What is a Master Limited Partnership (MLP)?

Master Limited Partnerships (“MLPs”) are limited partnerships that are publicly traded.  They were designed to combine the tax benefits of limited partnerships with the liquidity of publicly traded securities.

In 1981, Apache Corporation was the first company to form an MLP in the United States.  The MLP it formed was the Apache Petroleum Company (“APC”).  The favorable tax treatment and the success of APC resulted in other oil and gas companies forming MLPs.  There were followed by real estate companies, and by the mid-1980s a variety of other industries adopted the structure.

Due to concerns that the popularity of MLPs was eroding the corporate tax base, Congress enacted section 7704 in the Omnibus Budget Reconciliation Act of 1987.  It provided, as a general rule, that publicly traded partnerships would be treated as corporations.  However, Congress provided an exception to the 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.

It also provided that qualifying income includes income and gains derived from the exploration, development, mining or production, processing, refining, transportation, or marketing of minerals or natural resources.  The terms “mineral or natural resource” are defined 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.

The SteelPath Mutual Fund Family (n/k/a OppenheimerFunds) introduced the first MLP mutual fund in May of 2010.  Alerian launched the first MLP exchange traded fund, the Alerian MLP ETF, on August 25, 2010.

Regulations

In May of 2015, the Treasury Department and the IRS published proposed regulations relating to qualifying income from activities of publicly traded partnerships with respect to minerals or natural resources in the Federal Register.  Certain activities were also described as being activities intrinsic to section 7704(d)(1)(E) in the proposed regulations.

The requirements for an activity to be considered a qualifying activity are clarified and the terms listed in section 7704(d)(1)(E) are defined in the proposed regulations.  Further, the publication included certain activities that do-not qualify, including:

• Timber processing, including pulp, paper, paper products, treated lumber, oriented strand board, plywood, and treated poles;
• Olefins produced from assets not depreciated under MACRS class 13.3 (Petroleum Refining); and
• the production and sale of methanol.

The proposed regulations specify three requirements for an activity to be considered intrinsic in the proposed regulations, including:

1. Specialized – 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 must be “specialized” (e.g., personnel have received training unique to the mineral or natural resource). The preamble provides as an example of a non-intrinsic activity, catering services provided on a drilling site.
2. Essential – The activity must be essential to the section 7704(d)(1)(E) activity, meaning that it must be necessary to physically complete the activity or to comply with federal, state or local law. The preamble provides as an example, water delivery and disposal services for water provided for use in fracking as an essential activity.
3. Significant services – The preamble explains that 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. The IRS and Treasury have specifically requested comments as to whether and how this requirement can be set forth in an objective standard.

MLPs popularity has gone up and down since their introduction.  The vast majority of MLPs have been and continue to be pipeline businesses because of the general nature of the MLP structure and the strict requirements imposed them.  There are well over one hundred MLPs currently traded.

Currently Traded MLPs

The White Law Group continues to investigate the liability that brokerage firms may have for improperly recommending MLP investments (and, in particular) oil and gas MLPs.

Free Consultation

Brokerage firms that sell oil and gas MLPs are required to perform adequate due diligence on the investments to ensure a reasonable likelihood of success, and to evaluate whether the investments are suitable in light of the client’s age, net worth, investment experience, and investment objectives. Firms that fail to perform adequate due diligence, or that make unsuitable recommendations, can be held responsible for losses in a FINRA arbitration claim.

If you suffered losses investing in an oil and gas MLP and would like to discuss your litigation options, please call The White Law Group at 888-637-5510 for a free consultation.

The White Law Group is a national securities arbitration, securities fraud, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida.  The firm represents investors throughout the country in FINRA arbitration claims against their brokerage firm.

For more information on The White Law Group, visit www.whitesecuritieslaw.com.