Recent US Tax Developments Affecting Publicly Traded Partnerships

March 12, 2015

Partnerships targeted to widespread investors are a popular investment vehicle and a significant source of funding for oil and gas projects. However, their use is affected by the publicly traded partnership (“PTP”) tax rules. If the PTP rules apply, a partnership may be treated as a corporation for U.S. tax purposes and its earnings could potentially be subject to a double layer of tax: tax at the corporate level and then, when distributions are made, at the investor level. Also, tax losses and credits cannot flow through an entity treated as a corporation. 

IRS Resumes Private Letter Rulings on PTP Qualifying Income 

A PTP (sometimes also referred to as a master limited partnership or “MLP”) can avoid being treated as a corporation if 90% or more of its income consists of certain passive-type “qualifying income.” Qualifying income includes familiar items such as dividends and interest, but can also include other items (including certain income from exploring and extracting natural resources) whose scope is not clear. Where uncertainty exists, a private letter ruling upon which a taxpayer may rely can be sought from the IRS to get definitive advice for a particular set of facts. 

One type of qualifying income whose scope is unclear, described in Section 7704(d)(1)(E) of the Internal Revenue Code, is income derived from the exploration, development, mining or production, processing, refining, transportation or marketing of any mineral or natural resource. In 2012 and 2013 alone, the IRS issued nearly 40 rulings with respect to qualifying income under Section 7704(d)(1)(E) (for example, PLRs 201234005 and 201328005). Despite the need for guidance in this area, in 2014 the IRS temporarily stopped issuing private letter rulings on qualifying income, leaving taxpayers uncertain about the treatment of proposed PTP transactions, especially those in the oil and gas field. 

The IRS announced on March 6, 2015 that it was resuming consideration of these private letter rulings. The IRS also announced that it has made “significant progress” on regulations clarifying the scope of qualifying income from the exploration, extraction and processing of minerals and natural resources under Section 7704(d)(1)(E), including income earned by oilfield service companies, for which regulations are expected to be released “in the near future.” The announcement came from Caroline Hay, branch 3 attorney, IRS Office of Associate Chief Counsel (Passthroughs and Special Industries) at the Federal Bar Association Section on Taxation annual meeting in Washington. Separately on March 6, the IRS issued a statement containing Hay’s comments. 

Obama Budget Proposal Takes Aim at Certain PTPs 

While the IRS action is welcome news, a proposal in the Obama administration’s FY 2016 budget released on February 2, 2015 to treat PTPs with “activities relating to fossil fuels” as corporations could stifle investment in certain types of PTPs. This new rule would become effective in 2021 and is estimated to raise approximately US$1.7 billion over 10 years. While the scope of the phrase “activities relating to fossil fuels” is unclear, it is likely that this proposal, if enacted, would significantly affect the desirability of using PTPs to undertake oil and gas projects. However, it is unclear whether the proposal has a realistic chance of being passed by Congress. 


The IRS announced on March 6, 2015 that it would resume consideration of private letter rulings on whether a PTP satisfied Section 7704(c)’s qualifying income requirement. Furthermore, the IRS announced that in the near future it would issue regulations clarifying the scope of qualifying income earned under Section 7704(d)(1)(E), derived from the exploration, extraction and processing of minerals and natural resources. Separately, the Obama Administration’s FY 2016 budget would treat any PTPs with “activities relating to fossil fuels” as corporations. 

If you have any questions or for more information, please contact one of the attorneys listed below or any Dechert attorney with whom you regularly work.

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