IRS treats RIN sales and remote fuel delivery as qualifying partnership income

Plain-English summary

The IRS ruled that certain income earned by a publicly traded partnership qualifies for the exception to the publicly traded partnership corporate-treatment rule. The partnership generated renewable identification numbers through its fuel processing and marketing activities, then sold excess RINs. It also delivered refined fuel to remote coal-mining customers using specialized vehicles. The IRS concluded that income from those RIN sales and fuel delivery services was qualifying income under IRC § 7704(d)(1)(E), subject to limits in the ruling. The ruling did not determine whether the partnership met the separate 90 percent gross-income test, and it excluded sales to RIN purchasers acquiring the RINs for resale.

Ruling snapshot

• Question: Does income from selling RINs and delivering refined fuel to customers engaged in natural-resource mining qualify under the publicly traded partnership rules?
• Outcome: Approved, the specified income qualifies under IRC § 7704(d)(1)(E), subject to stated exclusions
• Key authorities: IRC §§ 7704, 6426, and 40A; S. Rep. No. 445, 100th Cong., 2d Sess. 424 (1988)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

                                                       Third Party Communication: None

Number: 201411004 Date of Communication: Not Applicable
Release Date: 3/14/2014 Person To Contact:
-----------------------, ID No. --------------
Index Number: 7704.00-00, 7704.03-00 Telephone Number:
----------------------
------------------------------------------------ Refer Reply To:
--------------------------------------- CC:PS:B02
-------------------------------------- PLR-121103-13
Date:

                                                         November 08, 2013

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

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

a = ----

Dear -------------------

This responds to your letter dated May 3, 2013, and subsequent correspondence,
submitted on behalf of X, requesting a ruling concerning the qualifying income exception
to the publicly traded partnership rules of § 7704 of the Internal Revenue Code.

                                               FACTS

X is a limited partnership organized under the laws of State. X, through affiliated limited
partnerships and disregarded entities, is engaged in a variety of business lines, which
include the mining, processing, marketing and transportation of various natural
resources through X’s service personnel and operating assets.

                                           RIN ACTIVITIES

A renewable identification number (RIN) is a 38 character code generated by the
producer or importer of renewable fuel, which uniquely identifies the batch of renewable
fuel and each gallon in that batch. The code identifies, among other things, the
company producing the renewable fuel, the facility in which the fuel was produced, the
year in which the fuel was produced and a five digit batch number assigned by the
producer. The complete RIN is assigned to a batch of renewable fuel no later than
when ownership of that renewable fuel is transferred to another party. The RIN must be
transferred with the renewable fuel until the point the renewable fuel is blended into a
PLR-121103-13 2

conventional fuel or sold in the retail fuel market, at which point the RIN is “separated”
from the fuel and becomes freely transferrable separate and apart from the renewable
fuel.

X accumulates RINs through two unique processes. First, as a wholesale distributor of
refined products, X sells gasoline, most of which contains a certain percentage of
ethanol. X purchases the ethanol feedstock from third-party suppliers with RINs already
associated with each gallon of ethanol feedstock purchased. When X blends the
feedstock ethanol into gasoline at facilities that are owned by X, the RINs previously
associated with the ethanol feedstock disassociate and become merchantable.
Second, X owns and operates a biodiesel refinery that produces renewable fuel from
produces renewable fuel from soy oil, animal fats, and waste cooking oil for use in
blending with traditional diesel products. The process of creating biodiesel generates a
new RIN that associates with each gallon of biodiesel within each batch of biodiesel that
is created by X. When X blends this biodiesel into conventional fuels at its facilities, the
RINs previously associated with such biodiesel disassociate and become merchantable.

X accumulates a significant amount of RINs that exceed any obligation X has in
connection with its renewable volume obligation under the Renewable Fuel Standard
program. From time to time, X sells its excess RINs to third parties through a broker
involved in trading RINs or directly to a producer or importer of conventional fuel. X
represents that the sale of RINs is merely a second revenue stream derived from X’s
processing and marketing of a natural resource.

X requests a ruling that income from the sale of RINs resulting from X’s processing and
marketing of gasoline and diesel fuel constitutes qualifying income under
§ 7704(d)(1)(E).

                       MARKETING OF REFINED FUELS

Mining activities involved in the development of coal mines and the production of coal
involve the use of heavy machinery and advanced equipment, which consume
substantial quantities of refined fuels. Such refined fuels must be provided for the
machinery and equipment at the mine site, either directly by or on behalf of the mining
company. X earns income from fuel delivery services (including the sale of refined fuel
and delivery services attendant to the sale) provided to coal mining companies in
support of the mining of coal.

X represents that fuel delivery is a critical and necessary part of developing coal mines
and producing coal in the regions served by X. X further represents that coal production
in these regions would terminate or be significantly curtailed if X did not provide fuel
delivery services. X’s customers typically engage in coal mining operations located far
from conventional roads and access points, and conventional fuel delivery vehicles
cannot be used to service such customers. X further represents that the vehicles used
PLR-121103-13 3

in the delivery process are specially customized to deliver refined fuels to above-ground
tanks and other non-conventional delivery points in remote locations and are not
designed or intended to be used for conventional fuel delivery of refined products to
retail gas stations. X also represents that approximately a% of the gross margin earned
from marketing refined fuels is directly attributable to the delivery and other related
services associated with marketing refined fuels to customers engaged in mining natural
resources in remote locations with the remainder attributable to the bare supply of
refined fuels.

X requests a ruling that income from the wholesale marketing of refined fuels to
customers engaged in the mining of natural resources that constitute a part of the
exploration, development, mining or production, processing and marketing of natural
resources will constitute qualifying income under § 7704(d)(1)(E).

                             LAW AND ANALYSIS

Section 7704(a) provides generally that a publicly traded partnership shall be treated as
a corporation.

According to § 7704(b), 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 its substantial
equivalent).

Section 7704(c)(1) exempts from treatment as a corporation any publicly traded
partnership for any tax year if the partnership meets the gross income requirements of
§ 7704(c)(2) for that year and each preceding tax year beginning after December 31,
1987, during which the partnership (or any predecessor) was in existence. Section
7704(c)(2) provides that a partnership meets the gross income requirement of § 7704
for any tax year if 90% or more of the partnership’s gross income for that year consists
of qualifying income.

Section 7704(d)(1)(E) defines “qualifying income” to include 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), 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 as defined in § 40A(d)(1).

The Senate Report accompanying the Technical and Miscellaneous Revenue Act of
1988 states:
PLR-121103-13 4

   With respect to marketing of minerals and natural resource (e.g., oil and gas and
   products thereof), the Committee intends that qualifying income be income from
   marketing at the level of exploration, development, processing or refining the
   mineral or natural resource. By contrast, income from marketing minerals and
   natural resources to end users at the retail level is not intended to be qualifying
   income. For example, income from retail marketing with respect to refined
   petroleum products (e.g., gas station operations) is not intended to be treated as
   qualifying income.

S. Rep. No. 445, 100th Cong., 2nd Sess. 424 (1988).

                                  CONCLUSION

Based solely on the facts submitted and representations made, we conclude that X’s
gross income from (1) the sale of RINs and (2) X’s refined fuel delivery services
provided to customers engaged in the mining of natural resources (excluding any
portion of such income derived from the delivery or sale of products to customers who
are not engaged in drilling, exploration and production, or mining activities) is qualifying
income within the meaning of § 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, we express no opinion 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.
To the extent that X’s gross income from the sale of RINs is attributable to sales to
brokers, traders, or any other purchasers of RINs for the purpose of resale, this letter
ruling will not apply in determining whether such income constitutes qualifying income
under § 7704(d)(1)(E). To the extent that X’s gross income from marketing refined fuels
in not attributable to its customers’ § 7704(d)(1)(E) activities (i.e., to activities of the
customer, such as drilling, exploration and production, or mining of a mineral or natural
resources, that would generally be expected to produce gross income that is qualifying
income under § 7704(d)(1)(E) regardless of the customer’s Federal tax classification),
this letter ruling will not apply in determining whether the income that may be derived by
X from such other uses constitutes qualifying income under § 7704(d)(1)(E).

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-121103-13 5

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,



                                   Melissa C. Liquerman
                                   Chief, Branch 2
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2):
Copy of this letter
Copy for § 6110 purpose