IRS Ruling: Income from Supplying and Transporting Fluids Used in Fracking Is Qualified Income for PTP Purposes

The IRS has issued a private ruling to a publicly traded partnership that the partnership's income, from providing "essential fluid handling services" to oil and gas producers engaged in the exploration, development and production of oil and natural gas, is "qualifying income" for purposes of determining whether the partnership should be subject to tax as a corporation rather than as a partnership for U.S. federal income tax purposes.Under the Tax Code generally, a partnership is taxable as a corporation if interests in such partnership are either (i) traded on an established securities market or (ii) readily tradable on a secondary market (or the substantial equivalent thereof). However, this rule does not apply to any publicly traded partnership for any taxable year in which 90% or more of the gross income of such partnership is "qualifying income". Qualifying income includes income and gains derived from the exploration, development, mining, production, refining, transportation or marketing of any mineral or natural resource.

The partnership in the ruling did not produce, mine, explore, develop or transport natural gas. Its income was expected to be from supplying freshwater for use in the fracturing process through pipelines and pumps that it owned, transportation of fluids for use by producers in the exploration and development of natural resources, transporting fracturing fluids to producers' well sites, and transportation of "flowback" and other production wastes from producers' well sites to disposal sites owned by third parties. The IRS ruled that all of such gross income constituted qualifying income. As a private ruling, it can only be relied on by the taxpayer that requested it.

Although it was just made public, the ruling was issued to the partnership in December 2013, prior to the IRS's announced suspension of rulings on publicly traded partnerships. In March, Clifford Warren, special counsel to the IRS associate chief counsel (pass-throughs and special industries), told a Washington tax conference that the IRS had suspended the issuance of such rulings pending the completion of an internal review as to the standards used by the IRS in issuing such rulings. Concern has been expressed that rulings, such as the one discussed above, may be treating income that is too far away from the oil and gas industry product to constitute qualifying income. It is also thought that the IRS may issue public guidance that sets clearer parameters and might eliminate the need for individual private rulings on the subject.

See: IRS Ruling.