OCI Partners LP
Comments to IRS Regarding Qualifying Income Proposed Regulations
Summary of Arguments
On May 6, 2015, the Internal Revenue Service (the “IRS”) and the Department of the Treasury published proposed regulations (the “Proposed Regulations”) under section 7704(d)(1)(E) of the Internal Revenue Code of 1986, as amended (the “Code”) setting forth which mineral and natural resource related activities would produce master limited partnership qualifying income. OCI Partners LP (the “Partnership”) submitted comments to the IRS addressing the scope of activities that the Proposed Regulations treat as processing or refining of natural gas and the classification of methanol as a mineral or natural resource. In addition, on October 27, 2015, the Partnership participated in a public hearing in Washington, D.C., during which it discussed its comments with officials from the IRS. The arguments summarized below formed the basis of the Partnership’s comments and its public presentation.
- Section 7704(d)(1)(E) provides a comprehensive upstream-to-downstream progression of activities that generate qualifying income as long as the inputs of such activities are minerals or natural resources. Under both the statute and the legislative history, natural gas is a natural resource. Therefore, income generated by performing any of the enumerated activities (e.g., processing, refining) with respect to natural gas constitutes qualifying income within the meaning of section 7704(d).
- Section 7704(d)(1)(E) treats processing and refining as distinct activities that generate qualifying income when directed at minerals or natural resources. The Proposed Regulations improperly combine these two terms. Moreover, the Proposed Regulations define processing and refining more narrowly with respect to natural gas than with respect to crude oil. The treatment of essentially identical processes producing essentially identical products differs under the Proposed Regulations depending on whether the feedstock is crude oil or natural gas. There is no basis for this preference for processors and refiners of crude oil in the statute or the legislative history, which treat oil, gas and products thereof as a single type of natural resource. This unjustified disparity should be eliminated.
- The term “natural resources” includes oil, gas and products thereof. The legislative history to section 7704 defines the term “oil, gas or products thereof” to include a list of petroleum and natural gas products, as well as similar products recovered from petroleum refineries and field facilities. Excluded from this definition of natural resources are only those products, such as plastics and similar petroleum derivatives, produced by additional processing beyond that performed at petroleum refineries and field facilities. The Partnership produces methanol from natural gas using typical refinery processes, catalysts and equipment that are currently used in refineries in the United States and around the world. Methanol is, therefore, not a product produced by additional processing beyond that performed at petroleum refineries and field facilities. Thus, methanol is itself a natural resource that the Partnership refines from natural gas, another natural resource. Income generated by the Partnership by refining natural gas into methanol and marketing the methanol constitutes qualifying income within the meaning of section 7704(d).
- Even under the Proposed Regulations, processing natural gas includes the conversion of “methane in one integrated conversion into liquid fuels that are otherwise produced from petroleum.” Thus, notwithstanding the prior arguments, the production of methanol from natural gas generates qualifying income pursuant to the standards set forth in the Proposed Regulations. Specifically, methanol is currently used around the world as a liquid fuel for automobiles, tractors, airplanes and ships. The Code recognizes methanol as a liquid fuel. The current U.S. Secretary of Energy, Ernest J. Moniz, chaired a study that remarked on the substantial cost and environmental advantages of methanol relative to other alternative fuels. Therefore, example 3 in the Proposed Regulations is simply wrong on its facts by concluding that the production and sale of methanol does not generate qualifying income because “methanol is not a liquid fuel otherwise produced from the processing of crude oil.” The production of methanol from natural gas and the sale thereof generates qualifying income within the meaning of section 7704(d) and the Proposed Regulations.