PLR 1351009: iron ore processing income qualifies for publicly traded partnership treatment

Plain-English summary

A publicly traded limited partnership that operated cokemaking facilities planned to expand into iron ore beneficiation and pelletizing. It asked whether income from processing iron ore and selling the resulting pellets and concentrates in bulk to iron and steel manufacturers would be qualifying income. The IRS ruled that the described processing income and non-retail sales qualify under IRC § 7704(d)(1)(E). The ruling did not decide whether the partnership would satisfy the separate requirement that at least 90 percent of its gross income be qualifying income.

Ruling snapshot

• Question: Is income from iron ore processing and non-retail sales qualifying income for a publicly traded partnership?
• Outcome: Approved
• Key authorities: IRC §§ 7704(a), 7704(c), 7704(d)(1)(E)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201351009 Third Party Communication: None
Release Date: 12/20/2013 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
----------------------------------------------- ----------------------, ID No. ------------------
------------------------------------------- Telephone Number:
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-------------------------- Refer Reply To:
CC:PSI:01
PLR-117185-13
Date:
September 12, 2013

Legend

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

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

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

This letter responds to a letter dated April 9, 2013, 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 presently operates two cokemaking
facilities which refine metallurgical coal into metallurgical coke, a high purity carbon
substance used in blast furnaces for making steel.

X intends to expand its existing business to include iron ore processing through the
benefication and pelletizing processes. Iron ore is primarily found in four sources:
magnetite, hematite, goethite, and siderite. Typical iron ores contain a significant
amount of worthless material, referred to as gangue, from which the iron oxides must be
concentrated before they are able to be used by the iron and steel industries. Best
quality ores, containing greater than 55% iron, may simply be crushed for size prior to
use in a blast furnace. Lower grade iron ores require additional processing.

Lower grade must first be crushed, ground, and separated from gangue through the
benefication process. Benefication includes crushing and grinding, separation through
PLR-117185-13 2

gravity concentration (spirals) or magnetic concentration, and iron ore upgrading,
flotation, and thickening, as needed. The beneficiated iron ore consists of finely-sized
particles which are not suitable for use in ironmaking or steelmaking and must be
agglomerated into larger particles before use. Pelletizing is one of the most common
ways to agglomerate iron ore particles. Prior to pelletizing, the iron ore is pretreated
through an additional grinding. After pretreatment, a balling drum or disc is used to form
the iron ore into spheres. A small amount of binder may be used to control balling rates
and hold the pellets together until hardening. The most common binder is bentonite
clay, but other clays, organics, and cements may also be used. The rotation of the
balling disc or drum forms the raw materials and binder into moist iron pellets, called
green pellets. A fine grade metallurgical coke (“Coke breeze”) may be added to the
pellet mix to add combustion heat in the hardening process. The green iron ore pellets
are hardened through heating with either a traveling grate machine or a grate-kiln-cooler
system. Depending on the needs of the customer, limestone and dolomite may also be
added to the mix prior to balling. Limestone removes impurities in the blast furnace.
Dolomite improves blast furnace recovery.

X may either purchase iron ore raw materials from a third party, beneficiate and
pelletize the iron ore and sell the pellets and concentrates on its own account, or
provide iron ore processing as a service for a for customers that own iron ore and
contract for processing. If X purchases iron ore (raw iron ore or concentrate) and sells
iron ore as pellets or concentrates, X represents that it will sell the iron ore pellets or
concentrates in bulk quantities to iron and steel manufacturers for further processing
into iron and steel. X will not sell any pellets or concentrates to a customer which could
be considered an end user at the retail level.

                              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.
PLR-117185-13 3

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 by X from iron ore processing and the non-retail sale of iron ore pellets
and concentrates 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 representative.

                                   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