PLR 1330026 treats proppant and ceramic product income as qualifying income

Plain-English summary

The IRS rules that income from mining, processing, and marketing specified sand and ceramic products for use as proppants, together with related well stimulation products, is qualifying income under the publicly traded partnership rules. The partnership planned to sell the products to oilfield service companies for hydraulic fracturing operations. The ruling applies IRC § 7704(d)(1)(E) and the legislative history concerning minerals and natural resources. It does not determine whether the partnership satisfies the separate 90-percent gross-income requirement.

Ruling snapshot

• Question: Is income from the described mining, processing, and marketing activities qualifying income under IRC § 7704?
• Outcome: Approved, the described product income qualifies under § 7704(d)(1)(E).
• Key authorities: IRC §§ 7704(a), (b), (c), and (d)(1)(E); H.R. Rep. No. 495, 100th Cong., 1st Sess. 947 (1987).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201330026 Third Party Communication: None
Release Date: 7/26/2013 Date of Communication: Not Applicable
Index Number: 7704.00-00
Person To Contact:
--------------------------------- ---------------------------, ID No. -------------
------------------------------- Telephone Number:
----------------------------- ---------------------
----------------------------- Refer Reply To:
CC:PSI:B01
PLR-148853-12
Date:
April 18, 2013

LEGEND

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

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

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

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

This letter responds to a letter from X’s authorized representatives dated November 13,
2012, submitted on behalf of X, requesting a ruling concerning the qualifying income
exception to the publicly traded partnership rules of § 7704 of the Internal Revenue
Code (the Code).

FACTS

According to the information submitted and representations made, X is a limited liability
company organized under the laws of State. X intends to contribute all or a portion of
its assets to a new limited partnership, Y. After the consummation of an initial public
offering, interests in Y are expected to be listed and traded on a nationally recognized
exchange. Thus, Y will be a publicly traded partnership within the meaning of §
7704(b).

Primarily, Y will mine, process, and market -----------------------------sand, --------, and
ceramic products to oilfield service companies, to be used as proppants in hydraulic
PLR-148853-12 2

fracturing operations. Y will also produce and sell well stimulation products, which
increase the efficacy of certain proppants, to the oilfield service companies.

Y’s raw sand will be well suited for use as a proppant, and ---------------------------------------
are essential to certain types of production activities. For example, ---------------------------

that would not otherwise be economically feasible. ------------------------------------------------
---------------------------------------------------------------------------------------------------------------.

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------.

LAW AND ANALYSIS

Section 7704(a), enacted by the Revenue Act of 1987, Pub. Law No. 100-203 (the 1987
Act) provides that, except as provided in § 7704(c), a publicly traded partnership shall
be treated as a corporation.

Section 7704(b) provides that, for the purposes of § 7704, 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) provides that § 7701(a) shall not apply to any publicly traded
partnership for any taxable year if such partnership met the gross income requirements
of § 7704(c)(2) for such 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) explains 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 such partnership for such taxable year is qualifying income.

Section 7704(d)(1)(E) provides that the term “qualifying income” means income or 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, or
timber).

In discussing the type of qualifying income described in § 7704(d)(1)(E), the Conference
Report accompanying the 1987 Act, states as follows:

     Income and gains from certain activities with respect to minerals or natural
     resources are treated as passive-type income. …Income of certain partnerships

PLR-148853-12 3

    whose exclusive activities are transportation and marketing activities is not
    treated as passive-type income. For example, the income of a partnership
    whose exclusive activity is transporting refined petroleum products by pipeline is
    intended to be treated as passive-type income, but the income of a partnership
    whose exclusive activities are transporting refined petroleum products by truck,
    or retail marketing with respect to refined petroleum products (e.g., gas station
    operations) is not intended to be treated as passive type income.

H.R. REP. NO. 495, 100th Cong., 1st Sess. 947 (1987), 1987-3 C.B. 946-947.

Based solely on the facts submitted and representations made, we conclude that
income derived by Y from the mining, processing, and marketing ------------------------------
sand, --------, and ceramic products for sale to oilfield service companies, ---------------, ---
-----------------------------------------------------------------------------, constitutes qualifying income
within the meaning of § 7704(d)(1)(E).

Except as expressly provided herein, we express or imply no opinion concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter. In particular, no opinion is expressed as to whether Y meets the 90 percent gross
income requirement of § 7704(c) in any taxable year.

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 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 X’s authorized representative.

                                             Sincerely,

                                             David R. Haglund
                                             David R. Haglund
                                             Chief, Branch 1
                                             Office of the Associate Chief Counsel
                                             (Passthroughs & Special Industries)

Enclosures (2)

Copy of this letter
Copy of this letter for section 6110 purposes

cc: