Final MLP Regulation Rumblings From the IRS

What’s the latest with MLP private letter rulings and when will we have the final updates to the regulations?

Your phone buzzes with a text. You are halfway through a never-ending meeting. You slyly look down to read the message. It says, “call me as soon as you can, I need to talk to you about something important.” Your mind swirls with what could possibly be so important that it’d merit the need for your immediate attention. The second you leave the meeting; you call the sender of the text. They don’t answer.

In March 2014, the IRS released a statement indicating that it would pause the issuance of new MLP private letter rulings (PLRs) related to MLP qualifying income while it reviewed exactly which activities fell within the bounds of Section 7704. A year later in March of 2015, the IRS announced the end of the pause. On May 6, 2015, the Federal Register published the proposed regulations intended to clarify the scope of qualifying income. In September of 2015, the opportunity for comment on the regulations closed and in October 2015, the IRS held a public hearing for further discussion. Since then, investors have been left, cell phone in hand, waiting to hear the important news.

Unfortunately, we don’t have the final regulations just yet, but word on the street is that they should be coming out any day now. As soon as we get the details, I’ll share them, but for today, let’s take a look at the recent history of PLRs.

Here are the PLR counts per year since 2011:

The majority of PLRs issued in 2011 were “straight down the middle of the fairway” with the exception of one letter issued to a hydraulic fracturing fluid transportation and storage company. In 2012 a few more non-traditional activities were discussed in the rulings and in 2013, the flood gates opened. The rulings no longer primarily addressed pipeline and storage activities, but things like the disposal of fracking water and fluids, the mining, marketing, and processing of sand and proppants used in fracking, and even offshore drilling. It’s easy to surmise that the large number of rulings issued in 2013 gave the IRS pause to re-evaluate the clarity of regulations.

Now, jumping to 2016, as the chart indicates, there have been six PLRs to date. And while none of the situations are identical, five of the six PLRs deal with some form of fluid handling and disposal services to oil and gas producers. To give you the CliffsNotes, activities such as the following are considered qualifying income by the IRS:

Delivery of fluids

Provision of inter-well water transfer services

Processing, treatment, and disposal of waste solids and waste fluids

Recovery, recycling, and marketing of brine, chemicals, and drilling mud to oil and gas producers

Transportation of produced water from crude oil and natural gas wells

Selling filtered hydrocarbons collected as part of the disposal process

The other PLR issued this year deals with the production, storage, transportation, and marketing of nitrogen-based fertilizers such as ammonia and ammonium nitrate. The company would sell these items in bulk to customers (not direct retail sales to end users). The IRS approved these activities as qualifying.

If you’re super interested in this topic and want to learn more, explore the PLR database by clicking here. It is easily searchable by number or subject. Stay tuned for more on the final version of the updated MLP regulations, and, as always, if you have any additional questions about this topic, please email me at [email protected]. I promise I won’t leave you hanging.

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Final MLP Regulation Rumblings From the IRS

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