80 FR 25970 - Qualifying Income From Activities of Publicly Traded Partnerships With Respect to Minerals or Natural Resources
DEPARTMENT OF THE TREASURY
Internal Revenue Service Federal Register Volume 80, Issue 87 (May 6, 2015)
Internal Revenue Service
Federal Register Volume 80, Issue 87 (May 6, 2015)
| Page Range | 25970-25977 | |
| FR Document | 2015-10592 |
[Federal Register Volume 80, Number 87 (Wednesday, May 6, 2015)] [Proposed Rules] [Pages 25970-25977] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2015-10592] ======================================================================= ----------------------------------------------------------------------- DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG-132634-14] RIN 1545-BM43 Qualifying Income From Activities of Publicly Traded Partnerships With Respect to Minerals or Natural Resources AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. ----------------------------------------------------------------------- SUMMARY: This document contains proposed regulations under section 7704(d)(1)(E) of the Internal Revenue Code (Code) relating to qualifying income from exploration, development, mining or production, processing, refining, transportation, and marketing of minerals or natural resources. The proposed regulations affect publicly traded partnerships and their partners. DATES: Comments and requests for a public hearing must be received by August 4, 2015. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-132634-14), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG- 132634-14), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC, or sent electronically, via the Federal eRulemaking Portal at www.regulations.gov (IRS REG-132634-14). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Caroline E. Hay at (202) 317-5279; concerning the submissions of comments and requests for a public [[Page 25971]] hearing, Regina Johnson at (202) 317-6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document contains proposed amendments to the Income Tax Regulations (26 CFR part 1) under section 7704(d)(1)(E) regarding qualifying income from certain activities with respect to minerals or natural resources. Congress enacted section 7704 in the Omnibus Budget Reconciliation Act of 1987, Public Law 100-203 (101 Stat. 1330 (1987)), due to concerns that the rapid growth of certain publicly traded partnerships was eroding the corporate tax base. See H.R. Rep. No. 100-391, at 1065 (1987). Section 7704(a) provides that, as a general rule, publicly traded partnerships will be treated as corporations. In section 7704(c), Congress provided an exception from this rule if 90 percent or more of the partnership's gross income is ``qualifying income.'' Qualifying income is generally passive-type income, such as interest, dividends, and rent. Section 7704(d)(1)(E) provides, however, that qualifying income also includes income and gains derived from the exploration, development, mining or production, processing, refining, transportation, or marketing of minerals or natural resources. Section 7704(d)(1) defines the term ``mineral or natural resource'' as any product for which a deduction for depletion is allowed under section 611, except soil, sod, dirt, turf, water, mosses, or minerals from sea water, the air, or other similar inexhaustible sources. Regulations have been published providing guidance on (1) when a partnership is publicly traded (Sec. 1.7704-1), (2) transition rules for partnerships in existence prior to the effective date of section 7704 (Sec. 1.7704-2), and (3) qualifying income from certain financial products (Sec. 1.7704-3). No regulations have been issued under section 7704(d)(1)(E). Instead, questions about the specific application of section 7704(d)(1)(E) generally have been resolved by private letter ruling. However, the number of private letter ruling requests received has increased steadily from five or fewer requests per year for most years before 2008 to more than 30 requests received in 2013. Many of these requests seek rulings that income from support services provided to businesses engaged in the section 7704(d)(1)(E) activities is qualifying income for purposes of section 7704. The Treasury Department and the IRS are issuing these proposed regulations in response to this increased interest in the application of section 7704(d)(1)(E). These proposed regulations provide guidance on whether income from activities with respect to minerals or natural resources as defined in section 7704(d)(1) is qualifying income. These regulations do not address the transportation or storage of any fuel described in section 6426(b), (c), (d), or (e), or activities with respect to industrial source carbon dioxide, any alcohol fuel defined in section 6426(b)(4)(A), or any biodiesel fuel as defined in section 40A(d)(1). The Treasury Department and the IRS request comments concerning whether guidance is also needed with respect to those activities and, if so, the specific issues such guidance should address. Explanation of Provisions These proposed regulations use the term ``qualifying activities'' to describe activities relating to minerals or natural resources that generate qualifying income. Qualifying activities include: (1) The exploration, development, mining or production, processing, refining, transportation, or marketing of minerals or natural resources (section 7704(d)(1)(E) activities), and (2) certain limited support activities that are intrinsic to section 7704(d)(1)(E) activities (an ``intrinsic activity''). These proposed regulations set forth the requirements under which an activity is a qualifying activity. 1. Section 7704(d)(1)(E) Activities Section 7704(d)(1)(E) activities represent different stages in the extraction of minerals or natural resources and the eventual offering of products for sale. These stages include exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), and marketing of any mineral or natural resource (including fertilizer, geothermal energy, and timber). Each of these stages involves various types of operations. Based in part on discussions with IRS engineers specializing in the various oil and natural resource fields, the proposed regulations provide an exclusive list of operations that comprise the section 7704(d)(1)(E) activities for purposes of section 7704. This list may be expanded by published guidance. The Treasury Department and the IRS intend that this list represents only those activities that would be undertaken by an exploration and development company, a mining or production company, a refiner or processor, or a transporter or marketer of a mineral or natural resource. Services provided to those businesses are not section 7704(d)(1)(E) activities, although they may qualify as intrinsic activities. The Treasury Department and the IRS request comments concerning whether additional activities should be included in the list of section 7704(d)(1)(E) activities. A. Exploration These proposed regulations define exploration as an activity performed to ascertain the existence, location, extent, or quality of any deposit of mineral or natural resource before the beginning of the development stage of the natural deposit. A partnership is engaged in exploration if the partnership: (i) Drills an exploratory or stratigraphic type test well; (ii) conducts drill stem and production flow tests to verify commerciality of the deposit; (iii) conducts geological or geophysical surveys; or (iv) interprets data obtained from geological or geophysical surveys. For minerals, exploration also includes testpitting, trenching, drilling, driving of exploration tunnels and adits, and similar types of activities described in Rev. Rul. 70-287 (1970-1 CB 146) if conducted prior to development activities with respect to the minerals. B. Development These proposed regulations define development as an activity performed to make minerals or natural resources accessible. A partnership is engaged in development if the partnership: (i) Drills wells to access deposits of mineral or natural resources; (ii) constructs and installs drilling, production, or dual purpose platforms in marine locations (or constructs and installs any similar supporting structures necessary for extraordinary non-marine terrain such as swamps or tundra); (iii) completes wells including by installing lease and well equipment (such as pumps, flow lines, separators, and storage tanks) so that wells are capable of producing oil and gas, and the production can be removed from the premises; (iv) performs a development technique (for example, fracturing for oil and natural gas, or, with respect to minerals, stripping, benching and terracing, dredging by dragline, stoping, and caving or room-and-pillar excavation); or (v) constructs and installs gathering systems and custody transfer stations. C. Mining or Production These proposed regulations define mining or production as an activity performed to extract minerals or other natural resources from the ground. A partnership is engaged in mining or production if the partnership: (i) [[Page 25972]] Operates equipment to extract natural resources from mines or wells, or (ii) operates equipment to convert raw mined products or raw well effluent to substances that can be readily transported or stored (including by passing crude oil through mechanical separators to remove gas, placing crude oil in settling tanks to recover basic sediment and water, dehydrating crude oil, and operating heater-treaters that separate raw oil well effluent into crude oil, natural gas, and salt water). D. Processing or Refining Because processing and refining activities vary with respect to different minerals or natural resources, these proposed regulations provide industry-specific rules (described herein) for when an activity qualifies as processing or refining. In general, however, these proposed regulations provide that an activity is processing or refining if it is done to purify, separate, or eliminate impurities. These proposed regulations further require that, for an activity to be treated as processing or refining, the partnership's position that an activity is processing or refining for purposes of section 7704 must be consistent with the partnership's designation of an appropriate Modified Accelerated Cost Recovery System (MACRS) class life for assets used in the activity in accordance with Rev. Rul. 87-56 (1987-2 CB 27) (for example, MACRS asset class 13.3 for petroleum refining facilities). In addition, except as specifically provided otherwise, processing or refining does not include activities that cause a substantial physical or chemical change in a mineral or natural resource, or that transform the extracted mineral or natural resource into new or different mineral products, including manufactured products. The Treasury Department and the IRS believe that this rule is consistent with definitions found elsewhere in the Code and regulations. See, for example, Sec. 1.613-4(g)(5). With respect to natural gas, an activity is processing or refining only if the activity purifies natural gas, including by removal of oil or condensate, water, and non-hydrocarbon gases (including carbon dioxide, hydrogen sulfide, nitrogen, and helium), or separates natural gas into its constituents which are normally recovered in a gaseous phase (for example, methane and ethane) and those which are normally recovered in a liquid phase (for example, propane and butane, pentane and gas condensate). It is generally anticipated that activities that create the products listed in the 2012 version (the most recent version as of the date of publication of these proposed regulations) of North American Industry Classification System (NAICS) code 211112 concerning natural gas liquid extraction will be qualifying activities. Processing will also include converting methane in one integrated conversion into liquid fuels that are otherwise produced from the processing of crude oil, as described in the following paragraph. With respect to crude oil, an activity is processing or refining if the activity is performed to physically separate crude oil into its component parts, including, but not limited to, naphtha, gasoline, kerosene, fuel oil, lubricating base oils, waxes, and similar products. An activity that chemically converts the physically separated components is processing or refining of crude oil only if one or more of the products of the conversion are recombined with other physically separated components of crude oil in a manner that is necessary to the cost-effective production of gasoline or other fuels (for example, gas oil converted to naphtha through a cracking process that is hydrotreated and combined into gasoline). It is generally anticipated that activities within a refinery that create the products that are listed in the 2012 version (the most recent version as of the date of publication of these proposed regulations) of NAICS code 324110 concerning petroleum refineries will be qualifying activities, if those products are refinery grade products that are obtained in the steps required to make fuels, lubricating base oils, waxes, and similar products. Additionally, physically separating any product that is itself generated by the processing or refining of crude oil is a qualifying activity for purposes of section 7704(d)(1)(E). The production of plastics and similar petroleum derivatives does not give rise to qualifying income derived from processing or refining. See H.R. Rep. No. 100-495, at 947 (1987) (Conf. Rep.). The following products are also not qualifying products under this standard: (1) Heat, steam, or electricity produced by the refining processes; (2) products that are obtained from third parties or produced onsite for use in the refinery, such as hydrogen, if excess amounts are sold; and (3) any product that results from further chemical change of the product produced from the separation of the crude oil if it is not combined with other products separated from the crude oil (for example, production of petroleum coke from heavy (refinery) residuum qualifies, but any upgrading of petroleum coke (such as to anode-grade coke) does not qualify because it is further chemically changed). With respect to ores and minerals, an activity is processing or refining if the activity is listed in Treasury Regulation Sec. 1.613- 4(f)(1)(ii) or (g)(6)(iii). Generally, refining of ores and minerals is any activity that eliminates impurities or foreign matter from smelted or partially processed metallic and nonmetallic ores and minerals, as for example, the refining of blister copper. With respect to timber, an activity is processing if it merely modifies the physical form of timber. Processing includes the application of heat or pressure to timber without adding any foreign substances. Processing of timber does not include activities that use chemicals or other foreign substances to manipulate timber's physical or chemical properties, such as using a digester to produce pulp. Products that result from timber processing include wood chips, sawdust, untreated lumber, veneers (unless a foreign substance is added), wood pellets, wood bark, and rough poles. Products that are not the result of timber processing include pulp, paper, paper products, treated lumber, oriented strand board, plywood, and treated poles. These proposed regulations reserve the provisions relating to fertilizer. The Treasury Department and the IRS request comments on what activities should be included. E. Transportation These proposed regulations define transportation as the movement of minerals or natural resources and products produced from processing and refining, including by pipeline, barge, rail, or truck. Transportation also includes terminalling, providing storage services, and operating custody transfer stations and gathering systems. Transportation includes the construction of a pipeline only to the extent that a pipe is run to connect a client to a preexisting interstate or intrastate line owned by the publicly traded partnership (interconnect agreement). Transportation (except for pipeline transportation) does not include transportation of oil or gas (or oil or gas products) to a place that sells or dispenses to retail customers. See H.R. Rep. No. 100-795, at 401 (1988). The legislative history accompanying section 7704 clarifies that ``a retail customer does not include a person who acquires the oil or gas for refining or processing, or partially refined or processed products thereof for further refining or processing, . . . [or a] utility providing power to customers.'' See H. R. Rep. No. 100-1104, vol. 2, at 18 (1988) (Conf. Rep.). By contrast, ``transporting refined petroleum [[Page 25973]] products by truck to retail customers is not a qualifying activity.'' Id. However, transportation includes bulk transportation, so long as the transportation is not to a place that sells or dispenses oil and gas (or oil and gas products) to retail customers. See S. Rep. No. 100- 445, at 424 (1988). F. Marketing These proposed regulations define marketing as the activities undertaken to facilitate sale of minerals or natural resources, or products produced from processing and refining. Marketing may also include some additive blending into fuels provided to a customer's specification. The legislative history of section 7704 provides that marketing does not include activities and assets involved primarily in sales ``to end users at the retail level.'' S. Rep. No. 100-445, at 424 (1988). Therefore, marketing does not include retail sales (sales made in small quantities directly to end users). For example, gas station operations are not included in marketing for purposes of section 7704(d)(1)(E). Id. However, marketing includes bulk and wholesale sales made to end users. See, for example, H.R. Rep. 100-1104, at 18 (1988) (Conf. Rep.) (with respect to fertilizer) and incorporating in footnote 1, 133 Cong. Rec. 37957 (December 22, 1987) (statement of Sen. Bentsen with respect to propane). 2. Intrinsic Activities The Treasury Department and the IRS believe that certain limited support activities intrinsic to section 7704(d)(1)(E) activities also give rise to qualifying income because the income is ``derived from'' the section 7704(d)(1)(E) activities. The proposed regulations set forth three requirements for a support activity to be intrinsic to section 7704(d)(1)(E) activities. An activity will qualify as an intrinsic activity only if the activity is specialized to support the section 7704(d)(1)(E) activity, is essential to the completion of the section 7704(d)(1)(E) activity, and requires the provision of significant services to support the section 7704(d)(1)(E) activity. If each of these requirements is met, the activity is an intrinsic activity, and any income received from the activity is qualifying income. The Treasury Department and IRS intend that intrinsic activities constitute active support of section 7704(d)(1)(E) activities, and not merely the supply of goods. A. Specialized An activity meets the first requirement of the intrinsic test if both the personnel performing the activity and any property used in the activity or sold to the customer performing the section 7704(d)(1)(E) activity are specialized. Personnel are specialized if they have received training unique to the mineral or natural resource industries that is of limited utility other than to perform or support a section 7704(d)(1)(E) activity. An activity cannot be an intrinsic activity without specialized service personnel because all intrinsic activities require the provision of significant services (as described in part 3.C of the Explanation of Provisions section of this Preamble). For example, catering services provided to employees at a drilling site would not give rise to qualifying income because catering services do not require skills (or equipment as explained below) limited to supporting a section 7704(d)(1)(E) activity. As such, catering services are not intrinsic activities and any income from those services is not qualifying income for purposes of section 7704(c). If an activity also involves the sale, provision, or use of property, then the property must qualify as specialized for the activity to be an intrinsic activity. The proposed regulations provide two alternative tests under which that property can qualify as specialized. Under the first test, property is specialized if it is used only in connection with section 7704(d)(1)(E) activities and has limited use outside of those activities. That property must also not be easily converted to a use other than performing or supporting a section 7704(d)(1)(E) activity. Whether property is easily converted is determined based on all facts and circumstances, including the cost to convert the property. Under the second test, property that can be used for purposes other than to perform or support a section 7704(d)(1)(E) activity will qualify as specialized to the extent that the property is used as an injectant to perform a section 7704(d)(1)(E) activity, and, as part of the activity, the partnership also collects and cleans, recycles, or otherwise disposes of the injectant after use in accordance with federal, state, or local regulations concerning waste products from mining or production activities. Injectants under this definition include, for example, water, lubricants, and sand used in connection with section 