IRS approves pipeline partnership income from an air separation unit

Plain-English summary

The IRS considered a publicly traded partnership that operates petroleum pipelines, storage facilities, and terminals. The partnership planned to acquire an onsite air separation unit at a crude oil refinery to supply nitrogen and oxygen used in refinery operations, along with related services. The IRS ruled that income from operating the unit and providing those services would be qualifying income under § 7704(d)(1)(E). The ruling did not decide whether the partnership would satisfy the separate 90-percent gross-income requirement for any taxable year.

Ruling snapshot

• Question: Would income from operating an onsite air separation unit and providing related refinery services qualify under § 7704(d)(1)(E)?
• Outcome: Approved, income treated as qualifying income
• Key authorities: IRC §§ 7704, 708, and 6110

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201408008 Third Party Communication: None
Release Date: 2/21/2014 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
----------------------- -----------------------, ID No. -------------------
------------------- ---------------------------------------------------
------------------------------------- Telephone Number:
---------------------------------------- ----------------------
------------------------------ Refer Reply To:
CC:PSI:B01
PLR-121490-13
Date:
October 29, 2013

Legend

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

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

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

This letter responds to a letter dated May 2, 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 is principally engaged in the business of
operating a system of petroleum product and crude pipelines, storage tanks, distribution
terminals, and loading rack facilities.

X intends to acquire an air separation unit (“ASU”) located in a crude oil refinery. The
ASU is a permanent piece of equipment built on the site of the refinery. The ASU is
integrated into the refinery facilities and all of the ASU’s existing capacity is dedicated to
supply nitrogen and oxygen to the refinery. X represents that it will not use the ASU
outside of its present activities integrated with the crude oil refinery operations. X may
acquire or construct ASUs located at other crude oil refineries to supply and service
those other refineries in a similar manner.
PLR-121490-13 2

X represents that nitrogen and oxygen are essential elements used in operating a
refinery. Refineries typically either have their own ASU on site to produce nitrogen and
oxygen, or purchase nitrogen and oxygen from third-party suppliers. Nitrogen is used to
displace oxygen in tanks, hoses, piping, and equipment throughout the refinery in order
to prevent the potential for unwanted reactions and prevent corrosion damage caused
by air and moisture. Oxygen is used to treat byproducts from the refining process. For
example, oxygen is used to increase capacity in a process that converts toxic hydrogen
sulfide into elemental sulfur and water.

The ASU that X intends to acquire uses a cryogenic process to separate atmospheric
air into nitrogen and oxygen. By adjusting flow rates, temperature, and pressure, the
ASU concentrates oxygen to a purity of 97% and removes it to one tower while nitrogen
is concentrated to a purity of 98% and separated in another tower. The oxygen and
nitrogen streams are then directed to plant supply headers.

An employee of X will provide on-site supply services, consulting with the refinery
personnel regarding the refinery’s demand for nitrogen and oxygen, the inventory levels
of nitrogen and oxygen at the ASU, and related maintenance issues at the refinery.

                              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).
PLR-121490-13 3

                                  CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
income derived by X from the operation of an onsite ASU used to supply nitrogen and
oxygen to a crude oil refinery for use in the processing, refining, and transportation of
crude oil and refined petroleum products, and the provision of related services,
constitutes 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,


                                   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

cc: