US IRS Issues Proposed Regulations On Master Limited Partnership Income

The US Internal Revenue Service (IRS) has published proposed regulations clarifying which activities generate "qualifying income" for a Master Limited Partnership (MLP). MLPs are partnerships whose ownership interests are traded on a securities exchange or secondary market. MLPs benefit from similar liquidity and access to markets as corporations, without being subject to an entity-level tax.

In 1987, in response to erosion of the corporate tax base due to the rapid growth of MLPs, Congress added section 7704 to the Internal Revenue Code, which generally treats MLPs as corporations. One exception to this treatment occurs if 90 percent or more of the MLP's gross income is "qualifying income." Qualifying income is generally passive income, however, under section 7704(d)(1)(E), qualifying income also includes income derived from the exploration, development, mining or production, processing, refining, transportation, or marketing of minerals or natural resources. The