Todd Keator Cited in Preamble to Final Regulations on PTP Qualifying Income

Posted by Todd Keator       On January 19, 2017, the IRS issued final regulations under Section 7704(d)(1)(E) regarding the scope of the qualifying income exception for publicly traded partnerships (“PTP”) engaged in activities with respect to minerals or natural resources. The regulations are available here.
PTPs are treated as corporations for federal income tax purposes unless 90% or more of the PTP’s gross income is “qualifying income.” Qualifying income is generally defined to include income from passive sources (e.g., rent, interest, dividends), but Section 7704(d)(1)(E) defines qualifying income to also include income and gains derived from the exploration, development, mining or production, processing, refining, transportation, or marketing of minerals or natural resources.
In recent years, there has been a significant increase in the number of private letter ruling requests regarding what constitutes qualifying income under Section 7704(d)(1)(E). In discussing the reasons for the increase, the preamble notes that one reason is investor pressure for higher yields, which has incentivized partnerships to push for an expanded definition of qualifying income in novel or non-traditional activities.  The preamble cites Todd Keator’s article “‘Hydraulically Fracturing’ Section 7704(d)(1)(E)—Stimulating Novel Sources of ‘Qualifying Income’ for MLPs” (available here) for this assertion.If you have any questions about the final regulations or qualifying income, please contact me or any of the other Tax lawyers at Thompson & Knight.