PLR 1340011: IRS approves processing and logistics income as qualifying partnership income

Plain-English summary

The IRS concluded that a planned publicly traded partnership would earn qualifying income from processing two natural resources into products, and from marketing, storing, and transporting those products and a byproduct. The partnership would be formed in connection with an initial public offering and would not sell the products at retail. The ruling treated the processing, marketing, storage, and transportation income as qualifying income under section 7704(d)(1)(E). The IRS did not rule on whether the partnership would satisfy the 90 percent gross-income test in every taxable year or whether the ownership structure would be a partnership for federal tax purposes.

Ruling snapshot

• Question: Would income from processing, selling, storing, and transporting the products qualify under the publicly traded partnership rules?
• Outcome: Approved
• Key authorities: IRC §§ 611, 613, 7701(a), 7704(a), (b), (c), and (d)(1)(E), and 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201340011 Third Party Communication: None
Release Date: 10/4/2013 Date of Communication: Not Applicable
Person To Contact:
Index Number: 7704.00-00, 7704.03-00 -------------------, ID No. -----------------
Telephone Number:
------------------------------------------------------- ---------------------
------------------------------------------ Refer Reply To:
------------------------------------------- CC:PS:B02
------------------------------ PLR-151417-12
Date:
June 26, 2013

Legend

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

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

Natural Resource 1 = -------------------------

Natural Resource 2 = ----------------------

Product 1 = ---------

Product 2 = ------------------------------------------

Product 3 = -------------

Process 1 = ----------------------------------------------------------------------------------------------------

Process 2 = ----------------------------------------------------------------------------------------------------

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

  This responds to your letter dated November 30, 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.

PLR-151417-12 2

Facts

    X is a publicly-traded corporation organized under the laws of State. X

represents that it intends to form a “publicly traded partnership” (the “Partnership”)
within the meaning of § 7704(b). As part of an initial public offering of units in the
Partnership, the Partnership will be formed and organized as a limited partnership under
the laws of State.

    X currently owns and operates facilities that process Natural Resource 1,

producing Product 1. X intends to convey these facilities to Partnership. X intends that
Partnership will process Natural Resource 1 to produce Product 1 and that Partnership
will also process Natural Resource 2 to produce Product 2.

   More specifically, X intends that Partnership will process Natural Resource 1

using Process 1. Product 1 is produced as a product of Process 1 and is sold to third
parties for use as in the production of products sold at retail. Product 3 is produced as a
byproduct of Process 1 and is sold for use in refineries.

   Additionally, X intends that Partnership will process Natural Resource 2 into

Product 2 using Process 2. These resulting compounds are then sold to manufacturers
which further process them into other products sold at retail. Product 3 is produced as a
byproduct of Process 2 and is sold for use in refineries.

   Finally, X intends that Partnership will engage in the storage and transportation

of Product 1 and Product 2. X represents that the Partnership will not sell either
Product 1 or Product 2 at the retail level.

   X has requested a ruling that the gross income that the Partnership will earn from

the processing, sales, storage and transportation of Product 1 and Product 2 will
constitute qualifying income within the meaning of § 7704(d)(1)(E).

Law and Analysis

  Section 7704(a) provides 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 that partnership are traded on an established securities
market, or (2) interests in that 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

PLR-151417-12 3

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) 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).

   Section 7704(d) further provides that for purposes of § 7704(d)(1)(E), the phrase

“mineral or natural resource” is defined to mean any product of a character with respect
to which a deduction for depletion is allowable under § 611, except that such term does
not include any product described in section 613(b)(7)(A) or (B).

Conclusion

    Based solely on the facts submitted and representations made, we conclude that

the gross income that Partnership will derive from processing Natural Resource 1 into
Product 1 and processing Natural Resource 2 into Product 2 will be qualifying income
within the meaning of § 7704(d)(1)(E). We further conclude that income derived by
Partnership from marketing, storing and transporting Product 1, Product 2, and Product
3 will constitute qualifying income within the meaning of § 7704(d)(1)(E).

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter, including whether X meets the 90 percent gross income
requirement of § 7704(c)(1) in any taxable year for which this ruling may apply. In
addition, no opinion is expressed or implied concerning whether any ownership
structure discussed or referenced in this letter constitutes a partnership for federal tax
purposes.

   A copy of this letter must be attached to any income tax return to which it is

relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.

  The rulings contained in this letter are based upon information and

representations submitted by the taxpayer and accompanied by a penalty of perjury
statement executed by an appropriate party. While this office has not verified any of

PLR-151417-12 4

the material submitted in support of the request for rulings, it is subject to verification on
examination.

     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,




                                    Charlotte Chyr
                                    Senior Technician Reviewer, Branch 2
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)

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

cc: