IRS Releases Proposed Regulations on MLP relating to Minerals and Natural Resources

The IRS released proposed regulations regarding master limited partnership ("MLP") qualifying income as to minerals and natural resources. A MLP is generally subject to a corporate-level tax unless at least 90 percent of its income constitutes "qualifying income."

Under section 7704, qualifying income includes passive-type income (such as interest, dividends, and rent), but also includes income and gains derived from the exploration, development, mining, or production, processing, refining, transporting, or marketing of minerals or natural resources (each, a "qualifying activity"). Previously, the IRS had resolved issues relating to whether an activity would be treated as a qualifying activity that would generate qualifying income by private letter ruling.

Under the proposed regulations, the IRS has identified several qualifying activities within each broad category of MLP activities. Although the list is meant to be exclusive, the IRS may expand the activities by published guidance.

The proposed regulations further provide guidance as to whether certain activities related to a qualifying activity will generate qualifying income if it is an "intrinsic activity" under section 7704(d)(1)(E). To qualify as an intrinsic activity, the activity must: (i) be specialized to support a qualifying activity, (ii) be essential to the completion of a qualifying activity, and (iii) require the provision of significant services to support the qualifying activity. Intrinsic activities do not, however, constitute merely supplying goods.

The proposed regulations will apply to income earned by an MLP on or after the date the regulations are published as final. Once the regulations are finalized, during a ten-year transitional period, MLPs that either (i) previously received a private letter ruling from the IRS treating certain income as qualifying income, or (ii) had treated income as qualifying income under a reasonable interpretation of the statute (taking into account the legislative history and prior interpretations of the IRS), may continue to treat such income as qualifying income.

Comments and requests for a public hearing must be received by August 4, 2015.

See: 80 FR 25970.