7704(d)(1)(E) activities. B. Essential An activity meets the second requirement of the intrinsic test if the activity is essential to a section 7704(d)(1)(E) activity. An activity is essential if it is necessary to (a) physically complete the section 7704(d)(1)(E) activity (including in a cost effective manner in order to make the activity economically viable), or (b) comply with federal, state or local law regulating the section 7704(d)(1)(E) activity. For example, water delivery and disposal services are essential when provided for use in fracturing because the water must be used to complete the drilling operations (a development activity under section 7704(d)(1)(E)) and because the water disposal services must be performed to comply with federal, state, or local law regulating drilling and fracturing. Legal, financial, consulting, accounting, insurance, and other similar services are not essential to a section 7704(d)(1)(E) activity because the connection to completion of the section 7704(d)(1)(E) activity is too attenuated. C. Significant Services An activity meets the third requirement of the intrinsic test if the activity includes the provision of significant services. A partnership provides significant services if its personnel have an ongoing or frequent presence at the site of the section 7704(d)(1)(E) activity and the activities of those personnel are necessary for the partnership to provide its services or to support the section 7704(d)(1)(E) activity. A partnership that provides the same services to multiple clients may satisfy this test by performing the activity through a rotating presence at multiple sites. For this purpose, determining whether services are ongoing or frequent is determined under all facts and circumstances, including recognized best practices in the relevant industry. The Treasury Department and the IRS request comments on whether and how this requirement could be set forth as an objective standard. In addition, the proposed regulations acknowledge that a qualifying activity in which the partnership engages could require extensive offsite services. Therefore, these proposed regulations provide that the services may be conducted offsite if the services are performed on an ongoing or frequent basis and offered exclusively for those engaged in one or more section 7704(d)(1)(E) activities. For example, monitoring services will satisfy the significant services requirement if the monitoring is done on an ongoing or frequent basis only to support persons engaged in one or more section 7704(d)(1)(E) activities. The proposed regulations also identify certain activities that do not qualify as significant services because [[Page 25974]] they involve the manufacture and sale or temporary provision of a good. Thus, the design, construction, manufacturing, repair, maintenance, lease, rent, or temporary provision of assets is not taken into account when determining whether a partnership has provided significant services. Proposed Effective/Applicability Date and Transition Rules Except for rules concerning the Transition Period, these regulations are proposed to apply to income earned by a partnership in a taxable year beginning on or after the date these regulations are published as final regulations in the Federal Register. These regulations also provide for a Transition Period, which ends on the last day of the partnership's taxable year that includes the date that is ten years after the date that these regulations are published as final regulations in the Federal Register. The proposed regulations provide that a partnership may treat income from an activity as qualifying income during the Transition Period if the partnership received a private letter ruling from the IRS holding that income from the activity is qualifying income. In addition, a partnership may treat income from an activity as qualifying income during the Transition Period if, prior to May 6, 2015, the partnership was publicly traded, engaged in the activity, and treated the activity as giving rise to qualifying income under section 7704(d)(1)(E), and that income was qualifying income under the statute as reasonably interpreted prior to the issuance of these proposed regulations. In determining whether an interpretation was reasonable, the legislative history and interpretations applied by the IRS prior to the issuance of these proposed regulations are taken into account. An interpretation was not reasonable merely because a partnership had a reasonable basis for that position. With respect to an activity undertaken prior to May 6, 2015, no inference is intended that an activity that is not described in these proposed regulations as a qualifying activity did or did not produce qualifying income under the statute and legislative history. A partnership that is publicly traded and engages in an activity after May 6, 2015, but before the date these regulations are published as final regulations in the Federal Register may treat income from that activity as qualifying income during the Transition Period if the income from that activity is qualifying income under these proposed regulations. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these proposed regulations. Because these proposed regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Requests for a Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the Addresses heading. The IRS and the Treasury Department request comments on all aspects of the proposed rules. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register. Drafting Information The principal author of these proposed regulations is Caroline E. Hay, Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1--INCOME TAXES 0 Paragraph 1. The authority citation for part 1 continues to read in part as follows: Authority: 26 U.S.C. 7805 * * * 0 Par. 2. Section 1.7704-4 is added to read as follows: Sec. 1.7704-4 Qualifying income--mineral and natural resources. (a) In general. For purposes of section 7704(d)(1)(E), qualifying income includes only income and gains from qualifying activities with respect to minerals or natural resources as defined in paragraph (b) of this section. For purposes of section 7704(d)(1)(E), qualifying activities include section 7704(d)(1)(E) activities (as described in paragraph (c) of this section) and intrinsic activities (as described in paragraph (d) of this section). (b) Mineral or natural resource. The term mineral or natural resource (including fertilizer, geothermal energy, and timber) means any product of a character with respect to which a deduction for depletion is allowable under section 611, except that such term does not include any product described in section 613(b)(7)(A) or (B) (soil, sod, dirt, turf, water, mosses, minerals from sea water, the air, or other similar inexhaustible sources). For purposes of this section, the term mineral or natural resource does not include industrial source carbon dioxide, fuels described in section 6426(b) through (e), any alcohol fuel defined in section 6426(b)(4)(A), or any biodiesel fuel as defined in section 40A(d)(1). (c) Section 7704(d)(1)(E) activities--(1) Definition. Section 7704(d)(1)(E) activities include the exploration, development, mining or production, processing, refining, transportation, or marketing of any mineral or natural resource as limited to those activities described in this paragraph (c) or as provided by the Commissioner by notice or in other forms of published guidance. No other activities qualify as section 7704(d)(1)(E) activities. (2) Exploration. An activity constitutes exploration if it is performed to ascertain the existence, location, extent, or quality of any deposit of mineral or natural resource before the beginning of the development stage of the natural deposit by: (i) Drilling an exploratory or stratigraphic type test well; (ii) Conducting drill stem and production flow tests to verify commerciality of the deposit; (iii) Conducting geological or geophysical surveys; (iv) Interpreting data obtained from geological or geophysical surveys; or (v) For minerals, testpitting, trenching, drilling, driving of exploration tunnels and adits, and similar types of activities described in Rev. Rul. 70-287 (1970-1 CB 146), (see [[Page 25975]] Sec. 601.601(d)(2)(ii)(b) of this chapter) if conducted prior to development activities with respect to the minerals. (3) Development. An activity constitutes development if it is performed to make accessible minerals or natural resources by: (i) Drilling wells to access deposits of mineral or natural resources; (ii) Constructing and installing drilling, production, or dual purpose platforms in marine locations, or any similar supporting structures necessary for extraordinary non-marine terrain (such as swamps or tundra); (iii) Completing wells, including by installing lease and well equipment, such as pumps, flow lines, separators, and storage tanks, so that wells are capable of producing oil and gas, and the production can be removed from the premises; (iv) Performing a development technique such as, for minerals, stripping, benching and terracing, dredging by dragline, stoping, and caving or room-and-pillar excavation, and for oil and natural gas, fracturing; or (vi) Constructing and installing gathering systems and custody transfer stations. (4) Mining or production. An activity constitutes mining or production if it is performed to extract minerals or other natural resources from the ground by: (i) Operating equipment to extract natural resources from mines and wells; or (ii) Operating equipment to convert raw mined products or raw well effluent to substances that can be readily transported or stored (for example, passing crude oil through mechanical separators to remove gas, placing crude oil in settling tanks to recover basic sediment and water, dehydrating crude oil, and operating heater-treaters that separate raw oil well effluent into crude oil, natural gas, and salt water). (5) Processing or refining--(i) In general. Except as otherwise provided in paragraph (c)(5) of this section, an activity is processing or refining if it is done to purify, separate, or eliminate impurities. For an activity to be treated as processing or refining for purposes of this section, the partnership's position that an activity is processing or refining for purposes of this section must be consistent with the partnership's designation of an appropriate Modified Accelerated Cost Recovery System (MACRS) class life for assets used in the activity in accordance with Rev. Rul. 87-56, 1987-2 CB 27 (see Sec. 601.601(d)(2)(ii)(b) of this chapter). For example, for an activity to be processing or refining of crude oil under paragraph (c)(5)(iii) of this section, the assets used in that process must also have a MACRS class life of 13.3, Petroleum Refining. Unless otherwise provided in this paragraph (c)(5), an activity will not qualify as processing or refining if the activity causes a substantial physical or chemical change in a mineral or natural resource, or transforms the extracted mineral or natural resource into new or different mineral products or into manufactured products. (ii) Natural Gas. An activity constitutes processing of natural gas if it is performed to: (A) Purify natural gas, including by removal of oil or condensate, water, or non-hydrocarbon gases (including carbon dioxide, hydrogen sulfide, nitrogen, and helium); (B) Separate natural gas into its constituents which are normally recovered in a gaseous phase (methane and ethane) and those which are normally recovered in a liquid phase (propane, butane, pentane, and gas condensate); or (C) Convert methane in one integrated conversion into liquid fuels that are otherwise produced from petroleum. (iii) Petroleum--(A) Qualifying activities. An activity constitutes processing or refining of petroleum if the end products of these processes are not plastics or similar petroleum derivatives and the activity is performed to: (1) Physically separate crude oil into its component parts, including, but not limited to, naphtha, gasoline, kerosene, fuel oil, lubricating base oils, waxes and similar products; (2) Chemically convert the physically separated components if one or more of the products of the conversion are recombined with other physically separated components of crude oil in a manner that is necessary to the cost effective production of gasoline or other fuels (for example, gas oil converted to naphtha through a cracking process that is hydrotreated and combined into gasoline); or (3) Physically separate products created through activities described in paragraph (c)(5)(iii)(A)(1) or (2) of this section. (B) Non-qualifying activities. For purposes of this section, the following products are not obtained through processing of petroleum: (1) Heat, steam, or electricity produced by the refining processes; (2) Products that are obtained from third parties or produced onsite for use in the refinery, such as hydrogen, if excess amounts are sold; and (3) Any product that results from further chemical change of the product produced from the separation of the crude oil if it is not combined with other products separated from the crude oil (for example, production of petroleum coke from heavy (refinery) residuum qualifies, but any upgrading of petroleum coke (such as to anode-grade coke) does not qualify because it is further chemically changed). (iv) Ores and minerals. An activity constitutes processing or refining of ores and minerals if it meets the definition of mining processes under Sec. 1.613-4(f)(1)(ii) or refining under Sec. 1.613- 4(g)(6)(iii). Generally, refining of ores and minerals is any activity that eliminates impurities or foreign matter from smelted or partially processed metallic and nonmetallic ores and minerals, as for example the refining of blister copper. (v) Timber. An activity constitutes processing of timber if it is performed to modify the physical form of timber, including by the application of heat or pressure to timber, without adding any foreign substances. Processing of timber does not include activities that add chemicals or other foreign substances to timber to manipulate its physical or chemical properties, such as using a digester to produce pulp. Products that result from timber processing include wood chips, sawdust, rough lumber, kiln-dried lumber, veneers, wood pellets, wood bark, and rough poles. Products that are not the result of timber processing include pulp, paper, paper products, treated lumber, oriented strand board/plywood, and treated poles. (vi) Fertilizer. [Reserved] (6) Transportation. Transportation is the movement of minerals or natural resources and products produced under paragraph (c)(4) or (5) of this section, including by pipeline, barge, rail, or truck, except for transportation (not including pipeline transportation) to a place that sells or dispenses to retail customers. Retail customers do not include a person who acquires oil or gas for refining or processing, or a utility. The following activities qualify as transportation-- (i) Providing storage services; (ii) Terminalling; (iii) Operating gathering systems and custody transfer stations; (iv) Operating pipelines, barges, rail, or trucks; and (v) Construction of a pipeline only to the extent that a pipe is run to connect a producer or refiner to a preexisting interstate or intrastate line owned by the publicly traded partnership (interconnect agreements). [[Page 25976]] (7) Marketing. An activity constitutes marketing if it is performed to facilitate sale of minerals or natural resources and products produced under paragraph (c)(4) or (5) of this section, including blending additives into fuels. Marketing does not include activities and assets involved primarily in retail sales (sales made in small quantities directly to end users), which includes, but is not limited to, operation of gasoline service stations, home heating oil delivery services, and local gas delivery services. (d) Intrinsic activities--(1) General requirements. An activity is an intrinsic activity only if the activity is specialized to support a section 7704(d)(1)(E) activity, is essential to the completion of the section 7704(d)(1)(E) activity, and requires the provision of significant services to support the section 7704(d)(1)(E) activity. Whether an activity is an intrinsic activity is determined on an activity-by-activity basis. (2) Specialization. An activity is a specialized activity if: (i) The partnership provides personnel to perform or support a section 7704(d)(1)(E) activity and those personnel have received training unique to the mineral or natural resource industry that is of limited utility other than to perform or support a section 7704(d)(1)(E) activity; and (ii) To the extent that the activity includes the sale, provision, or use of property, either: (A) The property is primarily tangible property that is dedicated to, and has limited utility outside of, section 7704(d)(1)(E) activities and is not easily converted (based on all the facts and circumstances, including the cost to convert the property) to another use other than supporting or performing the section 7704(d)(1)(E) activities; or (B) The property is used as an injectant to perform a section 7704(d)(1)(E) activity that is also commonly used outside of section 7704(d)(1)(E) activities (such as water, lubricants, and sand) and, as part of the activity, the partnership also collects and cleans, recycles, or otherwise disposes of the injectant after use in accordance with federal, state, or local regulations concerning waste products from mining or production activities. (3) Essential--(i) An activity is essential to the section 7704(d)(1)(E) activity if it is required to-- (A) Physically complete a section 7704(d)(1)(E) activity (including in a cost effective manner, such as by making the activity economically viable), or (B) Comply with federal, state, or local law regulating the section 7704(d)(1)(E) activity. (ii) Legal, financial, consulting, accounting, insurance, and other similar services do not qualify as essential to a section 7704(d)(1)(E) activity. (4) Significant services--(i) An activity requires significant services to support the section 7704(d)(1)(E) activity if it must be conducted on an ongoing or frequent basis by the partnership's personnel at the site or sites of the section 7704(d)(1)(E) activities. Alternatively, those services may be conducted offsite if the services are performed on an ongoing or frequent basis and are offered exclusively to those engaged in one or more section 7704(d)(1)(E) activities. Whether services are conducted on an ongoing or frequent basis is determined based on all the facts and circumstances, including recognized best practices in the relevant industry. (ii) Partnership personnel perform significant services only if those services are necessary for the partnership to perform an activity that is essential to the section 7704(d)(1)(E) activity, or to support the section 7704(d)(1)(E) activity. (iii) An activity does not constitute significant services with respect to a section 7704(d)(1)(E) activity if the activity principally involves the design, construction, manufacturing, repair, maintenance, lease, rent, or temporary provision of property. (e) Examples. The following examples illustrate the provisions of this section: Example 1. Petrochemical products sourced from an oil and gas well. (i) Z, a publicly traded partnership, chemically converts a mixture of ethane and propane (obtained from physical separation of natural gas) into ethylene, propylene, and other gases through use of a steam cracker. (ii) Z's activities chemically convert physically separated components of natural gas. The chemical conversion of physically separated components of natural gas (ethane and propane) is not an activity that gives rise to qualifying income under paragraph (c)(5)(ii) of this section. Therefore, the income Z receives from the sale of ethylene and propylene is not qualifying income for purposes of section 7704(d)(1)(E). Example 2. Petroleum streams chemically converted into refinery grade olefins byproducts. (i) Y, a publicly traded partnership, owns a petroleum refinery. Y classifies Y's assets used in the activity described in this paragraph under MACRS class 13.3 (Petroleum Refining). The refinery physically separates crude oil, obtaining heavy gas oil. The refinery then uses a catalytic cracking unit to chemically convert the heavy gas oil into a liquid stream suitable for gasoline blending and a gas stream containing ethane, ethylene, and other gases. The refinery also further physically separates the gas steam without additional chemical change, resulting in refinery grade ethylene. Y sells the ethylene to a third party. (ii) Y's activities are performed to physically separate crude oil into its component parts and to chemically convert the separated heavy gas oil into a liquid stream for recombining with other physically separated components of crude oil. Y has classified its assets used in that activity under an appropriate MACRS code pursuant to paragraph (c)(5)(i) of this section. Income Y receives from the liquid stream is qualifying income pursuant to paragraph (c)(5)(iii)(A)(2) of this section. Y's further physical separation of the gas stream produces ethane, ethylene, and other gases. Pursuant to paragraph (c)(5)(iii)(A)(3), income Y receives from the physically separated gases is qualifying income because the heavy gas oil was chemically converted as part of a processing activity pursuant to paragraph (c)(5)(iii)(A)(2) of this section. Example 3. Processing methane gas into synthetic fuels through chemical change. (i) Y, a publicly traded partnership, chemically converts methane into methanol and synthesis gas, and further chemically converts those products into gasoline and diesel fuel. Y receives income from sales of gasoline and diesel created during the conversion processes, as well as from sales of methanol. (ii) With respect to the production of gasoline or diesel, Y is engaged in the processing of natural gas as provided in paragraph (c)(5)(ii)(C) of this section. The production and sale of methanol, an intermediate product in the conversion process, is not a section 7704(d)(1)(E) activity because methanol is not a liquid fuel otherwise produced from the processing of crude oil. Example 4. Delivery of refined products. (i) X, a publicly traded partnership, sells diesel and lubricating oils to a government entity at wholesale prices and delivers those goods in bulk. (ii) X's sale of refined products to the government entity is a section 7704(d)(1)(E) activity because it is a bulk transportation and sale as described in paragraphs (c)(6) and (7) of this section and is not a retail sale. Example 5. Delivery of water. (i) X, a publicly traded partnership, owns interstate and intrastate natural gas pipelines. X built a water delivery pipeline along the existing right of way for its natural gas pipeline to deliver water to A for use in A's fracturing activity. A uses the delivered water in fracturing to develop A's natural gas reserve in a cost-efficient manner. X earns income for transporting natural gas in the pipelines and for delivery of water. (ii) X's income from transporting natural gas in its interstate and intrastate pipelines is qualifying income for purposes of section 7704(c) because transportation of natural gas is a section 7704(d)(1)(E) activity as provided in paragraph (c)(6) of this section. (iii) The income X obtains from its water delivery services is not a section 7704(d)(1)(E) activity as provided in paragraph (c) of this section. However, because X's water delivery supports A's [[Page 25977]] development of natural gas, a section 7704(d)(1)(E) activity, X's income from water delivery services may be qualifying income for purposes of section 7704(c) if the water delivery service is an intrinsic activity as provided in paragraph (d) of this section. An activity is an intrinsic activity if the activity is specialized to narrowly support the section 7704(d)(1)(E) activity, is essential to the completion of the section 7704(d)(1)(E) activity, and requires the provision of significant services to support the section 7704(d)(1)(E) activity. Under paragraph (d)(2)(ii)(B) of this section, the provision of water used in a section 7704(d)(1)(E) activity is specialized to that activity only if the partnership also collects and cleans, recycles, or otherwise disposes of the water after use in accordance with federal, state, or local regulations concerning waste products from mining or production activities. Because X does not collect and clean, recycle, or otherwise dispose of the delivered water after use, X's water delivery activities are not specialized to narrowly support the section 7704(d)(1)(E) activity. Thus, X's water delivery is not an intrinsic activity. Accordingly, X's income from the delivery of water is not qualifying income for purposes of section 7704(c). Example 6. Delivery of water and recovery and recycling of flowback. (i) Assume the same facts as in Example 5, except that X also collects and treats flowback at the drilling site in accordance with state regulations as part of its water delivery services and transports the treated flowback away from the site. In connection with these services, X provides personnel to perform these services on an ongoing or frequent basis that is consistent with best industry practices. X has provided these personnel with specialized training regarding the recovery and recycling of flowback produced during the development of natural gas, and this training is of limited utility other than to perform or support the development of natural gas. (ii) The income X obtains from its water delivery services is not a section 7704(d)(1)(E) activity as provided in paragraph (d) of this section. However, because X's water delivery supports A's development of natural gas, a section 7704(d)(1)(E) activity, X's income from water delivery services may be qualifying income for purposes of section 7704(c) if the water delivery service is an intrinsic activity as provided in paragraph (d) of this section. (iii) An activity is an intrinsic activity if the activity is specialized to narrowly support the section 7704(d)(1)(E) activity, is essential to the completion of the section 7704(d)(1)(E) activity, and requires the provision of significant services to support the section 7704(d)(1)(E) activity. Under paragraph (d)(2)(ii)(B) of this section, the provision of water used in a section 7704(d)(1)(E) activity is specialized to that activity only if the partnership also collects and cleans, recycles, or otherwise disposes of the water after use in accordance with federal, state, or local regulations concerning waste products from mining or production activities. X's provision of personnel is specialized because those personnel received training regarding the recovery and recycling of flowback produced during the development of natural gas, and this training is of limited utility other than to perform or support the development of natural gas. The provision of water is also specialized because water is an injectant used to perform a section 7704(d)(1)(E) activity, and X also collects and treats flowback in accordance with state regulations as part of its water delivery services. Therefore, X meets the specialized requirement. The delivery of water is essential to support A's development activity because the water is needed for use in fracturing to develop A's natural gas reserve in a cost-efficient manner. Finally, the water delivery and recovery and recycling activities require significant services to support the development activity because X's personnel provide services necessary for the partnership to perform the support activity at the development site on an ongoing or frequent basis that is consistent with best industry practices. Because X's delivery of water and X's collection, transport, and treatment of flowback is a specialized activity, is essential to the completion of a section 7704(d)(1)(E) activity, and requires significant services, the delivery of water and the transport and treatment of flowback is an intrinsic activity. X's income from the delivery of water and the collection, treatment, and transport of flowback is qualifying income for purposes of section 7704(c). (f) Proposed Effective/Applicability Date and Transition Rule--(i) Except as provided in paragraph (f)(ii) of this section, this section is proposed to apply to income earned by a partnership in a taxable year beginning on or after the date these regulations are published as final regulations in the Federal Register. Paragraph (f)(ii) of this section applies during the Transition Period, which ends on the last day of the partnership's taxable year that includes the date that is ten years after the date that these regulations are published as final regulations in the Federal Register. (ii) A partnership may treat income from an activity as qualifying income during the Transition Period if: (A) The partnership received a private letter ruling from the IRS holding that the income from that activity is qualifying income; (B) Prior to May 6, 2015, the partnership was publicly traded, engaged in the activity, and treated the activity as giving rise to qualifying income under section 7704(d)(1)(E), and that income was qualifying income under the statute as reasonably interpreted prior to the issuance of these proposed regulations; or (C) The partnership is publicly traded and engages in the activity after May 6, 2015 but before the date these regulations are published as final regulations in the Federal Register, and the income from that activity is qualifying income under these proposed regulations. John Dalrymple, Deputy Commissioner for Services and Enforcement. [FR Doc. 2015-10592 Filed 5-5-15; 8:45 am] BILLING CODE 4830-01-P
![25970 Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Proposed Rules
small entities acting on their own order boards and committees have unauthorized agreement or joint
behalf. always been subject to U.S. antitrust undertaking could result in prosecution
There are approximately 1,090 laws. AMS is simply updating the under the antitrust laws by the United
handlers who are subject to regulation regulations to reemphasize the States Department of Justice and/or suit
under the 28 federal marketing order applicability of U.S. antitrust laws in by injured private persons seeking treble
programs and approximately 33,100 light of global marketing and production damages, and could also result in
producers in the regulated areas. Small trends. All written comments timely expulsion of members from the
agricultural service firms are defined by received will be considered before a Committee or termination of
the Small Business Administration final determination is made on this employment with the Committee.
(SBA) as those having annual receipts of matter. Dated: April 30, 2015.
less than $7,000,000, and small
List of Subjects in 7 CFR Part 900 Rex A. Barnes,
agricultural producers are defined as
those having annual receipts of less than Administrative practice and Associate Administrator, Agricultural
$750,000 (13 CFR 121.201). USDA Marketing Service.
procedure, Freedom of information,
estimates that many of these handlers Marketing agreements, Reporting and [FR Doc. 2015–10447 Filed 5–5–15; 8:45 am]
and producers may be classified as recordkeeping requirements. BILLING CODE 3410–02–P
small entities. This rule would For the reasons set forth above, 7 CFR
accentuate the applicability of U.S. part 900 is proposed to be amended as
antitrust laws to marketing order follows: DEPARTMENT OF THE TREASURY
programs’ domestic and foreign
activities. This action would also advise PART 900—GENERAL REGULATIONS Internal Revenue Service
marketing order board and committee
members and personnel of the ■ 1. The authority citation for 7 CFR 26 CFR Part 1
restrictions, limitations, and liabilities part 900 continues to read as follows:
imposed by those laws. Authority: 7 U.S.C. 601–674 and 7 U.S.C. [REG–132634–14]
7401.
