The IRS issued proposed regulations, REG-132634-14, 80 Fed. Reg. 25970 (5/5/15), because of an increase in requests for private letter rulings that income for support services provided to businesses engaged in activities in the minerals and natural resource industry is qualifying income. The requests involved publicly traded partnerships, which are taxed as corporations unless 90% or more of the partnership’s gross income is “qualifying income.” Qualifying income is generally passive-type income, such as interest, dividends, and rent. However, under §7704(d)(1)(E), qualifying income also includes income and gains derived from the (1) exploration, (2) development, (3) mining or production, (4) processing or refining, (5) transportation, or (6) marketing of minerals or natural resources. Under the proposed regulations, each of these six activities (“section 7704(d)(1)(E) activities”) is defined and listed as a “qualifying activity,” i.e., an activity that would generate qualifying income.
Certain limited support activities (“intrinsic activities”) would also be considered qualifying activities, if they: (1) are specialized to support a section 7704(d)(1)(E) activity; (2) are essential to the completion of a section 7704(d)(1)(E) activity (i.e., necessary to physically complete the activity or comply with applicable laws regulating the activity); and (3) require significant services to support a section 7704(d)(1)(E) activity (i.e., the activity must be conducted on an ongoing or frequent basis by the partnership’s personnel at the site of the section 7704(d)(1)(E) activity or offsite if the services are ongoing and frequent and offered exclusively to those engaged in a section 7704(d)(1)(E) activity).
An activity would be considered specialized if both the personnel performing the activity and any property used in the activity or sold to the customer performing the section 7704(d)(1)(E) activity are specialized. Personnel who have received training that is unique to the mineral or natural resource industries and that is of limited utility other than to perform or support a section 7704(d)(1)(E) activity would be considered specialized. Property would be considered specialized if (1) it is used only in connection with section 7704(d)(1)(E) activities, (2) it has limited use outside those activities, and (3) it cannot be easily converted to another use. Property would also be considered specialized if it is an injectant (e.g., sand used in connection with a section 7704(d)(1)(E) activity) and is properly disposed of according to applicable laws.
Note that fracking services would get favorable treatment under the proposed regulations, which list water delivery and disposal services as essential activities when provided for use in fracturing.
The proposed regulations would provide transition rules and would generally apply to income earned by a partnership in a taxable year beginning on or after the date they are finalized.
by Vera Barnes
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)