I heard that the government is no longer allowing new MLPs. Is this true?
A lot of people write headlines to sell papers. What actually happened is that on March 28th, the IRS released a statement indicating that it would pause in the issuance of new MLP private letter rulings (PLRs) related to qualifying income. Previous to that time, there had been eight new PLRs issued in 2014. (There have been 14 in total during 2014, but we’ll get to that in a bit.)
We ran some quick calculations and realized that the IRS issued 28 PLRs in 2013, versus 12 in 2012, and less than five a year in 2009 through 2011. So, we figured they were just ready for a vacation.
Nope. Rather than going on vacation, the IRS is actually working harder. Looking back, a lot of those PLRs in 2012 and 2013 concerned non-traditional business models including but not limited to the disposal of fracking water and fluids, the mining, marketing, and processing of sand and proppants used in hydraulic fracturing, refining, and even offshore drilling. Since then, the industry has seen a significant increase in the IPOs of a diverse range of businesses.
On May 1st, an IRS employee noted during a panel discussion that the IRS will continue to issue PLRs for “down the middle” oil and gas businesses, which we interpret to mean pipeline and storage companies. The pause remains for the businesses that support hydraulic fracturing and others “outside the fairway” until the IRS can develop a standardized method of consideration. While the original review was expected to be complete in two to three months, there is now no estimate on timing.
This makes sense, given that six of the 14 PLRs issued this year have come after the pause was announced. All of the ones issued this year were submitted during the spring and summer of 2013, so the IRS has continued to work through their backlog. The last PLR was issued on May 16th.
On August 26th, the Treasury Department and the IRS issued their 2014-2015 Priority Guidance Plan. On page 22, the eighteenth and final item under partnerships is “Guidance under §7704(d)(1)(E) regarding qualifying income for publicly traded partnerships.” We do expect formal guidance to be issued eventually, but so far, no indication has been given as to what that guidance is (or when to expect it).