Paperwork Reduction Act RIN 1545–BM43
This rule contains no information Subpart—Miscellaneous Regulations
Qualifying Income From Activities of
collection or recordkeeping 2. The authority citation for Subpart—
■ Publicly Traded Partnerships With
requirements under the Paperwork Miscellaneous Regulations continues to Respect to Minerals or Natural
Reduction Act of 1995 (44 U.S.C. 3501– read as follows: Resources
3520).
AMS is committed to complying with Authority: Sec. 10, 48 Stat. 37, as AGENCY: Internal Revenue Service (IRS),
the E-Government Act, to promote the amended; 7 U.S.C. 610.
Treasury.
use of the internet and other ■ 3. Add new section 900.202 to read as ACTION: Notice of proposed rulemaking.
information technologies to provide follows:
increased opportunities for citizen SUMMARY: This document contains
access to Government information and § 900.202 Restrictions applicable to
proposed regulations under section
Committee personnel.
services, and for other purposes. 7704(d)(1)(E) of the Internal Revenue
USDA has not identified any relevant Members and employees of Federal Code (Code) relating to qualifying
Federal rules that duplicate, overlap, or marketing order boards and committees income from exploration, development,
conflict with this proposed rule. are immune from prosecution under the mining or production, processing,
AMS has discussed the changes to the United States antitrust laws only insofar refining, transportation, and marketing
regulations with all marketing order as their conduct in administering the of minerals or natural resources. The
board and committee staff that it respective marketing order is authorized proposed regulations affect publicly
oversees. Moreover, AMS conducted by the Agricultural Marketing traded partnerships and their partners.
refresher training on antitrust laws for Agreement Act of 1937, 7 U.S.C. 601–
DATES: Comments and requests for a
marketing order board and committee 674, or the provisions of the respective
order. Under the antitrust laws, public hearing must be received by
staff and officers at the Marketing Order August 4, 2015.
Management Conference on September Committee members and employees
23–24, 2014. Finally, interested persons may not engage in any unauthorized ADDRESSES: Send submissions to:
are invited to submit comments on this agreement or concerted action that CC:PA:LPD:PR (REG–132634–14), Room
proposed rule, including the regulatory unreasonably restrains United States 5203, Internal Revenue Service, P.O.
and informational impacts of this action domestic or foreign commerce. For Box 7604, Ben Franklin Station,
on small businesses. example, Committee members and Washington, DC 20044. Submissions
A small business guide on complying employees have no authority to may be hand-delivered Monday through
with fruit, vegetable, and specialty crop participate, either directly or indirectly, Friday between the hours of 8 a.m. and
marketing agreements and orders may whether on an informal or formal, 4 p.m. to CC:PA:LPD:PR (REG–132634–
be viewed at: www.ams.usda.gov/ written or oral basis, in any bilateral or 14), Courier’s Desk, Internal Revenue
MarketingOrdersSmallBusinessGuide. international undertaking or agreement Service, 1111 Constitution Avenue NW.,
Any questions about the compliance with any competing foreign producer or Washington, DC, or sent electronically,
via the Federal eRulemaking Portal at
tkelley on DSK3SPTVN1PROD with PROPOSALS
guide should be sent to Jeffrey Smutny seller or with any foreign government,
at the previously mentioned address in agency, or instrumentality acting on www.regulations.gov (IRS REG–132634–
the FOR FURTHER INFORMATION CONTACT behalf of competing foreign producers 14).
section. or sellers to (a) raise, fix, stabilize, or set FOR FURTHER INFORMATION CONTACT:
A 30-day comment period is provided a floor for commodity prices, or (b) limit Concerning the proposed regulations,
to allow interested persons to respond the quantity or quality of commodity Caroline E. Hay at (202) 317–5279;
to this proposal. Thirty days is deemed imported into or exported from the concerning the submissions of
appropriate because federal marketing United States. Participation in any such comments and requests for a public
VerDate Sep<11>2014 18:29 May 05, 2015 Jkt 235001 PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 E:\FR\FM\06MYP1.SGM 06MYP1](https://thefederalregister.org/doc/80_FR_26057/page/1.svg)
![25972 Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Proposed Rules
Operates equipment to extract natural regulations) of North American Industry With respect to ores and minerals, an
resources from mines or wells, or (ii) Classification System (NAICS) code activity is processing or refining if the
operates equipment to convert raw 211112 concerning natural gas liquid activity is listed in Treasury Regulation
mined products or raw well effluent to extraction will be qualifying activities. § 1.613–4(f)(1)(ii) or (g)(6)(iii).
substances that can be readily Processing will also include converting Generally, refining of ores and minerals
transported or stored (including by methane in one integrated conversion is any activity that eliminates impurities
passing crude oil through mechanical into liquid fuels that are otherwise or foreign matter from smelted or
separators to remove gas, placing crude produced from the processing of crude partially processed metallic and
oil in settling tanks to recover basic oil, as described in the following nonmetallic ores and minerals, as for
sediment and water, dehydrating crude paragraph. example, the refining of blister copper.
oil, and operating heater-treaters that With respect to crude oil, an activity With respect to timber, an activity is
separate raw oil well effluent into crude is processing or refining if the activity processing if it merely modifies the
oil, natural gas, and salt water). is performed to physically separate physical form of timber. Processing
crude oil into its component parts, includes the application of heat or
D. Processing or Refining including, but not limited to, naphtha, pressure to timber without adding any
Because processing and refining gasoline, kerosene, fuel oil, lubricating foreign substances. Processing of timber
activities vary with respect to different base oils, waxes, and similar products. does not include activities that use
minerals or natural resources, these An activity that chemically converts the chemicals or other foreign substances to
proposed regulations provide industry- physically separated components is manipulate timber’s physical or
specific rules (described herein) for processing or refining of crude oil only chemical properties, such as using a
when an activity qualifies as processing if one or more of the products of the digester to produce pulp. Products that
or refining. In general, however, these conversion are recombined with other result from timber processing include
proposed regulations provide that an physically separated components of wood chips, sawdust, untreated lumber,
activity is processing or refining if it is crude oil in a manner that is necessary veneers (unless a foreign substance is
done to purify, separate, or eliminate to the cost-effective production of added), wood pellets, wood bark, and
impurities. These proposed regulations gasoline or other fuels (for example, gas rough poles. Products that are not the
further require that, for an activity to be oil converted to naphtha through a result of timber processing include
treated as processing or refining, the cracking process that is hydrotreated pulp, paper, paper products, treated
partnership’s position that an activity is and combined into gasoline). It is lumber, oriented strand board, plywood,
processing or refining for purposes of generally anticipated that activities and treated poles.
section 7704 must be consistent with within a refinery that create the These proposed regulations reserve
the partnership’s designation of an products that are listed in the 2012 the provisions relating to fertilizer. The
appropriate Modified Accelerated Cost version (the most recent version as of Treasury Department and the IRS
Recovery System (MACRS) class life for the date of publication of these request comments on what activities
assets used in the activity in accordance proposed regulations) of NAICS code should be included.
with Rev. Rul. 87–56 (1987–2 CB 27) 324110 concerning petroleum refineries E. Transportation
(for example, MACRS asset class 13.3 will be qualifying activities, if those
for petroleum refining facilities). In products are refinery grade products These proposed regulations define
addition, except as specifically provided that are obtained in the steps required transportation as the movement of
otherwise, processing or refining does to make fuels, lubricating base oils, minerals or natural resources and
not include activities that cause a waxes, and similar products. products produced from processing and
substantial physical or chemical change Additionally, physically separating any refining, including by pipeline, barge,
in a mineral or natural resource, or that product that is itself generated by the rail, or truck. Transportation also
transform the extracted mineral or processing or refining of crude oil is a includes terminalling, providing storage
natural resource into new or different qualifying activity for purposes of services, and operating custody transfer
mineral products, including section 7704(d)(1)(E). stations and gathering systems.
