PLR 1330024 treats oilfield fluid and water services as qualifying income

Plain-English summary

The IRS rules that a publicly traded partnership's income from supplying, transporting, and storing fluids for oil and natural gas wells is qualifying income under IRC § 7704(d)(1)(E). The ruling also covers removing, treating, and disposing of fracturing flowback and produced water, as well as recycling that water and selling naturally occurring minerals and chemicals extracted from it on a non-retail basis. The conclusion applies to the described services provided to oil and natural gas producers. 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, water treatment, transportation, storage, and recycling 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).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201330024 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-147500-12
Date:
April 10, 2013

Legend

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

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

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

This responds to a letter dated November 1, 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 limited partnership organized under the laws of State. X is a publicly traded
partnership within the meaning of § 7704(b). X is principally engaged in the processing,
transportation, storage, and distribution of natural gas, natural gas liquids, and crude oil.
X, through a subsidiary, also provides fluid handling services to customers engaged in
the exploration for, and the development and production of, oil and natural gas.

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, X 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. X 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 procured. X will treat the flowback and produced
water so that it can be reused in a fracturing process or be disposed of consistent with
environmental regulations. Where possible, X will extract and process naturally
PLR-147500-12 2

occurring minerals and chemicals, including barite, hydrochlochloric acid, and chlor-
alkali products, from the produced water for commercial wholesale.

X will charge its customers fees for the provision of fractionation fluids and other fluids
necessary for the drilling and completion of oil and natural gas wells, which fees may
include tank storage and transportation components. X will also charge its customers
fees or the removal, treatment, and disposal of flowback and produced water, which
fees may include tank storage and transportation components. X will also earn income
from the non-retail sale of the minerals and chemicals it extracts from the produced
water.

                              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 X from the supply, transportation, and storage of fractionation
fluid and other fluids for oil and natural gas wells, and from the removal, treatment, and
disposal of fracturing flowback and produced water, including the provision of frac tanks
and transportation services, to oil and natural gas producers for use in their exploration
PLR-147500-12 3

for and production of oil and natural gas resources constitutes qualifying income under
§ 7704(d)(1)(E). We further conclude that the gross income derived by X from recycling
waste water, including the extraction, processing, and non-retail sale of naturally
occurring minerals and chemicals in the water, 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 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 income tax purposes.

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 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: