Oil and gas services produce qualifying income for a publicly traded partnership

Plain-English summary

The IRS ruled that a publicly traded limited partnership's income from providing specified services to customers involved in oil and natural gas production, processing, and transportation is qualifying income under IRC § 7704(d)(1)(E). The partnership planned to acquire part of an affiliate's service business, including customer contracts. The ruling was based on the submitted facts and representations. It did not address whether the partnership was taxable as a partnership under any other Code provision.

Ruling snapshot

• Question: Does gross income from the described oil and natural gas services qualify under § 7704(d)(1)(E)?
• Outcome: Approved.
• Key authorities: IRC §§ 708(b)(1)(B), 7704(a), 7704(b), 7704(c), 7704(d)(1)(E).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201405011 Third Party Communication: None
Release Date: 1/31/2014 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
----------------------------- -----------------------, ID No. -------------------
-------------------------------------- ---------------------------------------------------
------------------------------- Telephone Number:
---------------------------------- ----------------------
--------------------------------- Refer Reply To:
CC:PSI:B01
PLR-128041-13
Date:
September 25, 2013

Legend

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

Y= --------------------------------

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

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

This letter responds to a letter dated June 19, 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 provides ------------------ services to
clients engaged in natural gas production and processing.

X’s affiliate, Y, is engaged in the ---------------------------------- business and provides
operations, maintenance, service, and --------------------------for oil and natural gas
production, processing, and transportation applications. -----------------------------------------

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

--------------------------------------------------------------------------------------------- is an essential
element in oil and gas production, processing, and transportation. ----------------------------

PLR-128041-13 2

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X intends to acquire a portion of Y’s ------------------ business, including customer
contracts and -------------------------- A portion of the customer contracts -----------------------

----------------- (“Agreements”). ----------------------------------------------------------------------------

Y is obligated to provide substantial services ---------------------------------- In most cases Y
is required to: --------------------------------------------------------------------------------------------------

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

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

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

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

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

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X requests a ruling that gross income derived from providing ------------------------------------
services ------------------------------- pursuant to the Agreements to customers engaged in
the production, processing and transportation of oil and natural gas will constitute
qualifying income under § 7704(d)(1)(E).

                                       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).

PLR-128041-13 3

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)(1) 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
gross income derived by X from the provision of -----------------------------------services ------
-------------------------- pursuant to the Agreements described above to customers
engaged in the production, processing, and transportation of oil and natural gas
constitutes qualifying income pursuant to § 7704(d)(1)(E).

Except for the specific ruling above, we express or imply no opinion concerning the
federal tax consequences of this case under any other provision of the Code.
Specifically, we express or imply no opinion as to whether X is taxable as a partnership
for federal income tax purposes.

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.

PLR-128041-13 4

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,


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

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