manufactured products. The Treasury The production of plastics and similar Transportation includes the
Department and the IRS believe that this petroleum derivatives does not give rise construction of a pipeline only to the
rule is consistent with definitions found to qualifying income derived from extent that a pipe is run to connect a
elsewhere in the Code and regulations. processing or refining. See H.R. Rep. No. client to a preexisting interstate or
See, for example, § 1.613–4(g)(5). 100–495, at 947 (1987) (Conf. Rep.). The intrastate line owned by the publicly
With respect to natural gas, an activity following products are also not traded partnership (interconnect
is processing or refining only if the qualifying products under this standard: agreement). Transportation (except for
activity purifies natural gas, including (1) Heat, steam, or electricity produced pipeline transportation) does not
by removal of oil or condensate, water, by the refining processes; (2) products include transportation of oil or gas (or
and non-hydrocarbon gases (including that are obtained from third parties or oil or gas products) to a place that sells
carbon dioxide, hydrogen sulfide, produced onsite for use in the refinery, or dispenses to retail customers. See
nitrogen, and helium), or separates such as hydrogen, if excess amounts are H.R. Rep. No. 100–795, at 401 (1988).
natural gas into its constituents which sold; and (3) any product that results The legislative history accompanying
are normally recovered in a gaseous from further chemical change of the section 7704 clarifies that ‘‘a retail
phase (for example, methane and product produced from the separation of customer does not include a person who
tkelley on DSK3SPTVN1PROD with PROPOSALS
ethane) and those which are normally the crude oil if it is not combined with acquires the oil or gas for refining or
recovered in a liquid phase (for other products separated from the crude processing, or partially refined or
example, propane and butane, pentane oil (for example, production of processed products thereof for further
and gas condensate). It is generally petroleum coke from heavy (refinery) refining or processing, . . . [or a] utility
anticipated that activities that create the residuum qualifies, but any upgrading providing power to customers.’’ See H.
products listed in the 2012 version (the of petroleum coke (such as to anode- R. Rep. No. 100–1104, vol. 2, at 18
most recent version as of the date of grade coke) does not qualify because it (1988) (Conf. Rep.). By contrast,
publication of these proposed is further chemically changed). ‘‘transporting refined petroleum
VerDate Sep<11>2014 18:29 May 05, 2015 Jkt 235001 PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 E:\FR\FM\06MYP1.SGM 06MYP1](https://thefederalregister.org/doc/80_FR_26057/page/3.svg)
![Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Proposed Rules 25975
§ 601.601(d)(2)(ii)(b) of this chapter) if paragraph (c)(5)(iii) of this section, the (3) Any product that results from
conducted prior to development assets used in that process must also further chemical change of the product
activities with respect to the minerals. have a MACRS class life of 13.3, produced from the separation of the
(3) Development. An activity Petroleum Refining. Unless otherwise crude oil if it is not combined with
constitutes development if it is provided in this paragraph (c)(5), an other products separated from the crude
performed to make accessible minerals activity will not qualify as processing or oil (for example, production of
or natural resources by: refining if the activity causes a petroleum coke from heavy (refinery)
(i) Drilling wells to access deposits of substantial physical or chemical change residuum qualifies, but any upgrading
mineral or natural resources; in a mineral or natural resource, or of petroleum coke (such as to anode-
(ii) Constructing and installing transforms the extracted mineral or grade coke) does not qualify because it
drilling, production, or dual purpose natural resource into new or different is further chemically changed).
platforms in marine locations, or any mineral products or into manufactured (iv) Ores and minerals. An activity
similar supporting structures necessary products. constitutes processing or refining of ores
for extraordinary non-marine terrain (ii) Natural Gas. An activity and minerals if it meets the definition
(such as swamps or tundra); constitutes processing of natural gas if it of mining processes under § 1.613–
(iii) Completing wells, including by is performed to: 4(f)(1)(ii) or refining under § 1.613–
installing lease and well equipment, (A) Purify natural gas, including by 4(g)(6)(iii). Generally, refining of ores
such as pumps, flow lines, separators, removal of oil or condensate, water, or and minerals is any activity that
and storage tanks, so that wells are non-hydrocarbon gases (including eliminates impurities or foreign matter
capable of producing oil and gas, and carbon dioxide, hydrogen sulfide, from smelted or partially processed
the production can be removed from the nitrogen, and helium); metallic and nonmetallic ores and
premises; (B) Separate natural gas into its minerals, as for example the refining of
(iv) Performing a development blister copper.
constituents which are normally
technique such as, for minerals, (v) Timber. An activity constitutes
recovered in a gaseous phase (methane
stripping, benching and terracing, processing of timber if it is performed to
and ethane) and those which are
dredging by dragline, stoping, and modify the physical form of timber,
normally recovered in a liquid phase
caving or room-and-pillar excavation, including by the application of heat or
(propane, butane, pentane, and gas
and for oil and natural gas, fracturing; pressure to timber, without adding any
condensate); or
or foreign substances. Processing of timber
(vi) Constructing and installing (C) Convert methane in one integrated
conversion into liquid fuels that are does not include activities that add
gathering systems and custody transfer chemicals or other foreign substances to
stations. otherwise produced from petroleum.
(iii) Petroleum—(A) Qualifying timber to manipulate its physical or
(4) Mining or production. An activity chemical properties, such as using a
constitutes mining or production if it is activities. An activity constitutes
processing or refining of petroleum if digester to produce pulp. Products that
performed to extract minerals or other result from timber processing include
natural resources from the ground by: the end products of these processes are
not plastics or similar petroleum wood chips, sawdust, rough lumber,
(i) Operating equipment to extract kiln-dried lumber, veneers, wood
natural resources from mines and wells; derivatives and the activity is performed
to: pellets, wood bark, and rough poles.
or Products that are not the result of timber
(ii) Operating equipment to convert (1) Physically separate crude oil into
its component parts, including, but not processing include pulp, paper, paper
raw mined products or raw well effluent
limited to, naphtha, gasoline, kerosene, products, treated lumber, oriented
to substances that can be readily
fuel oil, lubricating base oils, waxes and strand board/plywood, and treated
transported or stored (for example,
similar products; poles.
passing crude oil through mechanical (vi) Fertilizer. [Reserved]
separators to remove gas, placing crude (2) Chemically convert the physically
(6) Transportation. Transportation is
oil in settling tanks to recover basic separated components if one or more of
the movement of minerals or natural
sediment and water, dehydrating crude the products of the conversion are
resources and products produced under
oil, and operating heater-treaters that recombined with other physically
paragraph (c)(4) or (5) of this section,
separate raw oil well effluent into crude separated components of crude oil in a
including by pipeline, barge, rail, or
oil, natural gas, and salt water). manner that is necessary to the cost
truck, except for transportation (not
(5) Processing or refining—(i) In effective production of gasoline or other
including pipeline transportation) to a
general. Except as otherwise provided fuels (for example, gas oil converted to
place that sells or dispenses to retail
in paragraph (c)(5) of this section, an naphtha through a cracking process that
customers. Retail customers do not
activity is processing or refining if it is is hydrotreated and combined into
include a person who acquires oil or gas
done to purify, separate, or eliminate gasoline); or
for refining or processing, or a utility.
impurities. For an activity to be treated (3) Physically separate products The following activities qualify as
as processing or refining for purposes of created through activities described in transportation—
this section, the partnership’s position paragraph (c)(5)(iii)(A)(1) or (2) of this (i) Providing storage services;
that an activity is processing or refining section. (ii) Terminalling;
for purposes of this section must be (B) Non-qualifying activities. For (iii) Operating gathering systems and
consistent with the partnership’s purposes of this section, the following custody transfer stations;
products are not obtained through
tkelley on DSK3SPTVN1PROD with PROPOSALS
designation of an appropriate Modified (iv) Operating pipelines, barges, rail,
Accelerated Cost Recovery System processing of petroleum: or trucks; and
(MACRS) class life for assets used in the (1) Heat, steam, or electricity (v) Construction of a pipeline only to
activity in accordance with Rev. Rul. produced by the refining processes; the extent that a pipe is run to connect
87–56, 1987–2 CB 27 (see (2) Products that are obtained from a producer or refiner to a preexisting
§ 601.601(d)(2)(ii)(b) of this chapter). third parties or produced onsite for use interstate or intrastate line owned by the
For example, for an activity to be in the refinery, such as hydrogen, if publicly traded partnership
processing or refining of crude oil under excess amounts are sold; and (interconnect agreements).
