Update on the Status of Master Limited Partnership Guidance
The IRS and Treasury are moving closer to announcing new guidance on qualifying income for publicly traded partnerships. At or about the same time that the new guidance is announced, the IRS plans to resume issuing rulings on the question of what is qualifying income.
Publicly traded partnerships are generally taxed as corporations, so that their income is taxed at the entity level, and then again at the investor level upon distribution. However, like many tax rules, exceptions to the general rule are the center of the action. Master Limited Partnerships (MLPs) are publicly traded partnerships that can qualify for partnership treatment, provided that at least 90 percent of the MLP's income is "qualifying income." Because MLP income is subject to tax at only the investor level, MLPs have become an attractive investment vehicle for ownership of oil and gas assets.
For an MLP, qualifying income generally includes passive income such as dividends, interest, rents, and capital gains. However, it also can include income and gains derived from mining and natural resource income. Specifically, 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." Code §7704(d)(1)(E).1
The IRS MLP Rulings Program and Proposed Guidance
For many years, the IRS issued private letter rulings on whether MLPs met the qualifying income standard. In recent years, IRS issued rulings issued to energy services MLPs that were not pure exploration and production, transportation, or refining and marketing companies. These MLPs successfully argued that their services generated qualifying income because the services or products were "integral" to exploration and development of oil and gas fields. For example, the IRS issued rulings that income from hydraulic fracturing services, the supply, transportation, and storage of hydraulic fracturing fluids, and the disposal of such fluids and produced water, were integral to exploration and production of oil and gas and therefore qualifying income. See PLR 201322024 (May 31, 2013); PLR 201341011 (Oct. 25, 2013).
In response to concerns about the expanding scope of qualifying income under its ruling program, in early 2014 the IRS instituted a temporary pause in issuing rulings. At the same time, Treasury announced that it would put out guidance on the definition of qualifying income for an MLP.
On March 6, 2015, at the Federal Bar Association's annual tax conference, an IRS speaker stated that the IRS is close to issuing its guidance on the definition of qualifying income and plans to end the pause in issuing private letter rulings. The guidance apparently will cover income from exploration development, production, processing, transportation and marketing of natural resources like oil and gas. The IRS also promised to address the income of service companies that contract with others in the oil and gas industry.2
When the guidance issues, we will of course let you know. The guidance will certainly be of interest to oil and gas services companies and others with services and products that may fall within the scope of qualifying income under the current statute. In addition, as explained below, the guidance may attract the attention of members of Congress who are interested in expanding the use of MLPs to include renewables, as well as those interested in restricting the availability of MLPs.
MLPs in Congress
In addition to the IRS and Treasury, Congress has been looking at the issue of MLPs. On the one hand, some policymakers are pushing to expand the scope of qualifying income to include income from renewable energy. On the other hand, there is a concern dating back to the enactment of the MLP provisions that MLPs tend to narrow the corporate tax base.
For those favoring an expanded definition of qualifying income, including renewables would be a more permanent way to encourage investment in the renewables industry. The renewables industry has benefited from certain temporary incentives, such as the investment tax credit, the production tax credit, and Section 1603 grant program. In 2011, the Congressional Research Service issued a paper detailing the options to expand the definition of qualifying income to include income from renewable energy resources. See M. Sherlock and M. Keightley, "Master Limited Partnerships: A Policy Option for the Renewable Energy Industry" (June 28, 2011). In the 113th Congress, Senator Coons of Delaware introduced the Master Limited Partnership Parity Act.
On the other side, some policymakers have sought to reduce the availability of MLPs. In the 113th Congress, former House Ways and Means Committee Chairman Dave Camp introduced a plan to prevent the use of MLPs by financial firms. The Administration's 2016 budget proposes to exclude fossil fuel income from the scope of qualifying income for MLPs beginning in 2021 as part of a grab bag of proposals to reduce tax benefits that have traditionally been available to the oil and gas industry.
1 In 2008, Congress expanded the definition somewhat to include income from ethanol, biodiesel, and industrial source carbon dioxide.
2 Although the IRS speaker was reported as stating that the guidance would be in the form of "proposed regulations," Treasury's most recent update of it 2014-2015 Priority Guidance Plan does not specify that the form of the planned "guidance."
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