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small entities acting on their own

behalf.
There are approximately 1,090
handlers who are subject to regulation
under the 28 federal marketing order
programs and approximately 33,100
producers in the regulated areas. Small
agricultural service firms are defined by
the Small Business Administration
(SBA) as those having annual receipts of
less than $7,000,000, and small
agricultural producers are defined as
those having annual receipts of less than
$750,000 (13 CFR 121.201). USDA
estimates that many of these handlers
and producers may be classified as
small entities. This rule would
accentuate the applicability of U.S.
antitrust laws to marketing order
programs domestic and foreign
activities. This action would also advise
marketing order board and committee
members and personnel of the
restrictions, limitations, and liabilities
imposed by those laws.
Paperwork Reduction Act
This rule contains no information
collection or recordkeeping
requirements under the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501
3520).
AMS is committed to complying with
the E-Government Act, to promote the
use of the internet and other
information technologies to provide
increased opportunities for citizen
access to Government information and
services, and for other purposes.
USDA has not identified any relevant
Federal rules that duplicate, overlap, or
conflict with this proposed rule.
AMS has discussed the changes to the
regulations with all marketing order
board and committee staff that it
oversees. Moreover, AMS conducted
refresher training on antitrust laws for
marketing order board and committee
staff and officers at the Marketing Order
Management Conference on September
2324, 2014. Finally, interested persons
are invited to submit comments on this
proposed rule, including the regulatory
and informational impacts of this action
on small businesses.
A small business guide on complying
with fruit, vegetable, and specialty crop
marketing agreements and orders may
be viewed at: [Link]/
MarketingOrdersSmallBusinessGuide.
Any questions about the compliance
guide should be sent to Jeffrey Smutny
at the previously mentioned address in
the FOR FURTHER INFORMATION CONTACT
section.
A 30-day comment period is provided
to allow interested persons to respond
to this proposal. Thirty days is deemed
appropriate because federal marketing

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order boards and committees have

always been subject to U.S. antitrust
laws. AMS is simply updating the
regulations to reemphasize the
applicability of U.S. antitrust laws in
light of global marketing and production
trends. All written comments timely
received will be considered before a
final determination is made on this
matter.
List of Subjects in 7 CFR Part 900
Administrative practice and
procedure, Freedom of information,
Marketing agreements, Reporting and
recordkeeping requirements.
For the reasons set forth above, 7 CFR
part 900 is proposed to be amended as
follows:

unauthorized agreement or joint

undertaking could result in prosecution
under the antitrust laws by the United
States Department of Justice and/or suit
by injured private persons seeking treble
damages, and could also result in
expulsion of members from the
Committee or termination of
employment with the Committee.
Dated: April 30, 2015.
Rex A. Barnes,
Associate Administrator, Agricultural
Marketing Service.
[FR Doc. 201510447 Filed 5515; 8:45 am]
BILLING CODE 341002P

DEPARTMENT OF THE TREASURY

PART 900GENERAL REGULATIONS

Internal Revenue Service

1. The authority citation for 7 CFR

part 900 continues to read as follows:

26 CFR Part 1

Authority: 7 U.S.C. 601674 and 7 U.S.C.

7401.

[REG13263414]

SubpartMiscellaneous Regulations
2. The authority citation for Subpart
Miscellaneous Regulations continues to
read as follows:

Authority: Sec. 10, 48 Stat. 37, as

amended; 7 U.S.C. 610.

3. Add new section 900.202 to read as

follows:

900.202 Restrictions applicable to

Committee personnel.

Members and employees of Federal

marketing order boards and committees
are immune from prosecution under the
United States antitrust laws only insofar
as their conduct in administering the
respective marketing order is authorized
by the Agricultural Marketing
Agreement Act of 1937, 7 U.S.C. 601
674, or the provisions of the respective
order. Under the antitrust laws,
Committee members and employees
may not engage in any unauthorized
agreement or concerted action that
unreasonably restrains United States
domestic or foreign commerce. For
example, Committee members and
employees have no authority to
participate, either directly or indirectly,
whether on an informal or formal,
written or oral basis, in any bilateral or
international undertaking or agreement
with any competing foreign producer or
seller or with any foreign government,
agency, or instrumentality acting on
behalf of competing foreign producers
or sellers to (a) raise, fix, stabilize, or set
a floor for commodity prices, or (b) limit
the quantity or quality of commodity
imported into or exported from the
United States. Participation in any such

