Petroleum product operations produce qualifying income

Plain-English summary

The IRS ruled that income from a publicly traded partnership's grease blending and packaging operation and re-refining operation was qualifying income under IRC § 7704(d)(1)(E). The partnership processed petroleum products and sold its products to wholesalers and distributors rather than retail end-users. The ruling addressed the character of the income, but did not determine whether the partnership met the separate 90-percent gross-income requirement for the applicable taxable year. The ruling could continue to be relied on by a successor partnership after a specified technical termination.

Ruling snapshot

• Question: Did income from the partnership's grease blending, packaging, and re-refining operations qualify under § 7704(d)(1)(E)?
• Outcome: Approved.
• Key authorities: IRC §§ 708(b)(1)(B), 7704(a), 7704(c), and 7704(d)(1)(E); IRC § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201403008 Third Party Communication: None
Release Date: 1/17/2014 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
-------------------------------- --------------, ID No. ----------------
---------------------------------------------------- Telephone Number:
------------------------- --------------------
--------------------------------- Refer Reply To:
CC:PSI:B01
PLR-118134-13
Date:
September 13, 2013

LEGEND:

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

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

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

This letter responds to your letter dated April 16, 2013, submitted on behalf of X,
requesting a ruling that income derived from the grease blending and packaging
operation and the re-refining operation constitutes qualifying income within the meaning
of § 7704(d)(1)(E) of the Internal Revenue Code.

FACTS

According to the information submitted and representations made, X is a limited
partnership organized under the laws of State. X is a publicly traded partnership within
the meaning of section 7704(b). X and its affiliates are engaged in the business of
storage, transportation, processing, and distribution of petroleum products, natural gas
and natural gas liquids. X and its affiliates blend refined petroleum distillates and lube
oil base stocks with a “soap” or “thickener” to create the desired lubricant-greases,
which are semi-solid suspensions. X sells its products to wholesalers and other fuel
distributors and marketers, none of X’s products are sold to customers who are end-
users.

In addition, X will ---------------------------------------------------------------------------------------------

PLR-118134-13 2

---------------------------------------------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------------------------- ----

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-------------------------------------use the base oil in its blending and packaging activities and
sell any surplus base oil and other refined petroleum products to wholesalers and retail
distributors and not to end-users at the retail level.

LAW AND ANALYSIS

Section 7704(a) provides that, except as provided in § 7704(c), a publicly traded
partnership shall be treated as a corporation.

Section 7704(b) provides that, for the purposes of § 7704, the term “publicly traded
partnership” means any partnership if (1) interests in the partnership are traded on an
established securities market, or (2) interests in the 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. Section 7704(c)(2) explains 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 such partnership for such taxable year is qualifying income.

Section 7704(c)(2) provides that a partnership meets the gross income requirements of
section 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” 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).

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
the that income derived by X from the grease blending and packaging operation and the

PLR-118134-13 3

--------------operation constitutes qualifying income within the meaning of section
7704(d)(1)(E).

Except as expressly provided herein, we express or imply no opinion concerning the 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) in any taxable year.

The ruling is directed only to the taxpayer who requested 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 the taxpayer’s authorized representative.

                                    Sincerely,


                                    David R. Haglund
                                    David R. Haglund
                                    Branch Chief, Branch 1
                                    Office of the Associate Chief Counsel
                                    (Passthroughs & Special Industries)

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