PLR 1338001: Fuel and petroleum product marketing qualifies as natural-resource income

Plain-English summary

A publicly traded partnership marketed petroleum products and other supplies to customers involved in oil and gas exploration and production. It asked whether income from marketing specified products, fuel, lubricating oils, refined petroleum products, and related supplies was qualifying income under IRC § 7704(d)(1)(E). The IRS ruled that the described income qualified as income from marketing a natural resource. The ruling was based on the partnership's representations about the products, customers, delivery methods, and business activities. It did not decide whether the partnership was otherwise taxable as a partnership for federal income tax purposes.

Ruling snapshot

• Question: Does the partnership's income from marketing specified natural-resource products qualify under IRC § 7704(d)(1)(E)?
• Outcome: Approved, the described income qualifies as qualifying natural-resource income.
• Key authorities: IRC §§ 7704(a), 7704(c), and 7704(d)(1)(E).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201338001 Third Party Communication: None
Release Date: 9/20/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
--------------------------------------------------- -----------------------, ID No. -------------------
------------------------------------------ ---------------------------------------------------
----------------------------- Telephone Number:
--------------------------------- ----------------------
Refer Reply To:
CC:PSI:B01
PLR-100511-13
Date:
May 30, 2013

Legend

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

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

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

This letter responds to a letter dated December 26, 2012, submitted on behalf of X by
X’s authorized representatives, 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’s primary business is the wholesale distribution of ----------------------------------------------.
X purchases ------ from -----------------------------------------------------------------and makes
wholesale sales to its customers. X represents that significantly all of its gross income
from wholesale ------ sales is from -----------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------. The
balance of X’s gross income from wholesale ------sales is from ----------------------------------

--------------------------------------------. The ------ sold to ------------------------------------------------

--------------------------------------------------------------------------------. X also sells ------------------
----------------------------------------------------------------------------------------------, to ------------------
PLR-100511-13 2

------------------------. X sells substantially all of its ---------- to --------------------------------------
--------------------and substantially all of its -------------- to --------------------------------------------
----------------.

X represents that its wholesale of ------------------------------------------------------------------------
--------------------------------------are not consistent with a retail sale -----------------------. X
determines the sales price for its products in a similar manner, ---------------------------------
-----------------------------------------------------------------------------------------. Any variance in the
sale price of its products is attributable primarily to the volume purchased, the
creditworthiness of the customer, and the location of the customer.

X also sells fuel, lubricating oils, other refined petroleum products, including kerosene
and naptha, and other products, including synthetic lubricating oils, methanol, and
antifreeze, to customers engaged in oil and gas exploration and production. X
represents that these products are essential to the exploration for and production of oil
and gas. Fuel is used to operate the drilling rigs, heavy machinery, trucks, and other
equipment at a well site. Lubricating oil is essential to proper operating of the
equipment. Naptha and kerosene are used as cleaning agents that degrease
equipment and keep it operating efficiently. Methanol is injected into drilling lines to
prevent the lines from freezing and blocking the flow of oil and gas. Antifreeze is used
in generators that power the drilling equipment and in the diesel trucks that transport
workers and equipment to the well sites.

X delivers these products to specific well sites. X represents that fuel is delivered in
specially designed trucks that are ill-suited for (and normally not used for) more
conventional types of fuel and lubricant delivery, including to retail gas stations. X may
also monitor the tanks that store fuel and lubricating oil to ensure that its customers
have an adequate supply.

X requests a ruling that its gross income derived from the marketing of ----------------------
---------------------------------------------------------to --------------------------------------------------------
constitutes qualifying income from the marketing of a natural resource pursuant to §
7704(d)(1)(E). X also requests a ruling that gross income from the marketing of fuel,
lubricating oils, other refined petroleum products, including naptha and kerosene, and
other products, including methanol, antifreeze, and synthetic lubricating oils, to
companies engaged in oil and gas exploration and production constitutes qualifying
income pursuant to § 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.
PLR-100511-13 3

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)(1) 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
gross income derived by X from the marketing of ---------------------------------------------------
--------------------------- to --------------------------------------------------constitutes qualifying
income from the marketing of a natural resource pursuant to § 7704(d)(1)(E). We
further conclude gross income derived by X from the marketing of fuel, lubricating oils,
other refined petroleum products, including naptha and kerosene, and other products,
including methanol, antifreeze, and synthetic lubricating oils, for use in oil and gas
exploration and production constitutes qualifying income pursuant to § 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 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.
PLR-100511-13 4

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 the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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

cc: