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Master Limited Partnerships: Where They Have Been and Where They Are Going

A master limited partnership (“MLP”) is a business that acts like a corporation (meaning it is publicly traded and an investor can buy units of it like it would buy shares of a corporation) but is organized as a partnership—thus not subject to double taxation like a traditional corporation. The first MLP came into existence in 1981 with Apache consolidating 33 oil- and gas-drilling program limited partnerships.1 Today, about 130 MLPs trade on major exchanges with most falling under the energy and natural resources umbrellas.2


MLPs became a prevalent structure throughout the 1980s following Apache’s IPO; however, tax legislation put in place in 1987 greatly limited the number of companies that could benefit from this structure by requiring that at least ninety percent of gross income each taxable year be “qualifying income.”3 Examples of qualifying income include income and gains derived from the development, exploration, mining, production, refining, processing, marketing, or transportation of natural resources or minerals.4


Companies have historically sought guidance from the Internal Revenue Service (“IRS”) as to whether certain activities generate qualifying income through Private Letter Rulings (PLRs), but the IRS temporarily suspended issuing PLRs in April 2014 to undergo a review of existing rules for MLPs.5 The IRS underwent this review to examine the consistency of PLRs and to evaluate whether they could give better guidance to the energy industry in particular.6


The IRS released anticipated proposed Treasury regulations on May 5, 2015, which provide an exclusive list of operations comprising each qualifying income activity. Only the operations listed in the proposed regulations or as provided for in future published guidance will constitute a qualifying income activity.7 If enacted in the present form, the proposed regulations could affect certain MLPs with activities that generated qualifying income in the past but would not under the proposed regulations. The proposed regulations might also restrict companies that could have gained access to the MLP market under the previous regulations.8


On September 14, 2015, the IRS issued its first PLRs regarding qualifying income since suspending their review last year. In one PLR, the IRS ruled that the MLP’s distributive share of income from contracts for the processing, regasification, liquefaction, and storage of natural gas counts as qualifying income.9 In the second PLR released, the IRS stated that income originating from the gathering, processing, transporting, treating, and disposing of saltwater created in the exploration and production of natural gas and oil as well as from the retrieval and marketing of skim oil to ends users other than at the retail level also amounts to qualifying income.10


Current MLPs have a 10-year transition period to comply with the proposed regulations.11 Over the next 10 years, an MLP may regard income from an activity as qualifying income under certain conditions: (1) the IRS issued the MLP a PLR concluding that income from a given activity constitutes qualifying income; (2) the MLP participated in the activity prior to the issuance of the proposed regulations, the MLP treated the activity as generating qualifying income, and the IRS would have considered the activity to be qualifying income under the statute prior to the proposed regulations; or (3) the MLP takes part in the activity after May 6, 2015 but prior to the regulations’ final publication, and the income from that activity is qualifying income under the proposed regulations.12


  1. Latham & Watkins LLP, Master Limited Partnerships – 101, (last visited Sept. 18, 2015). 

  2. Patrick Temple-West & Anna Driver, IRS puts damper on newer types of energy partnerships, Reuters, (Apr. 8, 2014, 5:55 PM),

  3. I.R.C. § 7704(c)(2) (2012). 

  4. I.R.C. § 7704(d)(1)(E) (2012). 

  5. Temple-West & Driver, supra note 2. 

  6. Id. 

  7. Mayer Brown, US Issues Proposed Regulations on Master Limited Partnership Income, (last visited Sept. 18, 2015). 

  8. EY, Master limited partnership alert: May 2015,$FILE/EY-master-limited-partnership-alert-may-2015.pdf (last visited Sept. 18, 2015). 

  9. I.R.S. P.L.R. 201537007 (Sept. 11, 2015). 

  10. I.R.S. P.L.R. 201537014 (Sept. 11, 2015). 

  11. Mayer Brown, supra note 7. 

  12. Id.