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RIN 1545BM43

Qualifying Income From Activities of

Publicly Traded Partnerships With
Respect to Minerals or Natural
Resources
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:

This document contains

proposed regulations under section
7704(d)(1)(E) of the Internal Revenue
Code (Code) relating to qualifying
income from exploration, development,
mining or production, processing,
refining, transportation, and marketing
of minerals or natural resources. The
proposed regulations affect publicly
traded partnerships and their partners.
DATES: Comments and requests for a
public hearing must be received by
August 4, 2015.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG13263414), Room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand-delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to CC:PA:LPD:PR (REG132634
14), Couriers Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC, or sent electronically,
via the Federal eRulemaking Portal at
[Link] (IRS REG132634
14).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
Caroline E. Hay at (202) 3175279;
concerning the submissions of
comments and requests for a public
SUMMARY:

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Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Proposed Rules
hearing, Regina Johnson at (202) 317
6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:

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Background
This document contains proposed
amendments to the Income Tax
Regulations (26 CFR part 1) under
section 7704(d)(1)(E) regarding
qualifying income from certain activities
with respect to minerals or natural
resources.
Congress enacted section 7704 in the
Omnibus Budget Reconciliation Act of
1987, Public Law 100203 (101 Stat.
1330 (1987)), due to concerns that the
rapid growth of certain publicly traded
partnerships was eroding the corporate
tax base. See H.R. Rep. No. 100391, at
1065 (1987). Section 7704(a) provides
that, as a general rule, publicly traded
partnerships will be treated as
corporations. In section 7704(c),
Congress provided an exception from
this rule if 90 percent or more of the
partnerships gross income is
qualifying income. Qualifying income
is generally passive-type income, such
as interest, dividends, and rent. Section
7704(d)(1)(E) provides, however, that
qualifying income also includes income
and gains derived from the exploration,
development, mining or production,
processing, refining, transportation, or
marketing of minerals or natural
resources. Section 7704(d)(1) defines the
term mineral or natural resource 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.
Regulations have been published
providing guidance on (1) when a
partnership is publicly traded ( 1.7704
1), (2) transition rules for partnerships
in existence prior to the effective date of
section 7704 ( 1.77042), and (3)
qualifying income from certain financial
products ( 1.77043). No regulations
have been issued under section
7704(d)(1)(E). Instead, questions about
the specific application of section
7704(d)(1)(E) generally have been
resolved by private letter ruling.
However, the number of private letter
ruling requests received has increased
steadily from five or fewer requests per
year for most years before 2008 to more
than 30 requests received in 2013. Many
of these requests seek rulings that
income from support services provided
to businesses engaged in the section
7704(d)(1)(E) activities is qualifying
income for purposes of section 7704.
The Treasury Department and the IRS
are issuing these proposed regulations

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in response to this increased interest in

the application of section 7704(d)(1)(E).
These proposed regulations provide
guidance on whether income from
activities with respect to minerals or
natural resources as defined in section
7704(d)(1) is qualifying income. These
regulations do not address the
transportation or storage of any fuel
described in section 6426(b), (c), (d), or
(e), or activities with respect to
industrial source carbon dioxide, any
alcohol fuel defined in section
6426(b)(4)(A), or any biodiesel fuel as
defined in section 40A(d)(1). The
Treasury Department and the IRS
request comments concerning whether
guidance is also needed with respect to
those activities and, if so, the specific
issues such guidance should address.
Explanation of Provisions
These proposed regulations use the
term qualifying activities to describe
activities relating to minerals or natural
resources that generate qualifying
income. Qualifying activities include:
(1) The exploration, development,
mining or production, processing,
refining, transportation, or marketing of
minerals or natural resources (section
7704(d)(1)(E) activities), and (2) certain
limited support activities that are
intrinsic to section 7704(d)(1)(E)
activities (an intrinsic activity). These
proposed regulations set forth the
requirements under which an activity is
a qualifying activity.
1. Section 7704(d)(1)(E) Activities
Section 7704(d)(1)(E) activities
represent different stages in the
extraction of minerals or natural
resources and the eventual offering of
products for sale. These stages include
exploration, development, mining or
production, processing, refining,
transportation (including pipelines
transporting gas, oil, or products
thereof), and marketing of any mineral
or natural resource (including fertilizer,
geothermal energy, and timber). Each of
these stages involves various types of
operations. Based in part on discussions
with IRS engineers specializing in the
various oil and natural resource fields,
the proposed regulations provide an
exclusive list of operations that
comprise the section 7704(d)(1)(E)
activities for purposes of section 7704.
This list may be expanded by published
guidance. The Treasury Department and
the IRS intend that this list represents
only those activities that would be
undertaken by an exploration and
development company, a mining or
production company, a refiner or
processor, or a transporter or marketer
of a mineral or natural resource.

