Petroleum product blending and additization fees are qualifying income

Plain-English summary

A publicly traded partnership asked whether fees from fuel additization, ethanol blending, and biodiesel blending at its petroleum terminals were qualifying income under IRC § 7704. The partnership received and stored refined petroleum products, added or blended fuel components while loading the products for wholesale delivery, and charged fees for those activities. The IRS concluded that the income was qualifying income from processing or transportation of mineral and fuel products under IRC § 7704(d)(1)(E). The ruling did not decide whether the partnership satisfied the separate 90-percent gross-income test.

Ruling snapshot

• Question: Was the partnership’s income from fuel additization, ethanol blending, and biodiesel blending qualifying income under IRC § 7704(d)(1)(E)?
• Outcome: Approved.
• Key authorities: IRC §§ 7701(a), 7704(a), 7704(b), 7704(c), 7704(d)(1)(E), 6426, 40A, 708(b)(1)(B), and 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201403004 Third Party Communication: None
Release Date: 1/17/2014 Date of Communication: Not Applicable
Index Numbers: 7704.03-00
Person To Contact:
------------------------------ ---------------------, ID No. ----------------
------------------------------------------------------------ Telephone Number:
----------------------------------- --------------------
--------------------------------------------------- Refer Reply To:
---------------------------- CC:PSI:B03
PLR-116883-13
Date:
September 16, 2013

                                                LEGEND

Company = --------------------------------------------------------------------------------------------------------------------

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

X = 2

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

  This responds to a letter dated April 1, 2013, submitted on behalf of Company,

requesting a ruling concerning the qualifying income exception to the publicly traded
partnership rules of § 7704 of the Internal Revenue Code (“Code”).

                                                 FACTS

   Company is a limited partnership organized under the laws of State. Company is

a “publicly traded partnership” within the meaning of § 7704(b) of the Code. Company,
through affiliated limited partnerships or disregarded entities, is principally engaged in
the transportation, storage and distribution of refined petroleum products. This ruling
request involves fees Company charges as part of its fuel additization, ethanol blending
and biodiesel blending activities at its refined product terminals.

   Company owns X refined product terminals. Company’s refined product

terminals receive petroleum from refineries, major common-carrier pipelines, or other
vessels. Company stores these products at its refined product terminals which it then
loads onto delivery vehicles for transportation to the next point in the fuel supply chain.
Company charges a fee for receiving and loading fuels onto delivery vehicles for
transportation. During the loading process, Company also injects fuel additives and

PLR-116883-13 2

blends ethanol and biodiesel into petroleum products. Company represents that it acts
as a wholesale distributor of refined petroleum products and is not engaged in retail
activity.

    Company generates fees at its refined product terminals for various additization

activities. Company handles a number of different types of additives at its terminals
including detergent additives, dyes, cetene improvers, pour point depressants, deicers,
wax crystal modifiers, anti-smoke additives, antioxidants, metal deactivators, anti-haze
additives, biocides, corrosion and gum inhibitors and anti-static additives. Fuel
additization activities involve receiving additives from various suppliers and blending
those additives into petroleum products in accordance with the requirements of
Company’s customers. Company receives some proprietary additives from customers
for mixture in accordance with the customer’s specifications. Company also uses
generic additives that are blended into fuel for sale to its customers. Additives are
injected into fuels while the fuels are being loaded onto transportation vehicles for
delivery to customers.

    Company generates fees at its refined product terminals from ethanol blending

activities. Company receives ethanol from customers via truck or rail, which it then
pumps into storage tanks. Company blends ethanol into gasoline by injecting the
ethanol into gasoline via pipelines attached to the storage tanks while the gasoline is
being loaded onto transportation trucks for delivery to customers.

    Company generates fees at its refined product terminals from biodiesel blending

activities. Company receives biodiesel from customers via truck, which it then pumps
into storage tanks. Company blends biodiesel into fuel by injecting the biodiesel via
pipelines attached to storage tanks while the fuel is being loaded onto transportation
trucks for delivery to customers.

                              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
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.

PLR-116883-13 3

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 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), industrial source carbon dioxide, or the transportation or storage of any fuel
described in §§ 6426(b), (c), (d), or (e) or any alcohol fuel defined in § 6426(b)(4)(A) or
any biodiesel fuel defined in § 40A(d)(1).

                                  CONCLUSION

Based solely on the facts submitted and representations made, we conclude that the
income derived by Company from its additization activities, ethanol blending and
biodiesel blending activities is 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 transaction or item discussed or referenced in this
letter. In particular, no opinion is expressed as to whether Company meets the 90
percent gross income requirement of § 7704(c)(1) in any taxable year for which this
ruling may apply.

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

This ruling is directly only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent. However, in the event of a technical
termination of Company 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).

PLR-116883-13 4

Pursuant to the power of attorney on file with the office, a copy of this ruling will be sent
to taxpayer’s authorized representative.

                                   Sincerely,



                                   Richard T. Probst
                                   Senior Technician Reviewer, Branch 3
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2)

   A copy of this letter
   A copy for § 6110 purposes