VerDate Sep<11>2014 18:29 May 05, 2015 Jkt 235001 PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 E:\FR\FM\06MYP1.SGM 06MYP1](https://thefederalregister.org/doc/80_FR_26057/page/6.svg)
![Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Proposed Rules 25977
development of natural gas, a section of flowback produced during the qualifying income under these proposed
7704(d)(1)(E) activity, X’s income from water development of natural gas, and this training regulations.
delivery services may be qualifying income is of limited utility other than to perform or
for purposes of section 7704(c) if the water support the development of natural gas. The John Dalrymple,
delivery service is an intrinsic activity as provision of water is also specialized because Deputy Commissioner for Services and
provided in paragraph (d) of this section. An water is an injectant used to perform a Enforcement.
activity is an intrinsic activity if the activity section 7704(d)(1)(E) activity, and X also [FR Doc. 2015–10592 Filed 5–5–15; 8:45 am]
is specialized to narrowly support the section collects and treats flowback in accordance
BILLING CODE 4830–01–P
7704(d)(1)(E) activity, is essential to the with state regulations as part of its water
completion of the section 7704(d)(1)(E) delivery services. Therefore, X meets the
activity, and requires the provision of specialized requirement. The delivery of
significant services to support the section water is essential to support A’s development FEDERAL COMMUNICATIONS
7704(d)(1)(E) activity. Under paragraph activity because the water is needed for use COMMISSION
(d)(2)(ii)(B) of this section, the provision of in fracturing to develop A’s natural gas
water used in a section 7704(d)(1)(E) activity reserve in a cost-efficient manner. Finally, 47 CFR Part 20
is specialized to that activity only if the the water delivery and recovery and
partnership also collects and cleans, recycles, recycling activities require significant [PS Docket No. 08–51; FCC 15–43]
or otherwise disposes of the water after use services to support the development activity
in accordance with federal, state, or local because X’s personnel provide services
911 Call-Forwarding Requirements for
regulations concerning waste products from necessary for the partnership to perform the Non-Service-Initialized Phones
mining or production activities. Because X support activity at the development site on
does not collect and clean, recycle, or AGENCY: Federal Communications
an ongoing or frequent basis that is consistent
otherwise dispose of the delivered water after Commission.
with best industry practices. Because X’s
use, X’s water delivery activities are not delivery of water and X’s collection, ACTION: Proposed rule.
specialized to narrowly support the section transport, and treatment of flowback is a
7704(d)(1)(E) activity. Thus, X’s water specialized activity, is essential to the
SUMMARY: The Commission seeks
delivery is not an intrinsic activity. completion of a section 7704(d)(1)(E) activity, comment on whether the obligation to
Accordingly, X’s income from the delivery of and requires significant services, the delivery transmit 911 calls from non-service-
water is not qualifying income for purposes of water and the transport and treatment of initialized (NSI) devices still serves an
of section 7704(c). flowback is an intrinsic activity. X’s income important public safety objective.
Example 6. Delivery of water and recovery from the delivery of water and the collection, Because the cumbersome call validation
and recycling of flowback. (i) Assume the treatment, and transport of flowback is methods extant when the rules were
same facts as in Example 5, except that X also qualifying income for purposes of section
collects and treats flowback at the drilling
adopted in the late 1990s are no longer
7704(c). in use, and because of the current
site in accordance with state regulations as
part of its water delivery services and (f) Proposed Effective/Applicability ubiquity of low-cost options for wireless
transports the treated flowback away from Date and Transition Rule—(i) Except as services, the Commission proposes to
the site. In connection with these services, X provided in paragraph (f)(ii) of this sunset the obligation to transmit 911
provides personnel to perform these services section, this section is proposed to calls from an NSI device within six
on an ongoing or frequent basis that is apply to income earned by a partnership month, accompanied by consumer
consistent with best industry practices. X has in a taxable year beginning on or after outreach and education. Public safety
provided these personnel with specialized the date these regulations are published representatives have indicated that NSI
training regarding the recovery and recycling
of flowback produced during the
as final regulations in the Federal devices are frequently used to make
development of natural gas, and this training Register. Paragraph (f)(ii) of this section fraudulent or otherwise non-emergency
is of limited utility other than to perform or applies during the Transition Period, calls, causing a significant waste of
support the development of natural gas. which ends on the last day of the limited public safety resources.
(ii) The income X obtains from its water partnership’s taxable year that includes DATES: Submit comments on or before
delivery services is not a section the date that is ten years after the date June 5, 2015 and reply comments by
7704(d)(1)(E) activity as provided in that these regulations are published as July 6, 2015. Written comments on the
paragraph (d) of this section. However, final regulations in the Federal Register. Paperwork Reduction Act proposed
because X’s water delivery supports A’s
(ii) A partnership may treat income information collection requirements
development of natural gas, a section
7704(d)(1)(E) activity, X’s income from water from an activity as qualifying income must be submitted by the public, Office
delivery services may be qualifying income during the Transition Period if: of Management and Budget (OMB), and
for purposes of section 7704(c) if the water (A) The partnership received a private other interested parties on or before July
delivery service is an intrinsic activity as letter ruling from the IRS holding that 6, 2015.
provided in paragraph (d) of this section. the income from that activity is ADDRESSES: Submit comments to the
(iii) An activity is an intrinsic activity if qualifying income; Federal Communications Commission,
the activity is specialized to narrowly (B) Prior to May 6, 2015, the 445 12th Street SW., Washington, DC
support the section 7704(d)(1)(E) activity, is
partnership was publicly traded, 20554. Comments may be submitted
essential to the completion of the section
7704(d)(1)(E) activity, and requires the engaged in the activity, and treated the electronically through the Federal
provision of significant services to support activity as giving rise to qualifying Communications Commission’s Web
the section 7704(d)(1)(E) activity. Under income under section 7704(d)(1)(E), and site: http://apps.fcc.gov/ecfs//. In
paragraph (d)(2)(ii)(B) of this section, the that income was qualifying income addition to filing comments with the
provision of water used in a section under the statute as reasonably Secretary, a copy of any comments on
7704(d)(1)(E) activity is specialized to that interpreted prior to the issuance of these
tkelley on DSK3SPTVN1PROD with PROPOSALS
the Paperwork Reduction Act
activity only if the partnership also collects proposed regulations; or information collection requirements
and cleans, recycles, or otherwise disposes of
(C) The partnership is publicly traded contained herein should be submitted to
the water after use in accordance with
federal, state, or local regulations concerning and engages in the activity after May 6, the Federal Communications
waste products from mining or production 2015 but before the date these Commission via email to PRA@fcc.gov.
activities. X’s provision of personnel is regulations are published as final For detailed instructions for submitting
specialized because those personnel received regulations in the Federal Register, and comments and additional information
training regarding the recovery and recycling the income from that activity is on the rulemaking process, see the
VerDate Sep<11>2014 18:29 May 05, 2015 Jkt 235001 PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 E:\FR\FM\06MYP1.SGM 06MYP1](https://thefederalregister.org/doc/80_FR_26057/page/8.svg)
Document Created: 2015-12-16 07:41:19
Document Modified: 2015-12-16 07:41:19
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Proposed Rules | |
| Action | Notice of proposed rulemaking. | |
| Dates | Comments and requests for a public hearing must be received by August 4, 2015. | |
| Contact | Concerning the proposed regulations, Caroline E. Hay at (202) 317-5279; concerning the submissions of comments and requests for a public hearing, Regina Johnson at (202) 317-6901 (not toll-free numbers). | |
| FR Citation | 80 FR 25970 | |
| RIN Number | 1545-BM43 | |
| CFR Associated | Income Taxes and Reporting and Recordkeeping Requirements |
2024 Federal Register | Disclaimer | Privacy Policy
USC | CFR | eCFR