Treats bulk nitrogen fertilizer income as qualifying partnership income

Plain-English summary

A corporation planned to form a limited partnership that would produce and market ammonia, urea, and urea ammonium nitrate in bulk. The partnership's interests could be publicly traded, making the section 7704 qualifying income rules important to its tax classification. The IRS ruled that income from selling those products to agricultural and non-agricultural customers would be qualifying income because fertilizer is a mineral or natural resource listed in section 7704(d)(1)(E). The ruling applies only to products of a grade consistent with agricultural fertilizer standards that are commonly sold and used as fertilizer, and it excludes retail sales directly to end users.

Ruling snapshot

• Question: Is income from producing and marketing specified nitrogen fertilizers qualifying income for a publicly traded partnership?
• Outcome: Approved, subject to product-grade, customary-use, and nonretail-sale limits.
• 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: 201833008 Third Party Communication: None
Release Date: 8/17/2018 Date of Communication: Not Applicable
Index Number: 7704.03-00
Person To Contact:
------------------- ----------------------, ID No. ------------------
---------------------------------------- Telephone Number:
--------------------------------------- ----------------------
----------------------- Refer Reply To:
------------------------------------- CC:PSI:B03
PLR-104208-15
Date:
May 22, 2018

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

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

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

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

   This letter responds to a letter dated January 16, 2015, and subsequent

correspondence, 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 or conveyed to an existing
publicly traded partnership. X represents that Y will be engaged in the production and
marketing of three nitrogen-based fertilizers: ammonia, 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-104208-15 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 and marketing of ammonia, 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 products in the form sold
are commonly sold and used as fertilizer. 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
this letter. In particular, no opinion is expressed as to whether Y will meet the 90
PLR-104208-15 3

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. 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/


                                   Caroline E. Hay
                                   Assistant to the Branch Chief, Branch 3
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)

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

cc: