Oil and gas services income qualifies under the publicly traded partnership rules

Plain-English summary

The IRS ruled that income a publicly traded partnership expected to earn from specified services for customers in the oil and natural gas industry would be qualifying income under IRC § 7704(d)(1)(E). The partnership planned to acquire an affiliate's business and provide services connected with oil and gas production, processing, and transportation. The ruling allows the described service income to count toward the qualifying-income exception to the general corporate treatment of publicly traded partnerships. The IRS did not rule on whether the partnership would satisfy the separate requirement that at least 90 percent of its gross income be qualifying income in any taxable year.

Ruling snapshot

• Question: Does the partnership's income from the described oil and gas services qualify under IRC § 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: 201412007 Third Party Communication: None
Release Date: 3/21/2014 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
----------------- ----------------------, ID No. -----------------
------------------------------------------------------------ Telephone Number:
------------- ---------------------
------------------------------------------------ Refer Reply To:
------------------------------ CC:PSI:B01
--------------------------------- PLR-131688-13
Date:
November 25, 2013

Legend

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

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

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

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

This letter responds to a letter dated July 12, 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. Following an initial public
offering, interests in X are expected to be listed and traded on a nationally recognized
exchange. Thus, X will be a publicly-traded partnership within the meaning of §
7704(b).

X’s affiliate, Y, provides a full suite of -------------------------------------------------------------------

---------- services to customers engaged in the oil and natural gas industry. X intends to
acquire Y’s -----------------------------------------------------------------------------------------------------
-----------business, including customer contracts ------------------------------.

PLR-131688-13 2

-------------------Services

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

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

------------------------------------------------------------------------------------.

A portion of the ----------------- contracts -----------------------------------------------------------------
--------------------------------------------------------(“------------------ Agreements”). -------------------
------------------------------------------------------------------------------, Y is obligated to provide
substantial services --------------------------------. In most cases Y is required to----------------

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

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

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

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

-----------------------------------------------------------------------------------------------------------------.

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

---------------------Services

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

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

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

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

---------------------------------------------------------------------------------------------.

PLR-131688-13 3

Y’s --------------------business is conducted pursuant to agreements -----------------------------
-------------------------------------------------------------------------------(“-------------------------
Agreements”). Under the terms of the ---------------------Agreements, Y is obligated to
provide substantial services --------------------------------. In most cases, Y is required to ---

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

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

-------------.

----------------------------Services

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

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

------------------------------------------------------------------------------------------------under
agreements ----------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------(“---------------------
Agreements”), -------------------------------------------------------------------------------------------------

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

------------------------------------------------------------------------------------------------------------------.

                                       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.

PLR-131688-13 4

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, ------
--------------------services, and ----------------services, -------------------------------------------------
--------------, as 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 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: