Energy infrastructure revenue qualifies for publicly traded partnership rules

Plain-English summary

An energy company planned to place infrastructure assets and business interests into a partnership that would become publicly traded after an initial public offering. The partnership expected income from redacted natural-resource storage, pipeline transportation, marketing arrangements, and terminal services. The IRS ruled that the listed revenue streams would constitute qualifying income under section 7704(d)(1)(E). The ruling did not decide whether the partnership would meet the separate requirement that at least 90 percent of its gross income be qualifying income.

Ruling snapshot

• Question: Would the partnership's storage, transportation, marketing, and terminal-service revenue be qualifying income under section 7704?
• Outcome: Approved
• Key authorities: IRC § 7704(c), (d)(1)(E)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201538012 Third Party Communication: None
Release Date: 9/18/2015 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
---------------------------------------- ---------------------, ID No. ----------------
-------------------- Telephone Number:
-------------------- --------------------
--------------------------------- Refer Reply To:
CC:PSI:01
PLR-149182-13
Date:
May 19, 2015

Legend

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

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

A= ---------------------------------------------

B= ---------------------------

C= ---------------------------------

D= ----------------------------------------

E= --------------------------------------------

F= --------------------------------------------------

G= --------------------------------------------

H= ---------------------------------------------

I= ----------------------------------

J= -----------------------------------

K= ------------------------------------------

PLR-149182-13 2

L= -------------------------

M= --------------------------

State1 = ------------

State2 = ------------

Date = --------------------

Year = ------

SystemA = ----------------------

SystemB = -------------------------------

SystemC = -----------------------------------

SystemD = -----------------------------------------------

SystemE = ------------------------------------------------

SystemF = ------------------------------------------------

Location1 = -----------------

Location2 = ------------------

Location3 = -------------------------------

n1 = ------

n2 = -----

n3 = ---

n4 = ---

n5 = ---

n6 = ---

n7 = ------

PLR-149182-13 3

n8 = --

n9 = --

n10 = ----------

n11 = --

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

This responds to your letter dated December 3, 2013, and subsequent correspondence,
submitted on behalf of Y, requesting a ruling under § 7704(d)(1)(E) of the Internal
Revenue Code.

                                                 FACTS

X is a corporation organized under the laws of State1. X is the common parent of an
affiliated group of corporations that files a U.S. consolidated Federal income tax return
and has numerous corporate and non-corporate, direct and indirect subsidiaries. X
owns energy-infrastructure companies, including --------------------------------------------, ------

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

Y is a limited partnership organized on Date under the laws of State2. Y is owned by
two subsidiaries of X. Y is currently inactive and is treated as a disregarded entity for
Federal income tax purposes. Upon consummation of an initial public offering (IPO), Y
will become a publicly traded partnership within the meaning of § 7704(b). X will
undertake an organizational restructuring to transfer the assets described in this ruling
to Y in connection with Y’s IPO.

Y will derive its income from the transportation, storage, and marketing -----------------,
processing and marketing of ------------------------------------------------------------------------------
------------------------------------------------------------- through various partnership interests or
directly.

X requests a ruling that income derived from each of the following facilities and activities
will constitute qualifying income under § 7704(d)(1)(e).

---------------- Storage

Y will own an n1% interest in A, a limited partnership, an n2% interest in B, currently a
wholly owned indirect subsidiary of X, and an n3% interest in C, an LLC. A owns and

PLR-149182-13 4

operates SystemA, B owns and operates SystemB, and C owns and operates SystemC.
SystemA, SystemB, and SystemC are ----------------------------------------------storage
facilities and related pipelines and operating assets.

Y’s income through its interests in A, B, and C will include revenue derived from ----------
----- storage services provided on SystemA, SystemB, and SystemC to multiple third
party customers.

Transportation of ----------------

Y will own an n4% interest in D, an LLC. D owns and operates SystemD. Y will own an
n2% interest in E, currently a wholly owned indirect subsidiary of X and a disregarded
entity for Federal income tax purposes. E owns and operates SystemE. SystemD and
SystemE are --------------------------------------pipeline systems --------------------------------------
-------------------.

Y’s income through its interests in D and E will include revenue derived from
transportation services provided to shippers -----------------. Y will not own -------------------
-----transported through SystemD or SystemE.

Y will own an n5% interest in F, a partnership for Federal income tax purposes. F owns
and operates SystemF. SystemF is a pipeline that generates transportation fees ---------
-------------------------------------------------------.

Y’s income through its interest in F will include revenue from fees for the transportation -
------------------. Y will not own the ---------------transported through SystemF.

Marketing of ----------------

G is a ---------------marketer organized as a corporation. G purchases ------------------------

----------- G -----------------------------------------------sells -----------------------------------------------
---------to unrelated third parties.

Y will own G’s business and assets that generate income from purchasing and selling --
----------------.

Marketing of ---

Y will own the --- rights to Location1, -------------------------------------------------------------------
----------------------------------. H, ------------------owned by X, owns the operating rights to
Location1. -----------------------------------------------------------------------------------------------------
------------------------------------. ------------------------------------------------------------------------------
-----------------------H owns all of the facilities involved ----------------------------------------------.

PLR-149182-13 5

-----------------------------------------------------------------------------------------------------. -------------
--------------------------------------------------------------------------------------------------------------. Y
will generate revenue from the marketing of -----------------Location1.

Marketing of -----------------------------

I is an indirect subsidiary of X engaged in the business of marketing --------------------------
-----. The majority of I’s income is generated under two contracts: -----------------------------
-------------------Sale and Purchase Agreement between I and J ----------------------------------
----------------------Sale and Purchase Agreement Among I and K -------------------- -----------
---------------. J is a third party. K is an affiliate of X treated as a disregarded entity for
Federal income tax purposes. I also has a ---------------sales agreement with K to sell K -
------------------------------.

I purchases ---------------------------from J ------------------------------------and then sells the ----
---------------------------to K ------------------------------------------. L, another X affiliate, owns
Location2. Pursuant to the terms of a ------- agreement between K and L, K has the -----
---------------------------it purchases from I -------------------------------and then markets ---------
-------------------------.

Under the terms of the ------ Agreement, J is obligated to sell and deliver a specified
quantity ---------------------------------------------------------------------------------------------------------
--------------------------------- and I is obligated to purchase ----------------. The ------
Agreement provides that J has a mandate to deliver at least a minimum -------------- ------
---------------------------------------------------but has the right, in its sole and absolute
discretion, to ------------------------------------. If J elects to -----------------, J is required --------
--------------------------------------to pay ---------------------------to I. ------------------------------------

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

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

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

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

Under the terms of the --------------Agreement, I is obligated to sell a specified quantity --
---------------------------------------each year to K at Location2 and K is obligated to purchase
----------------. --------------------------------------------------------------------------------------------------

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

PLR-149182-13 6

In advance of the IPO, I will be converted to a partnership interest and will issue Class I
and Class II interests. Y will own the Class I interests in I. The Class I interest will have
an interest in all of I’s income, including from the -------Agreement and from the -----------
--------------Agreement, and will be entitled to a preferred distribution of I’s cash flow.

Terminal Services

M is an indirect subsidiary of X formed to develop, own, and operate Location3, a --------
-------------------------------------terminal. Location3 -----------------------------------------------------
terminal and generates revenue through a ----------- services agreement. -------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

-----------------------------------------------------------------------------------------------------. This
project will incorporate M’s -----------------------------facilities and, upon completion,
Location3 will be able to perform -----------------------------------------------services.

Upon completion -----------------, terminal services provided ------------------------------- -------
----------------------------------------------------------------------- will consist of --------------, -----------

PLR-149182-13 7

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

------------------------------------------------------------------. Terminal services ------------------------
will also include -----------------------------------------------------------------------------------------------
------------------------------------------.

M will provide terminal services to the customers under the ----- Agreements on a --------

basis. Under this ------- arrangement, the customers will retain legal title --------------------

-----------------------------------------------------------. In addition, the customers will have title --
--------------------------------------------------------------------. M will be deemed in control of,
have responsibility for, and bear the risk of loss for -------------------------------------------------

----------. Specifically, M will bear the risk of loss ----------------------------------------------------

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

-----------------. During -----------------, M will be deemed in control of, have responsibility
for, and assume the risk of loss --------------------------------------------------------------------------

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

As part of X’s restructuring, a portion of X’s interest in M will be transferred to Y. Y’s
income earned through its indirect interest in M will include revenue from the -------
Agreements described above.

                                         LAW & 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.

PLR-149182-13 8

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), 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).

                                     CONCLUSION

Based solely on the facts submitted and the representations made, we conclude that
income derived by Y, directly or indirectly, from the following activities will constitute
qualifying income under § 7704(d)(1)(E):

 Storage of ---------------on SystemA, SystemB, and SystemC;
 Transportation of ---------------through SystemD, SystemE, and SystemF;
 ----------------marketing activities;
 Marketing of --------------from Location1;
 Marketing of --------------------------, including income derived from the ------
Agreement and the ------------- Agreement; and
 Revenue from the ----- Agreements for the ----------------------------------- ---------------
----------------------------------------------------at Location3.

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 Y 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 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). Section
6110(k)(3) of the Code provides that this letter may not be used or cited as precedent.

PLR-149182-13 9

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,


                                   Laura C. Fields
                                   Laura C. Fields
                                   Senior Technician Reviewer, Branch 1
                                   (Passthroughs & Special Industries)

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

cc: