After lifting a year-long “pause” in March on private rulings over qualifying income for MLPs, on May 6 the Internal Revenue Service released proposed rules clarifying what sorts of activity would produce qualifying income.
Much of the clarification in the proposed rules was around the processing or refining of natural resources. According to the proposal, an activity is processing or refining of natural gas only if the activity purifies that gas by removal of oil, condensate, water or non-hydrocarbon gases, or if the activity separates natural gas into its normal constituents in their gaseous phase, such as methane and ethane, and their liquid phase, such as propane and butane. Direct chemical processing of ethane and propane into ethylene and propylene would likely no longer be considered qualifying activities.
The rules also clarify which support activities would produce qualifying income for MLPs. According to the proposal, qualifying activities must be “intrinsic” to the sale of natural resources by meeting three standards:
- Specialized: Personnel and property involved in the performance of the activity must be uniquely trained or suited, respectively, to the mineral or natural resource industries;
- Essential: The service must be necessary to physically complete the sale of the natural resource, or must be necessary to make the sale process comply with regulations; and
- Significant: The products or personnel must have an ongoing and frequent presence at the site of the natural resource sale activity, and the involvement by the products or personnel must be necessary to complete the activity.
A period for public comment on the proposal will take place before the rules are finalized.
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