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Services provided to those businesses

are not section 7704(d)(1)(E) activities,
although they may qualify as intrinsic
activities. The Treasury Department and
the IRS request comments concerning
whether additional activities should be
included in the list of section
7704(d)(1)(E) activities.
A. Exploration
These proposed regulations define
exploration 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 of the natural
deposit. A partnership is engaged in
exploration if the partnership: (i) Drills
an exploratory or stratigraphic type test
well; (ii) conducts drill stem and
production flow tests to verify
commerciality of the deposit; (iii)
conducts geological or geophysical
surveys; or (iv) interprets data obtained
from geological or geophysical surveys.
For minerals, exploration also includes
testpitting, trenching, drilling, driving of
exploration tunnels and adits, and
similar types of activities described in
Rev. Rul. 70287 (19701 CB 146) if
conducted prior to development
activities with respect to the minerals.
B. Development
These proposed regulations define
development as an activity performed to
make minerals or natural resources
accessible. A partnership is engaged in
development if the partnership: (i) Drills
wells to access deposits of mineral or
natural resources; (ii) constructs and
installs drilling, production, or dual
purpose platforms in marine locations
(or constructs and installs any similar
supporting structures necessary for
extraordinary non-marine terrain such
as swamps or tundra); (iii) completes
wells including by installing lease and
well equipment (such as pumps, flow
lines, separators, and storage tanks) so
that wells are capable of producing oil
and gas, and the production can be
removed from the premises; (iv)
performs a development technique (for
example, fracturing for oil and natural
gas, or, with respect to minerals,
stripping, benching and terracing,
dredging by dragline, stoping, and
caving or room-and-pillar excavation);
or (v) constructs and installs gathering
systems and custody transfer stations.
C. Mining or Production
These proposed regulations define
mining or production as an activity
performed to extract minerals or other
natural resources from the ground. A
partnership is engaged in mining or
production if the partnership: (i)

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Operates equipment to extract natural

resources from mines or wells, or (ii)
operates equipment to convert raw
mined products or raw well effluent to
substances that can be readily
transported or stored (including by
passing crude oil through mechanical
separators to remove gas, placing crude
oil in settling tanks to recover basic
sediment and water, dehydrating crude
oil, and operating heater-treaters that
separate raw oil well effluent into crude
oil, natural gas, and salt water).
D. Processing or Refining
Because processing and refining
activities vary with respect to different
minerals or natural resources, these
proposed regulations provide industryspecific rules (described herein) for
when an activity qualifies as processing
or refining. In general, however, these
proposed regulations provide that an
activity is processing or refining if it is
done to purify, separate, or eliminate
impurities. These proposed regulations
further require that, for an activity to be
treated as processing or refining, the
partnerships position that an activity is
processing or refining for purposes of
section 7704 must be consistent with
the partnerships designation of an
appropriate Modified Accelerated Cost
Recovery System (MACRS) class life for
assets used in the activity in accordance
with Rev. Rul. 8756 (19872 CB 27)
(for example, MACRS asset class 13.3
for petroleum refining facilities). In
addition, except as specifically provided
otherwise, processing or refining does
not include activities that cause a
substantial physical or chemical change
in a mineral or natural resource, or that
transform the extracted mineral or
natural resource into new or different
mineral products, including
manufactured products. The Treasury
Department and the IRS believe that this
rule is consistent with definitions found
elsewhere in the Code and regulations.
See, for example, 1.6134(g)(5).
With respect to natural gas, an activity
is processing or refining only if the
activity purifies natural gas, including
by removal of oil or condensate, water,
and non-hydrocarbon gases (including
carbon dioxide, hydrogen sulfide,
nitrogen, and helium), or separates
natural gas into its constituents which
are normally recovered in a gaseous
phase (for example, methane and
ethane) and those which are normally
recovered in a liquid phase (for
example, propane and butane, pentane
and gas condensate). It is generally
anticipated that activities that create the
products listed in the 2012 version (the
most recent version as of the date of
publication of these proposed

