ABA Group: Energy Partnership Rules Undermine IRS Authority

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Jan. 4 — Proposed rules that seek to curb the types of businesses that qualify as publicly traded partnerships undermine the IRS's authority when it issues private letter rulings, the American Bar Association Section of Taxation said.

“Given the de facto reliance by PTPs and the investing public on previously issued PLRs, we believe that taking a position in the Proposed Regulations that is inconsistent with such prior interpretations may be damaging to the public's confidence in the administration of the tax law,” the group said in a Jan. 4 letter to the Internal Revenue Service.

The proposed rules (REG-132634-14) are a response to what IRS and Treasury Department officials view as the industry overusing the favorable tax conditions for PTPs, also known as master limited partnerships, granted to entities engaged with the production of oil and gas under tax code Section 7704(d)(1)(e). The rules, issued in May 2015, introduced an exclusive list of activities that qualify for a company to be treated as an MLP (87 DTR G-1, 5/6/15).

Consistency Is Key

The ABA tax section asked that the final rules be consistent with previously issued PLRs and asked the IRS to abandon an exclusive list for an illustrative list of qualifying activities that provides a safe harbor for companies engaged in that line of business.

“In the face of a list that is exclusive and absolute, there would be no room for advice and interpretation,” the letter said. “A static list ignores the dynamic nature of the industry and fails to account for technological advances, thereby preventing businesses that use such advances from accessing capital markets through PTPs and thus discouraging cost-effective production of mineral and natural resources and products.”

The rules should define processing by listing the products created, rather than by analyzing the chemical and physical steps used in the production process. The group also said the proposed regulations' definition of processing is based on “questionable interpretation of the statute” and legislative history.

Blurry Line

Government officials pressed representatives from MLPs at a hearing in October about when “processing” becomes “manufacturing.” The IRS is seeking to make the MLP structure available only to groups involved in natural resource production, rather than manufacturing (208 DTR G-5, 10/28/15).

The production of some compounds blessed in previous PLRs, such as ethylene and propylene, can be used in fuels or to create plastics, but don't come straight from the ground and aren't final products. If the rules were made final as written, several companies that went public under IRS rulings, including Westlake Chemical Partners and Enterprise Products Partners LP, could lose their partnership status.

To contact the reporter on this story: Laura Davison in Washington at ldavison@bna.com
To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com