October 19, 2021

Volume XI, Number 292

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October 19, 2021

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October 18, 2021

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They’re Here… Master Limited Partnership Qualifying Income Regulations Have Finally Arrived

The Treasury Department and the IRS today issued long-awaited final regulations under Section 7704 of the Internal Revenue Code that provide qualifying income guidance with respect to the natural resource activities of publicly traded partnerships or “MLPs.”

Proposed qualifying income regulations released in May 2015 to provide natural resource-related guidance drew significant industry and investor comment, and some amount of criticism. Although we are continuing to digest these much anticipated final regulations issued today, we offer a few initial observations. Stay tuned.

No More Exclusive List

The final regulations removed the proposed “exclusive list” of Section 7704(d)(1)(E) activities. Commenters noted that an exclusive list ignored the potential for technological changes that would leave the regulations inflexible to adapt to new technologies and processes. The final regulations provide a general definition of each of the eight listed activities, followed by a non-exclusive list of examples of each. However, the IRS and Treasury Department do not intend that the regulations be interpreted or applied in an expansive manner.

Olefins Generate Qualifying Income

The final regulations generally define processing of natural gas and crude oil as the purification and separation into its component parts and, importantly, the refining of natural gas and crude oil as the further physical or chemical conversion or separation of the components parts. There is no longer a disparate treatment of olefins produced from crude oil and olefins produced from natural gas. Activities are treated as refining to the extent they give rise to listed products adopted from a U.S. Energy Information Administration (EIA) list of products produced in a crude oil refinery. Thus, refining of natural gas liquids into olefins such as ethylene, propylene and butylene is an approved activity. Following the structure of the regulations, the transportation, storage or marketing of olefins is also an approved activity.

Liquefaction and Regasification of Natural Gas Generates Qualifying Income

Neither LNG nor LPG are minerals or natural resources, however, liquefaction and regasification of natural gas is an approved transportation activity. The final regulations specifically provide that retail sales of LPG are qualifying.

Reimbursement of Costs

Reimbursement of construction costs and allowable “back office” functions (such as staffing, billing, accounting and financial reporting) incurred in connection with performing a Section 7704(d)(1)(E) activity is qualifying. Management fees for administrative activities when the MLP is not otherwise performing the Section 7704(d)(1)(E) activity (e.g. operating the pipeline) is only qualifying if the intrinsic activity requirements are met.

Basin by Basin Approach for Oil Field Service Providers, and Clarification that an MLP’s Subcontractors are Treated as “Partnership Personnel”

The final regulations adopt a “basin by basin” approach for water delivery services as opposed to the “well by well” approach taken in the proposed regulations. Thus, so long as the MLP provides fresh water to oil and gas producers and provides disposal services in the same geographic area, the MLP’s income from such activities can be qualifying. The final regulations also provide that the intrinsic activity requirements can be met if the MLP uses subcontractors, so long as the subcontractors are being compensated by the MLP.

Methanol Sales

Income from the sale of methanol is not qualifying. This remains unchanged from the proposed regulations.

Coking of Coal

Coking of coal is not a qualifying activity.

Copyright © 2021, Hunton Andrews Kurth LLP. All Rights Reserved.National Law Review, Volume VII, Number 20
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About this Author

Thomas W. Ford, Jr., Tax Attorney, Andrews Kurth Law Firm
Partner

Tom's practice includes experience in the federal income taxation of business transactions and business entities, including formations, mergers and securities offerings of partnerships (publicly traded "master limited partnerships" and private) and joint ventures and dispositions of interests therein; oil, gas and mineral transactions; mergers, acquisitions and spin-offs of corporations; royalty trusts; real estate investment trusts; and financially troubled entities, including financial institutions.

713-220-4498
Allison D. Mantor, Income Tax Lawyer, Mergers, Acquisitions
Partner

Allison's practice includes experience in various federal income tax matters with an emphasis on domestic business transaction planning. She has significant experience advising both private partnerships and joint ventures and publicly-traded partnerships (MLPs) on capital formation, acquisition and recapitalization activities and has served as tax counsel to both issuers and underwriters in connection with numerous MLP initial public and follow-on offerings. Allison also advises clients on federal income tax issues in mergers and acquisitions, including tax-free...

713.220.3929
Robert J. McNamara, Federal Tax Attorney, Andrews Kurth Law firm
Partner

Robert’s practice focuses on advising U.S. based businesses and investors on federal income tax matters with an emphasis on business transaction planning. Robert regularly counsels publicly-traded partnerships (MLPs) on a wide variety of tax issues, including formation, on-going qualification, and acquisition and disposition activities. Robert handles the tax aspects of public and private offerings of debt and equity securities and has advised companies on numerous public and private acquisitions, dispositions and joint ventures, including tax-free reorganizations and like-kind exchanges...

713-220-4413
Jocelyn Tau, Andrews Kurth Law Firm, Tax Attorney
Associate

Jocelyn is an Associate in the Tax section of the Houston office. One certainty about taxes is that the codes and statutes governing businesses are complex and ever changing. Andrews Kurth tax lawyers guide companies and individuals through the tangle of federal and state tax laws. In keeping with our Straight Talk approach, we decode tax talk and communicate with clients to understand the big picture tax implications and meet their business goals. Whether counseling on a business or personal income tax issue or resolving regulatory and audit issues, our viewpoint is...

713-220-4433
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