Bulk nitrogen fertilizer income qualifies for partnership exception

Plain-English summary

A corporation planned a publicly traded partnership that would produce, store, transport, and market several nitrogen-based fertilizers. The IRS ruled that income from bulk sales of ammonia, ammonium nitrate, ammonium nitrate-ammonia, urea, and urea ammonium nitrate to agricultural and non-agricultural customers is qualifying income under IRC § 7704(d)(1)(E). The ruling applies only when the products meet agricultural fertilizer grades and are commonly sold and used as fertilizer. It excludes specified low-density or solution forms of ammonium nitrate and does not cover retail sales directly to end users. The IRS did not decide whether the partnership would satisfy the overall 90 percent qualifying-income test.

Ruling snapshot

• Question: Is income from producing, storing, transporting, and marketing the listed nitrogen fertilizers qualifying income for a publicly traded partnership?
• 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: 201619002                                            Third Party Communication: None
Release Date: 5/6/2016                                       Date of Communication: Not Applicable
Index Number: 7704.03-00
                                                             Person To Contact:
---------------------------------------------------------    --------------------, ID No. ----------------
-------------------------                                    Telephone Number:
--------------------------------                             --------------------
------------------------------------------                   Refer Reply To:
                                                             CC:PSI:B03
                                                             PLR-126651-15
                                                             Date:
                                                             February 08, 2016


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

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

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


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

       This letter responds to a letter dated August 5, 2015, submitted on behalf of X by
X’s authorized representative, requesting a ruling under § 7704(d)(1)(E) of the Internal
Revenue Code (Code).

                                                     FACTS

         X is a State law corporation. X intends to form a State limited partnership, Y,
interests in which may be sold in an initial public offering. X represents that Y will be
engaged in the production, storage, transportation, and marketing of the nitrogen-based
fertilizers ammonia, ammonium nitrate, ammonium nitrate-ammonia (ANA), urea (both
granulated and in solution), and urea ammonium nitrate (UAN). X represents that these
products are all direct application fertilizers. X further represents that Y will sell these
products in bulk to customers operating in agricultural and non-agricultural industries.

                                                       LAW

      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
PLR-126651-15                                 2

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).

      The Conference Report accompanying the Omnibus Budget Reconciliation Act of
1987 states:
      Income and gains from certain activities with respect to minerals or natural
      resources are treated as passive-type income. Specifically, natural resources
      include fertilizer, geothermal energy, and timber, as well as oil, gas or products
      thereof. For this purpose, fertilizer includes plant nutrients such as sulphur,
      phosphate, potash, and nitrogen that are used for the production of crops and
      phosphate-based livestock feed.
H.R. Rep. No. 495, 100th Cong., 1st Sess. 943 (1987), 1987-3 C.B. 946-47.

                                      CONCLUSION

       Based solely on the materials submitted and the representations made, we
conclude that income derived by Y from the production, storage, transportation, and
marketing of ammonia, ammonium nitrate, ANA, urea (both granulated and in solution),
and UAN to both agricultural and non-agricultural customers is qualifying income for
purposes of §7704(d)(1)(E). This ruling only applies, however, to the extent that the
products in question are of a grade that is consistent with industry standards for
agricultural uses as a fertilizer and such product in the form sold is commonly sold and
used as a fertilizer. For example, income with respect to the marketing of low density
ammonium nitrate or ammonium nitrate solution is not qualifying. In addition, this ruling
does not apply to retail sales made directly to end users.

       Except as specifically provided, we express or imply no opinion as to the federal
tax consequences of any aspect of any transaction or item discussed or referenced in
PLR-126651-15                                  3

this letter. In particular, no opinion is expressed as to whether Y will meet the 90
percent gross income requirement of § 7704(c)(1) or whether any other type of income
not addressed in this ruling is qualifying income under § 7704(d).

        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 it may not be used or cited as precedent.

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

                                       Sincerely,

                                       /s/


                                       Richard T. Probst
                                       Senior Technician Reviewer, Branch 3
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)


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