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regulations) of North American Industry

Classification System (NAICS) code
211112 concerning natural gas liquid
extraction will be qualifying activities.
Processing will also include converting
methane in one integrated conversion
into liquid fuels that are otherwise
produced from the processing of crude
oil, as described in the following
paragraph.
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,
including, but not limited to, naphtha,
gasoline, kerosene, fuel oil, lubricating
base oils, waxes, and similar products.
An activity that chemically converts the
physically separated components is
processing or refining of crude oil only
if one or more of the products of the
conversion are recombined with other
physically separated components of
crude oil in a manner that is necessary
to the cost-effective production of
gasoline or other fuels (for example, gas
oil converted to naphtha through a
cracking process that is hydrotreated
and combined into gasoline). It is
generally anticipated that activities
within a refinery that create the
products that are listed in the 2012
version (the most recent version as of
the date of publication of these
proposed regulations) of NAICS code
324110 concerning petroleum refineries
will be qualifying activities, if those
products are refinery grade products
that are obtained in the steps required
to make fuels, lubricating base oils,
waxes, and similar products.
Additionally, physically separating any
product that is itself generated by the
processing or refining of crude oil is a
qualifying activity for purposes of
section 7704(d)(1)(E).
The production of plastics and similar
petroleum derivatives does not give rise
to qualifying income derived from
processing or refining. See H.R. Rep. No.
100495, at 947 (1987) (Conf. Rep.). The
following products are also not
qualifying products under this standard:
(1) Heat, steam, or electricity produced
by the refining processes; (2) products
that are obtained from third parties or
produced onsite for use in the refinery,
such as hydrogen, if excess amounts are
sold; and (3) any product that results
from further chemical change of the
product produced from the separation of
the crude oil if it is not combined with
other products separated from the crude
oil (for example, production of
petroleum coke from heavy (refinery)
residuum qualifies, but any upgrading
of petroleum coke (such as to anodegrade coke) does not qualify because it
is further chemically changed).

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With respect to ores and minerals, an

activity is processing or refining if the
activity is listed in Treasury Regulation
1.6134(f)(1)(ii) or (g)(6)(iii).
Generally, refining of ores and minerals
is any activity that eliminates impurities
or foreign matter from smelted or
partially processed metallic and
nonmetallic ores and minerals, as for
example, the refining of blister copper.
With respect to timber, an activity is
processing if it merely modifies the
physical form of timber. Processing
includes the application of heat or
pressure to timber without adding any
foreign substances. Processing of timber
does not include activities that use
chemicals or other foreign substances to
manipulate timbers physical or
chemical properties, such as using a
digester to produce pulp. Products that
result from timber processing include
wood chips, sawdust, untreated lumber,
veneers (unless a foreign substance is
added), wood pellets, wood bark, and
rough poles. Products that are not the
result of timber processing include
pulp, paper, paper products, treated
lumber, oriented strand board, plywood,
and treated poles.
These proposed regulations reserve
the provisions relating to fertilizer. The
Treasury Department and the IRS
request comments on what activities
should be included.
E. Transportation
These proposed regulations define
transportation as the movement of
minerals or natural resources and
products produced from processing and
refining, including by pipeline, barge,
rail, or truck. Transportation also
includes terminalling, providing storage
services, and operating custody transfer
stations and gathering systems.
Transportation includes the
construction of a pipeline only to the
extent that a pipe is run to connect a
client to a preexisting interstate or
intrastate line owned by the publicly
traded partnership (interconnect
agreement). Transportation (except for
pipeline transportation) does not
include transportation of oil or gas (or
oil or gas products) to a place that sells
or dispenses to retail customers. See
H.R. Rep. No. 100795, at 401 (1988).
The legislative history accompanying
section 7704 clarifies that a retail
customer does not include a person who
acquires the oil or gas for refining or
processing, or partially refined or
processed products thereof for further
refining or processing, . . . [or a] utility
providing power to customers. See H.
R. Rep. No. 1001104, vol. 2, at 18
(1988) (Conf. Rep.). By contrast,
transporting refined petroleum

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Federal Register / Vol. 80, No. 87 / Wednesday, May 6, 2015 / Proposed Rules
products by truck to retail customers is
not a qualifying activity. Id. However,
transportation includes bulk
transportation, so long as the
transportation is not to a place that sells
or dispenses oil and gas (or oil and gas
products) to retail customers. See S.
Rep. No. 100445, at 424 (1988).

