LNG regasification fees are qualifying partnership income

Plain-English summary

A publicly traded partnership indirectly owned a liquefied natural gas receiving and regasification terminal through a disregarded entity. Suppliers retained title to the natural gas but transferred possession and control to the terminal operator while the LNG was warmed into pipeline-quality gas and transported to delivery points. The suppliers paid a fixed monthly capacity fee for the regasification service. Section 7704 generally taxes a publicly traded partnership as a corporation unless at least 90 percent of its gross income is qualifying income. The IRS ruled that the entity's regasification income was qualifying income under section 7704(d)(1)(E), without deciding whether the partnership met the overall 90 percent test.

Ruling snapshot

• Question: Is income from regasifying LNG under the processing agreement 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: 201636025                                             Third Party Communication: None
Release Date: 9/2/2016                                        Date of Communication: Not Applicable
Index Number: 7704.03-00
                                                              Person To Contact:
-------------------------------------------------------       ---------------------------, ID No. ---------------
---------------------------------------------------           ----------------
-----------------------------                                 Telephone Number:
-----------------------------------------                     --------------------
-------------------------------------                         Refer Reply To:
 ------------------------------                               CC:PSI:01
                                                              PLR-139335-15
                                                              Date:
                                                              May 26, 2016




Legend
X                                    = ----------------------------------------------------------------------------
                                       -------------------------

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

Date                                 = ------

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

Processing Agreement                 = ---------------------------------

Supplier 1                           = -----------------------------------------------------

Supplier 2                           = --------------------------

n1                                   = ------


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

This responds to your letter dated December 3, 2015, submitted on behalf of X by its
authorized representative, requesting a ruling under § 7704(d)(1)(E) of the Internal
Revenue Code (Code).

                                                      FACTS

X is a limited partnership organized on Date under the laws of State. Upon
consummation of an initial public offering (IPO), X became a publicly traded partnership
within the meaning of § 7704(b).
PLR-139335-15                                 2


X owns indirectly all of the outstanding equity interests of Y, a limited partnership that is
treated as a disregarded entity for Federal tax purposes. Y owns and operates a
liquefied natural gas (LNG) receiving and regasification terminal (Terminal). Under a
Processing Agreement with Supplier 1 and Supplier 2, Y receives LNG from Supplier 1
and Supplier 2 and processes it into gas for further transport. Supplier 1 and Supplier 2
retain legal title to the natural gas delivered to the Terminal at all times; however,
possession and control of the LNG transfers to Y upon delivery and remains with Y
during the processing of the LNG into gas and during the transportation of the gas to
customers’ delivery point. Pursuant to the Processing Agreement, Supplier 1 and
Supplier 2 subscribe n1% of the available LNG into gas processing capacity of the
Terminal. Supplier 1 and Supplier 2 pay Y a fixed monthly capacity fee for
regasification services.

LNG is natural gas that has been cooled until it condenses into a liquid in a process
referred to as liquefaction. The liquefaction process includes the removal of certain
components from the natural gas stream, such as water, carbon dioxide, sulfur,
mercury, and heavy hydrocarbons. The purified natural gas is condensed into a liquid
at close to atmospheric pressure by cooling it to a cryogenic temperature of
approximately minus 260 degrees Fahrenheit. The liquefaction process reduces the
volume of the molecules to 1/600th of their original size. The reduction in volume makes
natural gas considerably more cost effective to transport over long distances where
pipelines do not exist. LNG transportation to an LNG receiving terminal typically occurs
by ocean-going LNG tankers that are designed with a special containment system to
keep the appropriate atmospheric pressure and cryogenic temperature.

Regasification is the inverse process of liquefaction. It involves warming the LNG
through a series of vaporizers until the LNG is converted into pipeline quality natural
gas. Unloaded LNG is pumped through various components, including vaporizers, to
convert or warm the LNG into natural gas. The vaporizers use either air or seawater to
warm the LNG (ambient temperature systems) or burn fuel to generate heat to indirectly
warm the LNG (above-ambient temperature systems).

                                  LAW AND ANALYSIS

Section 7704(a) provides that, except as provided in § 7704(c), a publicly traded
partnership shall 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 substantial equivalent thereof).

Section 7704(c)(1) provides that § 7704(a) shall not apply to any publicly traded
partnership for any taxable year if such partnership met the gross income requirements
of § 7704(c)(2) for such taxable year and each preceding taxable year beginning after
PLR-139335-15                               3

December 31, 1987, during which the partnership (or any predecessor) was in
existence.

Section 7704(c)(2) explains that a partnership meets the gross income requirements of
§ 7704(c) for any taxable year if 90 percent or more of the gross income of such
partnership for that taxable year is qualifying income.

Section 7704(d)(1)(E) provides that the term “qualifying income” means income or 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).

                                     CONCLUSION

Based solely on the facts submitted and representations made, we conclude that the
income derived by Y for regasification under the Processing Agreement is qualifying
income within the meaning of § 7704(d)(1)(E).

Except as expressly provided herein, no opinion is expressed or implied concerning the
federal tax consequences of any transaction or item discussed or referenced in this
letter. In particular, no opinion is expressed as to whether Company meets the 90
percent gross income requirement of § 7704(c)(1) in any taxable year for which this
ruling may apply.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides
that it may not be used or cited as precedent. However, in the event of a technical
termination of X 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).
PLR-139335-15                                  4


Pursuant to the power of attorney on file with the office, a copy of this ruling will be sent
to X’s 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: