Natural gas processing fees are qualifying PTP income

Plain-English summary

A publicly traded partnership indirectly owned a natural gas processing plant. The plant used cryogenic expansion to remove natural gas liquids so the remaining gas met interstate pipeline specifications. A supplier retained title to the gas and paid the partnership a fixed capacity charge plus a variable fee based on processing volume. The IRS concluded that the plant's activities were processing a mineral or natural resource under IRC § 7704(d)(1)(E). The resulting fee income was qualifying income, although the IRS did not decide whether the partnership met the separate 90 percent gross-income test.

Ruling snapshot

• Question: Were fixed and volume-based fees for processing natural gas qualifying income for a publicly traded partnership?
• Outcome: approved
• Key authorities: IRC § 7704(c), (d)(1)(E); Treas. Reg. § 1.7704-4(c)(5)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201728021 Third Party Communication: None
Release Date: 7/14/2017 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------------------------------------------------ --------------------------, ID No. ----------------
-------------------------------- -----------------
---------------------------------------- Telephone Number:
------------------------------------- --------------------
------------------------------ Refer Reply To:
CC:PSI:03
PLR-143388-13
Date:
April 17, 2017

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

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

Supplier = ----------------------------

Operator = ------------------------------

Plant = -----------------------------------------------------------------------------------------------
-------------------------------------------------

Agreement = -----------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------

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

   This letter responds to a letter dated October 4, 2013, and subsequent

correspondence, submitted on behalf of X, requesting a ruling under § 7704(d)(1)(E) of
the Internal Revenue Code (Code) that income and gains from X’s activities relating to
processing natural gas will constitute qualifying income.

                                                 FACTS

   X is a limited partnership organized under the laws of State. X is a publicly

traded partnership within the meaning of § 7704(b) of the Code.
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   X, through affiliated limited partnerships, limited liability companies, or

disregarded entities, is principally engaged in the business of (1) gathering,
compressing, treating, processing, transporting, storing, and selling natural gas;
(2) producing, fractionating, transporting, storing, and selling natural gas liquids (NGLs)
and condensate, and (3) transporting, storing and selling propane in wholesale markets.
This ruling request involves income X derives from its ownership of a natural gas
processing plant that receives fees for its natural gas processing services.

    X indirectly wholly owns the Plant, a natural gas processing plant. The Plant

uses cryogenic expansion to extract NGLs from natural gas. Under an arm’s length
agreement, the Plant is operated and maintained by Operator, a minority partner in X
and the indirect 100% owner of Supplier, on behalf of X. Under a second arm’s length
agreement, Agreement, the Plant receives raw natural gas from Supplier and processes
it to remove the NGLs to meet interstate pipeline gas quality specifications. Supplier
retains legal title to the natural gas delivered to the Plant at all times and to the volumes
of extracted residue gas and NGLs at the outlet of the facilities. Pursuant to Agreement,
Supplier subscribes 100% of the available natural gas processing capacity of the Plant.
Supplier pays X a processing fee that is composed of both a fixed monthly demand
charge (calculated based on the Plant’s capacity to process the natural gas) and a
variable service fee (calculated based on the volume of natural gas that the Plant
processes).

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

   Section 7704(c)(2) provides 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
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the marketing of any mineral or natural resource (including fertilizer, geothermal energy,
or timber).

    Section 1.7704-4(a) of the Income Tax Regulations provides that qualifying

income is income and gains from qualifying activities with respect to minerals or natural
resources as defined in § 1.7704-4(b). Qualifying activities are section 7704(d)(1)(E)
activities (as described in § 1.7704-4(c)) and intrinsic activities (as described in
§ 1.7704-4(d)).

  Section 1.7704-4(c) provides that section 7704(d)(1)(E) activities include the

exploration, development, mining or production, processing, refining, transportation, or
marketing of any mineral or natural resource.

    Section 1.7704-4(c)(5) provides that an activity constitutes processing if it is

performed to convert raw mined or harvested products or raw well effluent to
substances that can be readily transported or stored, as described in §1.7704-4(c)(5).
Section 1.7704-4(c)(5)(i) provides that an activity constitutes processing of natural gas if
it is performed to (A) purify natural gas, including by removal of oil or condensate, water,
or non-hydrocarbon gases (such as carbon dioxide, hydrogen sulfide, nitrogen, and
helium), and (B) separate natural gas into its constituents which are normally recovered
in a gaseous phase (methane and ethane) and those which are normally recovered in a
liquid phase (propane, butane, pentane, and heavier streams).

                                  CONCLUSION

   Based solely on the facts submitted and representations made, we conclude that

the income derived by X from the processing of natural gas under 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 X meets
the 90 percent gross income requirement of § 7704(c)(1) in any taxable year for which
this ruling may apply.

   The ruling contained in this letter is 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 ruling request, 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
PLR-143388-13 4

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).

  Pursuant to the power of attorney on file with the office, a copy of this ruling will

be sent to X’s authorized representative.

                                   Sincerely,



                                   Holly Porter
                                   Branch Chief, Branch 3
                                   Office of the Chief Counsel
                                   (Passthroughs & Special Industries)

Enclosures (2):

   Copy of this letter
   Copy for § 6110 purposes