Direct-reduced-iron income qualifies for publicly traded partnership

Plain-English summary

A publicly traded limited partnership planned to process or refine iron ore feedstocks into direct reduced iron and associated byproducts. Direct reduced iron turns finely processed iron ore into a feedstock suitable for electric arc furnaces and traditional steelmaking. The partnership represented that it would sell the products in bulk and not to retail end users. The IRS ruled that income from the described processing or refining and sales would be qualifying income under § 7704(d)(1)(E). The ruling did not decide whether the partnership would satisfy the separate requirement that at least 90 percent of its gross income be qualifying income.

Ruling snapshot

• Question: Would income from processing or refining iron ore into direct reduced iron, and selling the resulting products and byproducts, qualify under § 7704(d)(1)(E)?
• Outcome: Approved
• Key authorities: IRC § 7704(c) and (d)(1)(E)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201448019 Third Party Communication: None
Release Date: 11/28/2014 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
---------------------------------------------- --------------------, ID No. ----------------
------------------------------------------ Telephone Number:
-------------------------------------------- --------------------
----------------------- Refer Reply To:
CC:PSI:BR01
PLR-146763-13
Date:
May 22, 2014

Legend:

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

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

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

This letter responds to a letter dated November 8, 2013, submitted on behalf of X by X’s
authorized representatives, requesting a ruling under section 7704(d)(1)(E) of the
Internal Revenue Code.

                                                  Facts

Based on the materials submitted, we understand the relevant facts to be as follows. X
is a limited partnership organized under the laws of State. X is a publicly traded
partnership within the meaning of § 7704(b). --------------------------------------------------------

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Iron ore is primarily found in four sources: magnetite, hematite, goethite, and siderite.
Typical iron ores contain a significant amount of worthless material, referred to as
gangue, from which the iron oxides must be concentrated before they are able to be
used by the iron and steel industries. Best quality ores, containing greater than 55%
iron, may simply be crushed for size prior to use in a blast furnace. Lower grade iron
PLR-146763-13 2

ores require additional processing and must be crushed, ground and separated from
gangue in a process called beneficiation. The beneficiation iron ore consists of finely-
sized particles, or fines, which are not suitable for use in ironmaking or steelmaking and
must be agglomerated into larger particles before the iron ore is useful. The iron ore
pellets are then processed into steel in both blast furnaces and electric arc furnaces. An
electric arc furnace requires a different combination of iron feedstocks. The processing
of iron oxide, as found in lumped ore, iron ore pellets, or iron ore fines, into direct
reduced iron creates a suitable feedstock for steel manufacturing both (i) in conjunction
with or as an alternative to relying on scrap steel to feed an electric arc furnace and (ii)
as a supplementary feedstock in more traditional iron and steelmaking. ---------------------

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-------------------------------------------------- Byproducts produced during the direct reduced
iron processing may include carbon dioxide, water, ------------------------------------------------

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X may either (i) purchase -------------------------feedstocks from third parties or purchase
raw -----------materials ---------------------------------------------------------------------------------------

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-------------------------------------------X represents that if it purchases feedstocks and sells ---
------------------------, X will sell in bulk quantities -------------------------------------------------------
---------------------------- X further represents that it will not sell ------------------------------------
----------------------------------------------------------------------------------------------------------------to a
party which would be considered to be an end user at the retail level.

                                          Law and Analysis

PLR-146763-13 3

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).

                                    Conclusion

Based solely on the facts submitted and the representations made, we conclude that
income derived by X from the refining or processing of -------------------direct reduced iron
and the sale of direct reduced iron or byproducts as described above constitute
qualifying income within the meaning of section 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 income requirement of section 7704(c)(1) in any taxable year for which
this ruling may apply.

This ruling is directed only the taxpayer requesting it. However, in the event of a
technical termination of X under section 708(b)(1)(B), the resulting partnership may
continue to rely on this ruling in determining its qualifying income under section
7704(d)(1)(E). Section 6110(k)(3) of the Code provides that it may not be used or cited
as precedent.
PLR-146763-13 4

In accordance with the Power of Attorney on file with this office, a copy of this letter will
be sent to your authorized representative.

                                    Sincerely,


                                    David R. Haglund
                                    David R. Haglund
                                    Chief, Branch 1
                                    (Passthroughs & Special Industries)

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

cc: