Earlier this year, the Internal Revenue Service (the IRS) issued a private letter ruling (PLR) expanding the realm of what constitutes “qualifying income” for certain publicly traded partnerships to include fees received for the expansion of the taxpayer’s terminalling, storage and transportation assets.1
Under Section 7704(a) of the Internal Revenue Code, publicly traded partnerships are generally taxed as corporations, and therefore subject to taxation at the entity level. However, there is an exception for publicly traded partnerships that earn income from certain qualifying sources and through certain qualifying activities. Section 7704(c) of the Code provides an exception to the general rule of corporate treatment for publicly traded partnerships if 90 percent or more of the partnership’s gross income is “qualifying income.” Section 7704(d)(1)(E) of the Code 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 or timber).”
A taxpayer seeking clarification on whether certain activities not listed in the Internal Revenue Code or the Treasury Regulations would generate qualifying income, or whether the products involved are “minerals or natural resources,” can request a private letter ruling from the IRS, and the IRS has issued several private letter rulings determining whether certain types of activities and products generate “qualifying income” under Section 7704 of the Internal Revenue Code. For example, the IRS has previously ruled that income from certain terminalling activities (i.e., PLR 9340031), certain storage activities (i.e., PLR 9452013) and certain transportation activities (i.e., PLRs 200422023 and 200638018) constituted qualifying income under Section 7704. However, the IRS had not previously addressed the question of whether fees received for the expansion of terminalling, storage or transportation assets constituted qualifying income.
In PLR 201314029, the taxpayer, a publicly traded partnership, represented that it earned income by terminalling, storing and transporting crude oil, refined petroleum products and liquefied petroleum gas on behalf of its customers. The taxpayer’s terminalling, storage and transportation assets included storage tanks, marine docks and pipelines, and the taxpayer represented that such assets were integral to the transportation of the crude oil, refined petroleum products and liquefied petroleum gas at its terminals. However, where no pipeline existed connecting the taxpayer’s facilities with a customer’s facilities, or where the taxpayer’s facilities could not accommodate the storage and terminalling needs of a customer, the taxpayer entered into separate expansion agreements with its customers, whereby the customer was responsible for some or all of the construction costs to improve and/or expand the taxpayer’s facilities. Some of the expansion agreements required the customer to construct the improvements and transfer ownership of the improvements to the taxpayer; other agreements provided that the customer would make reimbursement payments to the taxpayer for the construction costs; still other agreements required the customer to pay a premium for the terminalling, storage or transportation services, whereby the customer would eventually reimburse the taxpayer for some or all of the construction costs. Ultimately, under all of the expansion agreements, the taxpayer owned the facility improvements constructed pursuant to the expansion agreements.
The IRS ruled that the expansion agreements were integral to the transportation of petroleum and related products, and therefore the amounts (or facilities) the taxpayer received under the expansion agreements constituted qualifying income within the meaning of Section 7704(d)(1)(E).
1 Please note that only the taxpayer receiving the private letter ruling can rely on the ruling for federal income tax purposes.