Oilfield-services partnership receives mixed qualifying-income ruling

Plain-English summary

A company planned to contribute oilfield-services operations to a limited partnership and offer partnership interests to public investors. The partnership would provide well-site services used in oil and natural-gas exploration, development, and production, but the detailed service descriptions were heavily redacted. The IRS ruled that gross income from the specified services was qualifying income under IRC § 7704(d)(1)(E). It separately stated that income earned under another redacted circumstance would not qualify. The ruling did not decide whether the entity would otherwise be taxable as a partnership.

Ruling snapshot

• Question: Did income from the partnership's described oilfield services qualify under IRC § 7704(d)(1)(E)?
• Outcome: Mixed. Income from the specified services qualified, but income under a separately redacted circumstance did not.
• Key authorities: IRC § 7704(a), (c), and (d)(1)(E)

Full text (IRS public release)

Department of the Treasury
Washington, DC 20224
Internal Revenue Service
Number: 201420012
Third Party Communication: None
Release Date: 5/16/2014
Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
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-----------------, ID No. ----------------
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Telephone Number:
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Refer Reply To:
CC:PSI:B02
PLR-135627-13
Date:
August 30, 2013

Legend:

X = -----------------------------------
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Y = ----------------------------
----------------------

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

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

This letter responds to a letter from X’s authorized representatives dated August 12, 2013, submitted on behalf of X and Y, requesting a ruling under § 7704(d)(1)(E) of the Internal Revenue Code.

Y is a limited partnership organized under the laws of State. X has formed Y with the intent of contributing to Y all or a portion of X’s activities and operations described herein, and offering inte rests in Y to the public investors via an initial public offering. Afterwards, Y, itself and through affiliated operating limited partnerships, limited liability companies, or disregarded entities, will engage in oilfield services activities, including
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services.

Each stage of drilling, completion and production of modern oil and gas wells requires
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-------------------- services. Y’s ---------------------- services ------------- will include -------------
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-------------------------. In addition, Y will derive income from providing --------------------------
-------------------------------------------------- services necessary for the development and production of oil and natural gas, ------------------------------------------------------------------------
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---------------------------------------------------------------------------------. In connection with and in addition to the above services, Y also will provide --------------------------------------------------
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----------------------------------------------------------------- otherwise necessary for the exploration and production activities at the well-site. In many instances, employees of Y conduct ------------------------------------------------------------------------------------------------- at the well-site.

The complex process of exploration and production also requires experienced personnel at the well-site to ensure safe, efficient and effective exploration and production of oil and natural gas. Y will provide -----------------------------------------------------
-------------------------------------- to exploration and production companies on a project-by- project basis in exchange for a fee. --------------------------------------------------------------------
---------------, Y will derive income from providing supervisory, specialist and management functions at the well-site. Y will use -------------------------to provide certain technical services and specialized tasks, -------------------------------------------------------------. For other services, Y will generally utilize --------------------------------------------------------------
----------------------------.

X seeks a ruling, on behalf of Y, that Y’s gross income derived from --------------------------
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--------------------------------------------------------------------------------------services constitutes qualifying income under § 7704(d)(1)(E).

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

Section § 7704(b) provides that 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).
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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 requirements 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, or marketing of any mineral or natural resource.

Based solely on the representations made and the facts submitted, we conclude that Y’s gross income from --------------------------------------------------------------------------------------
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-------------------------------services, is qualifying income within the meaning of § 7704 (d)(1)(E). However, in the case where Y --------------------------------------------------------------
-----------------------------------------------------------------------------------------------------, such income will not constitute qualifying income under § 7704(d)(1)(E).

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

This ruling is directed only to the taxpayer requesting it. However, in the event of a technical termination of Y 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).

According to § 6110(k)(3), this ruling may not be used or cited as precedent.
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Under a power of attorney on file with this office, we are sending a copy of this letter to your authorized representatives.

Sincerely,

Bradford R. Poston
Senior Counsel, Branch 2
(Passthroughs & Special Industries)

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

cc: