MLP Qualifying Income Update: As Final Regulations Near, ABA Comment Letter Strongly Supports Industry on Proposed Regulations Affecting Publicly Traded Partnerships
On Monday, January 4, the American Bar Association Section of Taxation filed detailed comments on proposed regulations issued by the IRS addressing qualifying income of publicly traded partnerships (PTPs) from minerals and natural resources. These comments strongly support the positions taken by the Master Limited Partnership Association (formerly the National Association of Publicly Traded Partnerships), and multiple industry participants, as well as the 40 substantive comment letters filed with the IRS during the 90-day comment period and the oral comments provided at an October 27, 2015 public hearing before a panel of IRS and Treasury representatives. The ABA’s comments are also consistent with the comments made by Vinson & Elkins in one of the first comment letters submitted to the IRS. All of the comment letters, proposed regulations and prior PLRs regarding qualifying income are available here.
The submission of the ABA Comments is an important development because the Section of Taxation’s sole interest is to further the sound administration of the tax law by implementing a clear and correct interpretation of applicable law. The authors of the ABA Comments do not represent any clients with an economic interest in the substance of the final regulations. Thus, comments submitted by the Section of Taxation often carry particular weight in shaping regulations.
Significantly, the ABA Comments express concern that the Proposed Regulations take positions that are inconsistent with IRS interpretations of Section 7704 expressed in a large body of PLRs issued over a number of years. The ABA Comments note that there has been no intervening change in the law or facts to justify this reversal and conclude that the promulgation of final regulations in their current form “may be damaging to the public’s confidence in the administration of the tax law.” Accordingly, the ABA Comments concluded that final regulations should be consistent with existing PLRs or, if a position is changed, provide an explanation of the policy determination behind the change.
Other significant recommendations in the ABA Comments include the following:
- Include the phrase “or products thereof” in the definition of “mineral or natural resource” to clarify that qualifying income may be derived from refining or processing such products.
- Eliminate provisions that are not supported by statutory construction or legislative history or treat similarly situated taxpayers differently, including the “substantial physical or chemical change” limitation and the emphasis on the production of fuels.
- Eliminate the “exclusive list” concept.
- Provide a separate definition of “processing” in addition to the definition of “refining,” which as drafted describes only purification, i.e., refining activities.
- Amend the “intrinsic activity” standard to make it more consistent with existing PLRs and industry practice.
Although the formal comment process has expired, the IRS and Treasury are continuing to seek and consider additional input from interested parties. With the receipt of the ABA Comments, we expect that the IRS and Treasury will shortly begin to wrap up their information-gathering process. Based on informal statements made by IRS and Treasury officials, we anticipate that the IRS will publish final regulations before the November 2016 elections. In addition, while working to finalize the regulations, the IRS is continuing to work through the backlog of pending private letter rulings submitted prior to or during the PLR pause (having released eight new PLRs on qualifying income).
Additional Background on Qualifying Income:
The Internal Revenue Code generally treats an MLP as a corporation, rather than a partnership, for federal income tax purposes unless 90 percent or more of the MLP’s gross income for every taxable year consists of “qualifying income.” For this purpose, “qualifying income” includes income derived from the exploration, development, mining, production, processing, refining, transportation, or marketing of minerals, natural resources, or industrial source carbon dioxide, and the transportation and storage of certain renewable fuels. Other types of qualifying income include dividends, interest (other than interest generated by a financial or insurance business), and certain income that would be qualifying to a real estate investment trust (REIT) or a regulated investment company (RIC).
Contact Info for MLP Team:
If you have questions or would like to discuss the Proposed Regulations, please contact a member of the V&E MLP tax team:
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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.