PLR 1336006: IRS approves oil and gas waste services as qualifying partnership income

Plain-English summary

The taxpayer was a limited partnership that provided services involving brine, water, and other residual waste from oil and gas well fracturing. It asked whether income from removing, transporting, storing, treating, and disposing of that waste, along with marketing oil recovered from treatment, would count as qualifying income under IRC § 7704(d)(1)(E). The IRS concluded that the described income was qualifying income because the activities were connected with the development and production of oil and gas, excluding retail marketing of minerals and natural resources to end users. The ruling addressed only the specific facts and did not decide whether the partnership was otherwise taxable as a partnership.

Ruling snapshot

• Question: Does income from oil and gas well waste services and related oil marketing qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved for the described activities, with retail end-user marketing excluded.
• Key authorities: IRC §§ 7704 and 6110.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201336006 Third Party Communication: None
Release Date: 9/6/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------------------------- -------------------, ID No. ------------------
------------------------------ Telephone Number:
---------------------------- ----------------------
------------------------------ Refer Reply To:
CC:PSI:B02
PLR-116166-13
Date:
April 22, 2013

Legend:

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

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

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

This letter responds to a letter dated April 1, 2013, submitted on behalf of X, requesting
a ruling under § 7704(d)(1)(E) of the Internal Revenue Code.

X is a limited partnership organized under the laws of State. X, through affiliated
operating limited partnerships, limited liability companies or disregarded entities,
engages principally in activities that X represents as producing qualifying income under
§ 7704(d)(1)(E) from the exploration, development, mining or production, transportation
or marketing of a mineral or natural resource.

X expects to derive gross income from (i) the removal, transportation, storage,
treatment and disposal of brine, water, and other residual waste produced in connection
with the fracturing of oil and gas wells, and (ii) the marketing of oil recovered as a result
of the treatment of brine, water, and other residual waste produced in connection with
the fracturing of oil and gas wells. X requests a ruling that income derived from these
activities will constitute qualifying income under § 7704(d)(1)(E).

Fracturing is a technique by which fluids are pumped into an oil and gas well at high
pressure to fracture geologic formations and open up pathways for the oil and gas to
flow. Typically, the fracturing of oil and gas wells results in the production of significant
amounts of water, brine, and other residual waste. X represents that the removal,
PLR-116166-13 2

transportation, storage, treatment and disposal of brine, water, and other residual waste
produced in connection the development of oil and gas wells is integral to the
exploration, production and development of minerals and natural resources, because
the exploration, development and production of minerals and natural resources would
be significantly curtailed in the absence of such services. X also represents that it will
treat any income derived from the sale of crude oil to end users at the retail level as
nonqualifying income.

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 representations made and the facts submitted, we conclude that
X’s gross income derived from (i) the removal, transportation, storage, treatment and
disposal of brine, water, and other residual waste produced in connection the
development of oil and gas wells, and (ii) the marketing of oil recovered as a result of
the treatment of brine, water, and other residual waste produced in connection the
development of oil and gas wells, excluding income earned from marketing minerals
and natural resources to end users at the retail level, is qualifying income within the
meaning of § 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 X is taxable as a
partnership for federal tax purposes.
PLR-116166-13 3

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).

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