Qualifying Income Resources

Vinson & Elkins has extensive experience with the tax treatment of master limited partnerships (MLPs) and the definition of “qualifying income” for MLPs. We have also pioneered the application of these rules to numerous asset classes.

Treatment of an MLP as a partnership for federal income tax purposes requires that 90 percent or more of the MLP’sgross income for every taxable year consists of “qualifying income.” In the context of a public offering, MLP investors require a high level of certainty with respect to the qualifying income nature of the MLP’s income-generating activities. If there is uncertainty as to the nature of an activity, it is possible to seek a private letter ruling (PLR) from the Internal Revenue Service with respect to the treatment of such activity.

The Treasury Department has recently proposed regulations that provide guidance on whether certain activities with respect to minerals or natural resources generate qualifying income. For a discussion of the proposed regulations, click here. Information regarding the proposed regulations, including relevant authorities and public comments in response to the proposed regulations, are available below. These materials reflect the opinions of the applicable authority or commentator as of the date of their submission and do not necessarily reflect the views of Vinson & Elkins LLP.

Qualifying Income Authorities

• Internal Revenue Code §7704 – The statutory qualifying income rule.
• Legislative History – Compilation of congressional reports regarding IRC §7704.
• Treasury Regulations §1.7704-3 – Existing treasury regulations regarding the qualifying income requirement.
• Proposed Treasury Regulations §1.7704-4 – New proposed standards for qualifying income under IRC §7704(d)(1)(E)
• Final Treasury Regulations §1.7704-4 – Final standards for qualifying income under IRC §7704(d)(1)(E)

Comments to Proposed Regulations

Comments to the proposed regulations are organized in various ways below. Select the method of organization and expand subheadings as necessary. To view the full text of the comments, please click on the name of the comment.

Our corporate and tax lawyers have advised on 80 percent of all natural resource or real estate MLP initial public offerings completed. In many of those instances, we have assisted our clients in obtaining PLRs for their assets. Recent interest in nontraditional MLP asset classes has led to an increasing number of PLRs addressing MLP qualifying income. Our historical experience in the market, combined with our ongoing involvement in the development of these nontraditional asset classes, provides us with unique positioning to assist our potential MLP clients in obtaining a PLR, regardless of industry or operations.

Below is a list of the activities addressed by IRS guidance (including PLRs) relative to MLP qualifying income. To view the full text of the IRS document, please click on the PLR number. These PLRs represent the interpretation of the IRS prior to the release of proposed Treasury regulations concerning qualifying income on May 5, 2015 and may not reflect the current position of the IRS with respect to certain activities.