PLR 1349004: Natural gas processing and related services generate qualifying income

Plain-English summary

A publicly traded limited partnership planned to convert butane into butadiene and to handle related byproducts. It would provide processing, marketing, storage, and transportation services under tolling agreements and product contracts. The IRS ruled that income from converting butane into butadiene or Crude C4, and from marketing, transporting, or storing those products, would be qualifying income under IRC § 7704(d)(1)(E). The ruling did not determine whether the partnership satisfied the separate 90 percent gross-income test for publicly traded partnerships.

Ruling snapshot

• Question: Would income from processing, marketing, transporting, and storing butadiene or related products qualify under the publicly traded partnership rules?
• Outcome: approved
• Key authorities: IRC §§ 708 and 7704, especially § 7704(d)(1)(E)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201349004                                              Third Party Communication: None
Release Date: 12/6/2013                                        Date of Communication: Not Applicable
Index Number: 7704.03-00
                                                               Person To Contact:
----------------                                               -----------------------, ID No. -------------------
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----------------------------------------------                 Telephone Number:
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 ---------------------------------                             Refer Reply To:
                                                               CC:PSI:01
                                                               PLR-112063-13
                                                               Date:
                                                               August 29, 2013




Legend

X=                 -----------------------------------------------
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State =           --------------


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

This letter responds to a letter dated March 11, 2013, and subsequent correspondence,
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, through affiliated partnerships,
disregarded entities, and corporate subsidiaries, is principally engaged in the
transportation, processing, storage, and distribution of natural gas, natural gas liquids
(“NGL”), crude oil, and refined petrochemical and petroleum products.

X is building a facility (“Facility”) that will convert butane into butadiene through
dehydrogenation or catalytic cracking. In addition to creating butadiene, this process
will also create an output stream consisting of unreacted butane, hydrogen, ethane,
methane, and other NGLs as byproducts (“Byproducts.”) This output stream is referred
to as Crude C4. X may separate the components of the output stream using distillation
systems and other typical refinery separation processes.
PLR-112063-13                                 2

X will operate Facility pursuant to long-term tolling agreements (“Agreements”) and
long-term contracts (“Contracts.”) Under the terms of the Agreements, customers will
deliver unrefined butane to Facility and will receive butadiene in accordance with an
agreed-upon yield ratio. X may also deliver Crude C4 to its customers. The customer
may purchase the butane feedstock from X at a market-index price or from third parties.
Customers will pay X a formula-based cash fee for its services on a monthly basis. X
will retain all Byproducts not delivered as Crude C4 as additional compensation and
may, in its sole discretion, retain any butadiene produced in excess of the yield ratio.
Under the Contracts, X will use its own butane as feedstock for the Facility and sell the
resulting product, butadiene or Crude C4, to its customers at a formula price that
includes adjustments based on the market price of butane, the cost of electricity and
gas necessary for the operation of the Facility, and the cost of the construction of the
Facility. Under both Agreements and Contracts, X may provide storage and
transportation services with respect to butadiene or Crude C4 produced by the facility.

                                  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
PLR-112063-13                                  3

Based solely on the facts submitted and the representations made, we conclude that
income derived by X from the conversion of butane into butadiene or Crude C4 and
income derived by X from marketing, transporting, or storing butadiene or Crude C4 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
federal tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. In particular, no opinion is expressed as to whether X meets
the 90 percent gross income requirement of § 7704(c)(1) in any taxable year for which
this ruling may apply.

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 the Associate Chief Counsel
                                       (Passthroughs & Special Industries)

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