Subsequent to the publication of our alert, on January 24, 2017, these regulations were published in the Federal Register and in that publication stated to have an effective date of January 19, 2017. The IRS and Treasury, simultaneously on January 24, 2017, issued a statement that “The Federal Register today published [the MLP] regulations, as approved by the Office of Management and Budget. These had an effective date of January 19, 2017 , which preceded the Administration’s January 20, 2017 freeze.” The Executive Order issued on January 20, 2017 stated that regulations that had been sent to the Office of the Federal Register but not published should be withdrawn. The Executive Order does not state explicitly, however, that such publication must have occurred prior to January 20. The IRS position that the regulations are effective may be based on the view that, since the regulations were accepted and then published by the OFR, they have been published as required by the Executive Order and therefore, even though not published before January 20, the regulations are effective.
On January 19, 2017, less than 24 hours before the change of administration, the IRS and Treasury released much-anticipated final regulations under Code section 7704(d)(1)(E) setting parameters for qualifying income for publicly traded partnerships (frequently referred to as master limited partnerships or "MLPs") arising from activities with respect to natural resources, including, minerals, timber, oil and gas. Previously proposed regulations, issued in May 2015, sparked a firestorm of criticism, generating a record number of letters to Treasury from industry, investors and advisors. The final regulations are significantly different from the proposed regulations in a number of respects and represent a clear effort to respond to taxpayers' concerns regarding the proposed regulations.
However, President Donald Trump signed an executive order Jan. 20 that institutes a moratorium on all federal rulemaking until the new administration can review all regulations in process. Trump's Chief of Staff Reince Priebus told department and agency heads that no regulations should be sent to the Federal Register until advised by the administration. Regulations that have already been submitted to the Federal Register will be withdrawn and regulations that have been published but are not yet effective will be postponed 60 days. Although regulatory freezes frequently occur with a change of administration, the withdrawal of the much-anticipated MLP regulations is still unsettling.
The focus of criticism of the proposed regulations was on the definition of qualifying processing and refining activity. The proposed regulations carved back these concepts in direct contrast to private letter rulings previously issued to some MLPs. The final regulations have taken a different tack that reinstates most of the activities previously called into question.
The key policies contained in the final regulations are as follows:
The regulations were drafted to apply to income earned by a partnership in a taxable year beginning on or after January 19, 2017. To the extent that an existing publicly traded partnership's activities do not meet the standards in the final regulations, the regulations provide a 10-year transition period for publicly traded partnerships that (i) have received a private letter ruling from the IRS holding that an activity is qualifying income, (ii) have been engaged in an activity prior to May 6, 2015 and have reasonably treated the activity as giving rise to qualifying income under the statute as interpreted prior to May 6, 2015; (iii) have entered into a binding agreement for construction of assets to be used in an activity that would give rise to qualifying income under the statute as reasonably interpreted prior to May 6, 2015; or (iv) engaged in an activity after May 6, 2015 but before January 19, 2017 and the income from that activity was qualifying income under the proposed regulations. Due to the moratorium and withdrawal of regulations by the new administration, however, if and when the regulations are re-released, the effective date is likely to change.
In general, the final regulations can be viewed as a victory for the MLP industry, however, there are some areas that are likely to need further clarification and some areas that may continue to be unduly narrow in the eyes of taxpayers.
Our MLP team will be continuing to review and digest the new rules on the assumption that they will eventually be re-promulgated. In the meantime, please do not hesitate to contact a member of our MLP team if you would like to discuss these new rules.