With a Jan. 19, 2017, effective date preceding President Donald Trump's Jan. 20 regulatory freeze memo, the final regulations on qualifying income of publicly traded partnerships from mineral or natural resources activities (T.D. 9817) appear to have squeezed in just under the wire at the Federal Register. Guidance on whether income from minerals or natural resources activities saves a partnership from being treated as a corporation has been 30 years in the making. This item explains how the final regulations differ from the proposed regulations.
Enacted by the Omnibus Budget Reconciliation Act of 1987, RL. 100-203, and clarified by the Technical and Miscellaneous Revenue Act of 1988, RL. 100-647, Sec. 7704 generally treats a publicly traded partnership (PTP) as a corporation for federal income tax purposes. A partnership is publicly traded if (1) interests in the partnership are traded on an established securities market, or (2) interests in the partnership are readily tradable on a secondary market (or the substantial equivalent thereof) (Sec. 7704(b)). In Sec. 7704(c), however, Congress provided an exception to this rule: A PTP is not treated as a corporation for federal tax purposes if 90% or more of its gross income consists of qualifying income. Qualifying income includes passive-type income such as interest, dividends, real property rents, and gain from the disposition of real property, as well as income and gains from certain natural resources activities (Sec. 7704(d)). With respect to natural resources activities, the statute states:
Except as otherwise provided in this subsection, the term "qualifying income" means ... (E) income and gains derived from the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber), industrial source carbon dioxide, or the transportation or storage of any fuel described in subsection (b), (c), (d), or (e) of section 6426, or any alcohol fuel defined in section 6426(b)(4)(A) or any biodiesel fuel as defined in section 40A(d)(1).... For purposes of subparagraph (E), the term "mineral or natural resource" means any product of a character with respect to which a deduction for depletion is allowable under section 611; except that such term shall not include any product described in subparagraph (A) or (B) of section 613(b)(7). [emphasis added] The language in italics was added by Section 208(a) of the Energy Improvement and Extension Act of2008 (Division B), P.L. 110-343, effective for tax years ending after Oct. 3, 2008.
First, the statute requires the involvement of a mineral or natural resource that qualifies for depletion (except in the case of fertilizer and oil and gas products, which appear to receive dejure classification as a mineral or natural resource). The definition of "gas, oil, or products thereof" includes gasoline, kerosene, No. 2 fuel oil, refined lubricating oils, diesel fuel, methane, butane, propane, and similar products that are recovered from petroleum refineries or field facilities; it is not intended to encompass oil or gas products...