appropriate for the fracturing process to operators of oil and
gas wells, as well as superheater services, whereby fracturing fluid is pre-heated prior
to it being pumped into the well. Y will also remove, store, and transport flowback
generated in the fracturing process, as well as naturally occurring produced water
contained in the geological formation from which the oil and gas is produced. Y will
treat the flowback and produced water so that it can be used in a fracturing process or
be disposed of consistent with environmental regulations. Y will also provide fluids for
use in drilling muds used in the drilling of oil and gas wells and casing cement used in
oil and gas wellbores. Finally, as part of the extraction and production of oil and natural
gas, Y expects to provide hot oiler services, whereby heating units are used to remove
paraffin from drilling equipment and to provide heat-based produced water separation
services at crude oil stock tanks at a producer’s well site.

Y will charge its customers fees for the provision of fractionation fluid (including fees for
the provision of fracturing fluid superheater services where necessary) and other fluids
necessary for the drilling and completion of oil and natural gas wells, which fees may
include tank storage and transportation components. Y will also charge its customers
fees for the removal, treatment, and disposal of flowback and produced water, which
fees may include tank storage and transportation components. In addition, Y will earn
income from fees paid to provide hot oiler services during and after the extraction and
production of oil and natural gas.

                              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).

                                  CONCLUSION

Based solely on the facts submitted and representations made, we conclude that the
gross income derived by Y from the supply, transportation, and storage of fractionation
fluid and other fluids for oil and natural gas wells, including any associated fractionation
fluid heating services, and from the removal, treatment, and disposal of fracturing
flowback, produced water, and salt water, including the provision of frac tanks and
transportation services, to oil and natural gas producers for use in their exploration for
and production of oil and natural gas resources constitutes 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 this case under any other provision of the Code.
Specifically, we express or imply no opinion as to whether Y 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 Y under § 708(b)(1)(B), the resulting partnership may to
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: