Fracking income is qualifying income for publicly traded partnership

Fracking income is qualifying income for publicly traded partnership

In a recent letter ruling, the IRS determined that a publicly traded partnership's (PTP) income from the removal, treatment, recycling, and disposal of waste products from hydraulic fracturing ("fracking") is qualifying income under Code Sec. 7704(d)(1)(E).

"Fracking" defined

"Fracking" is a technique by which fluids are pumped in a gas or oil well at high pressure to fracture geologic formations and open up pathways for the gas or oil to flow up for extraction. Once the injection process is completed, the internal pressure of the rock formation causes fluid to return to the surface through the wellbore. This fluid is known as "flowback."

Tax Code and qualifying income

Under Code Sec. 7704(a), a PTP is treated as a corporation unless the partnership meets the gross income requirements under Code Sec. 7704(c)(2) for the tax year and each preceding tax year beginning after December 31, 1987, during which the partnership or any predecessor was in existence. A partnership meets the gross income requirements for any tax year if 90 percent or more of the gross income of the partnership for the tax year consists of qualifying income.

Qualifying income is generally interest, dividends, real property rents, and gain from the sale or other disposition of real property. Qualifying income includes income or 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.

IRS analysis

The IRS determined that the PTP's income from the removal, treatment, recycling, and disposal of fracturing flowback, produced water, and other residual waste products generated by oil and gas wells during the fracturing process would constitute qualifying income.

The IRS also determined that income derived from the marketing and distribution of salvaged crude oil and the asphalt alternative produced by the PTP-excluding income earned from marketing natural resources to end users at the retail level-would constitute qualifying income.

If you operate within the hydraulic fracturing industry and would like help with these requirements, please contact our office.

LTR 201227002