The outgoing administration of President Barack Obama finalized a tax policy rule that clarifies that liquefaction and compliance with biofuels mandates are qualifying activities for master limited partnerships (MLP).
The Internal Revenue Service (IRS) released the rule yesterday following nearly two years of work, prompted by the significant growth of interest in forming MLPs. The partnerships, unlike most corporations, are subject to a single partnership income tax as long as 90pc of the MLP's income meets certain criteria.
The final rule provides a detailed list of activities in extraction, processing and transportation of natural resources that the IRS says should obviate the need for most partnerships to request private letter rulings — determinations that a specific activity qualifies for an MLP status. The final rule took into account criticism from industry insiders and declined to establish an exhaustive list of qualifying activities.
In another nod to comments filed in 2015, when the proposed rule came out, the IRS plans to classify production of ethylene and propylene at petrochemical facilities into MLP qualifying activities.
The initial proposal would have conferred a preferred tax treatment to products derived from oil and gas refining but not petrochemical cracking. The final rule allows products of refining both from refineries and petrochemical plants, so long as the products are included in the Energy Information Administration's Form EIA-810 "Monthly Refinery Report," and Form EIA-816 "Monthly Natural Gas Liquids Report."
The final rule spells out that natural gas compression services, liquefaction and regasification of natural gas, and the sale of renewable identification numbers used for compliance with US biofuels mandates qualify for MLP status. The change means that partnerships engaged in those lines of business no longer have to ask IRS in writing to confirm their MLP status. But coal coking under the rule will not qualify as an MLP activity as "coal is extracted to be used substantially as is."
The rule was scheduled for publication in the Federal Register on 24 January. President Donald Trump is expected to follow the precedent set by its predecessors and hold unpublished or pending regulations inherited from the previous administration for review.
The rule, if kept in its final form by the incoming administration, would be effective retroactively to 19 January. It would establish a 10-year transition period for the MLPs that under the rule would no longer have qualifying activities.
MLPs became more attractive to potential investors since 2008 as interest rates fell in the wake of the financial crisis. The preferred tax treatment also gives MLPs a lower cost of capital.
