Publicly Traded Partnership Proposed Regulations

June 23, 2015

Widely held partnerships are a significant source of funding for oil, gas and certain natural resources projects, but the publicly traded partnership (“PTP”) rules can cause such partnerships to be treated as corporations for U.S. tax purposes, which results in their earnings being subject to a double layer of tax. However, a PTP will not be treated as a corporation if at least 90% of its gross income is “qualifying income,” as defined in Code Section 7704(d) (such a PTP is commonly referred to as a master limited partnership, or MLP). Qualifying income is comprised of “passive” investment income, such as dividends and interest, and also active income derived from certain activities with respect to minerals or natural resources pursuant to Section 7704(d)(1)(E) of the Internal Revenue Code (the “Code”). The scope of the activities described in Section 7704(d)(1)(E) has historically been unclear. On May 6, 2015, the IRS issued proposed regulations on qualifying income under Section 7701(d)(1)(E) (“Proposed Regulations”) which seek to clarify the types of minerals or natural resources related activities that give rise to qualifying income. The Proposed Regulations benefit certain sectors within the oil, gas and natural resources industry and harm others, although a 10-year transition period eases the negative impact of the Proposed Regulations on any adversely-impacted businesses.

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