PLR 1337014: Natural-gas midstream income qualifies as publicly traded partnership income

Plain-English summary

A publicly traded partnership asked whether income from natural-gas midstream activities would be qualifying income under IRC § 7704(d)(1)(E). The activities included transportation, storage, gathering, processing, refining, and marketing of natural gas and natural gas liquids. The IRS ruled that income from the described refining, processing, transportation, storage, and marketing activities qualified, whether earned directly by the partnership and its subsidiaries or through the partnership’s distributive share of a joint venture. The ruling was based on the partnership’s representations about its facilities, customers, and sales.

Ruling snapshot

• Question: Does income from the partnership’s described natural-gas midstream activities qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved, the described income is qualifying income.
• Key authorities: IRC §§ 7704(a), 7704(b), 7704(c), 7704(d)(1)(E), and 708(b)(1)(B).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201337014 Third Party Communication: None
Release Date: 9/13/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
--------------------------------------------------- -----------------------, ID No. -------------------
-------------------------------------------- ---------------------------------------------------
------------------------------------------ Telephone Number:
----------------------------------- ----------------------
Refer Reply To:
CC:PSI:B01
PLR-154368-12
Date:
May 30, 2013

Legend

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

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

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

This letter responds to a letter dated December 21, 2012, and subsequent
correspondence, 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, through direct and indirect wholly
owned and disregarded subsidiaries, is involved in natural gas midstream activities
including transportation, storage, gathering, and processing.

X represents that it transports and stores --------------------------------------------------------------
----------------------------------------------- through a network of pipelines and storage caverns.
X also sells ---------- to manufacturers and other industrial customers -------------------------
--------------------------------------------- or to customers who resell --------------- to
manufacturers and other industrial users.

X represents that it intends to construct or acquire one or more -------- facilities. X
represents that the facilities will refine or process natural gas liquids (NGLs) ---------------

PLR-154368-12 2

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

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

-------------------------------------------------------------------------------------------------be stored and
transported, often via X’s pipeline and storage facilities, to manufacturers and other
industrial customers. X represents that its sales -------------- are not to end-users at the
retail level.

X represents that it may conduct the activities described above as a joint venture,
treated as a partnership, with a strategic or financial partner.

                                       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 the representations made, we conclude that
income derived from the refining and processing ----------------------------------------------------

PLR-154368-12 3

transportation, storage, and marketing --------------constitutes qualifying income within
the meaning of § 7704(d)(1)(E), regardless of whether the income is earned directly by
X and its subsidiaries or through its distributive share of a joint venture.

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 representatives.

                                   Sincerely,


                                   Laura C. Fields
                                   Laura C. Fields
                                   Senior Technician Reviewer, Branch 1
                                   Office of Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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