PLR 1331002: IRS confirms certain liquid urea sales qualify as partnership income

Plain-English summary

The IRS ruled that income from a publicly traded partnership's non-retail sales of liquid urea to petroleum products distributors can be qualifying income under § 7704(d)(1)(E). The partnership represented that the liquid urea was suitable for use as agricultural fertilizer, even though a distributor diluted some of it and resold it as diesel exhaust fluid. Section 7704(d)(1)(E) treats income from the marketing of fertilizer and other natural resources as qualifying income for the publicly traded partnership exception. The ruling applies only to the described sales and only to the extent the products would otherwise be marketable as fertilizer for agricultural purposes.

Ruling snapshot

• Question: Does income from the non-retail sale of liquid urea to petroleum products distributors qualify under § 7704(d)(1)(E)?
• Outcome: Approved, to the extent the products would otherwise be marketable as fertilizer for agricultural purposes.
• Key authorities: IRC §§ 7704(c), 7704(d)(1)(E), and 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201331002 Third Party Communication: None
Release Date: 8/2/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
---------------------------- -----------------------, ID No. -------------------
------------------------- ---------------------------------------------------
-------------------------------------- Telephone Number:
-------------------------------------- ----------------------
Refer Reply To:
CC:PSI:B01
PLR-152320-12
Date:
April 16, 2013

Legend

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

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

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

This letter responds to a letter dated December 7, 2012, submitted on behalf of X by X’s
authorized representative, requesting a ruling under § 7701(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, through a subsidiary, is engaged in the
production and marketing of nitrogen fertilizer products, including ammonia, UAN, and
urea.

Urea can be diluted with water to form liquid urea, which can then be applied as a foliar
spray fertilizer. X represents that liquid urea used as a foliar spray fertilizer may range
in concentrations from ----------urea (------ nitrogen) to ------ urea (----------------nitrogen)
depending on the ambient temperature.

X’s customers include a specialty petroleum products distributor that purchases liquid
urea at a ------ urea concentration (------ nitrogen). X represents that this concentration
is suitable for use as a fertilizer. X understands that the petroleum products distributor
dilutes the ------ urea to a --------- urea concentration and resells the liquid urea for use

PLR-152320-12 2

as diesel exhaust fluid. Diesel exhaust fluid is injected into the exhaust systems of
diesel engines to reduce NOx emissions.

X seeks a ruling that income from the sale of liquid urea to petroleum products
distributors will constitute qualifying income under § 7704(d)(1)(E).

                              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).

The Conference Report accompanying the Omnibus Budget Reconciliation Act of 1987
states:

   Income and gains from certain activities with respect to minerals or natural
   resources are treated as passive-type income. Specifically, natural
   resources include fertilizer, geothermal energy, and timber, as well as oil,
   gas or products thereof. For this purpose, fertilizer includes plant nutrients
   such as sulphur, phosphate, potash, and nitrogen that are used for the
   production of crops and phosphate-based livestock feed.

H.R. Rep. No. 495, 100th Cong., 1st Sess. 943 (1987), 1987-3 C.B. 946-947.

PLR-152320-12 3

                                  CONCLUSION

Based solely on the materials submitted and the representations made, we conclude
that income derived by X from the non-retail sale of liquid urea to petroleum products
distributors will constitute qualifying income under § 7704(d)(1)(E) to the extent that the
products in question would otherwise be marketable as fertilizer for agricultural
purposes.

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 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
                                   Senior Technician Reviewer, Branch 1
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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