IRS Publishes Proposed Regulations Addressing Fracking Services By MLPs

On May 6, 2015, the Internal Revenue Service (IRS) published proposed regulations [REG-132634-14], which if finalized would clarify that income from certain oil and natural gas fracturing ("fracking") services is "qualifying income" for purposes of determining whether a master limited partnership (MLP) qualifies for favorable "passthrough" federal tax status.

Generally, an MLP qualifies for passthrough tax status if 90 percent or more of the MLP's gross income for the year is qualifying income, which includes certain income from natural resource-related activities, including income from the exploration, development, mining and production, processing, refining, transportation, and marketing of minerals and natural resources. If an MLP does not satisfy the 90 percent threshold, the IRS could treat it as a taxable corporation, meaning that its income could be subject to two levels of tax – corporate income tax at the level of the MLP and additional tax at the level of