On Tuesday, May 5, 2015, the Internal Revenue Service (“IRS”) released proposed regulations defining qualifying income for Master Limited Partnerships (“MLPs”). MLPs are publicly traded partnerships that are taxed as a partnership rather than a corporation.

Being taxed as a MLP has many advantages. While shareholders in a corporation face double taxation  ̶  paying taxes first at the corporate level, and then at the personal level when those earnings are received as dividends  ̶  owners of a partnership are taxed only once, when they receive distributions. The absence of taxes at the company level gives MLPs a lower cost of capital than is typically available to corporations, allowing the MLPs to pursue projects that might not be feasible for corporations.

To qualify as a MLP, at least 90% of the entity’s gross income must be “qualifying income.” Previously, there had been no detailed list of what constitutes qualifying income.

These proposed regulations use the term “qualifying activities” to describe activities relating to minerals or natural resources that generate qualifying income. The IRS has now provided an exclusive list of operations that constitute qualifying activities. The activities addressed include exploration, development, mining or production, processing, refining, transportation, and marketing of any natural resource.

Exploration Activities

Exploration is defined 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. Exploration activities include drilling test wells, conducting tests to verify commercial viability of the deposit, conducting geological or geophysical surveys, and/or interpreting data obtained from geological or geophysical surveys.

Development Activities

Development activities include drilling wells to access natural resources, constructing drilling platforms, completing wells, performing enhanced development technique (such as hydraulic fracturing), and/or constructing and installing gathering systems.

Mining or Production

A partnership is engaged in mining or production if the partnership: (1) operates equipment to extract natural resources from mines or wells, or (2) operates equipment to convert raw products to substances that can be readily transported or stored.


In general, the proposed regulations provide that an activity is “processing or refining” if it is done to purify, separate, or eliminate impurities. With respect to natural gas, an activity is processing or refining only if the activity purifies natural gas or separates natural gas into its constituents. 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.


The proposed regulations define transportation as the movement of minerals or natural resources, including by pipeline, barge, rail, or truck. However, transportation does not include transportation of oil or gas to a place that sells or dispenses to retail customers, except for pipeline transportation.


Marketing is defined as the activities undertaken to facilitate the sale of minerals or natural resources. Marketing may also include some additive blending into fuels provided to a customer’s specification.

In addition to the above activities, certain limited support activities that are intrinsic to the production of natural resources are also qualifying activities. A three part test will be used to determine whether a support activity is intrinsic to the production of natural resources:

  1. The support services must be specialized and employees must have training that is of limited value other than to perform support for the exploration and production of natural resources.
  2. The support services must be essential to natural resource production and physically necessary to complete the process.
  3. The support company’s personnel have an ongoing or frequent presence at the site of the mineral and natural resource production.

In general, the proposed regulations will apply to income earned by a partnership in a taxable year beginning on or after the date final regulations are published in the Federal Register.