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F. Marketing
These proposed regulations define
marketing as the activities undertaken to
facilitate sale of minerals or natural
resources, or products produced from
processing and refining. Marketing may
also include some additive blending
into fuels provided to a customers
specification. The legislative history of
section 7704 provides that marketing
does not include activities and assets
involved primarily in sales to end
users at the retail level. S. Rep. No.
100445, at 424 (1988). Therefore,
marketing does not include retail sales
(sales made in small quantities directly
to end users). For example, gas station
operations are not included in
marketing for purposes of section
7704(d)(1)(E). Id. However, marketing
includes bulk and wholesale sales made
to end users. See, for example, H.R. Rep.
1001104, at 18 (1988) (Conf. Rep.)
(with respect to fertilizer) and
incorporating in footnote 1, 133 Cong.
Rec. 37957 (December 22, 1987)
(statement of Sen. Bentsen with respect
to propane).
2. Intrinsic Activities
The Treasury Department and the IRS
believe that certain limited support
activities intrinsic to section
7704(d)(1)(E) activities also give rise to
qualifying income because the income is
derived from the section 7704(d)(1)(E)
activities. The proposed regulations set
forth three requirements for a support
activity to be intrinsic to section
7704(d)(1)(E) activities. An activity will
qualify as an intrinsic activity only if
the activity is specialized to support the
section 7704(d)(1)(E) activity, is
essential to the completion of the
section 7704(d)(1)(E) activity, and
requires the provision of significant
services to support the section
7704(d)(1)(E) activity. If each of these
requirements is met, the activity is an
intrinsic activity, and any income
received from the activity is qualifying
income. The Treasury Department and
IRS intend that intrinsic activities
constitute active support of section
7704(d)(1)(E) activities, and not merely
the supply of goods.
A. Specialized
An activity meets the first
requirement of the intrinsic test if both

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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 are
specialized. Personnel are specialized if
they have received training unique to
the mineral or natural resource
industries that is of limited utility other
than to perform or support a section
7704(d)(1)(E) activity. An activity
cannot be an intrinsic activity without
specialized service personnel because
all intrinsic activities require the
provision of significant services (as
described in part 3.C of the Explanation
of Provisions section of this Preamble).
For example, catering services provided
to employees at a drilling site would not
give rise to qualifying income because
catering services do not require skills (or
equipment as explained below) limited
to supporting a section 7704(d)(1)(E)
activity. As such, catering services are
not intrinsic activities and any income
from those services is not qualifying
income for purposes of section 7704(c).
If an activity also involves the sale,
provision, or use of property, then the
property must qualify as specialized for
the activity to be an intrinsic activity.
The proposed regulations provide two
alternative tests under which that
property can qualify as specialized.
Under the first test, property is
specialized if it is used only in
connection with section 7704(d)(1)(E)
activities and has limited use outside of
those activities. That property must also
not be easily converted to a use other
than performing or supporting a section
7704(d)(1)(E) activity. Whether property
is easily converted is determined based
on all facts and circumstances,
including the cost to convert the
property.
Under the second test, property that
can be used for purposes other than to
perform or support a section
7704(d)(1)(E) activity will qualify as
specialized to the extent that the
property is used as an injectant to
perform a section 7704(d)(1)(E) activity,
and, as part of the activity, the
partnership also collects and cleans,
recycles, or otherwise disposes of the
injectant after use in accordance with
federal, state, or local regulations
concerning waste products from mining
or production activities. Injectants
under this definition include, for
example, water, lubricants, and sand
used in connection with section
7704(d)(1)(E) activities.
B. Essential
An activity meets the second
requirement of the intrinsic test if the
activity is essential to a section
7704(d)(1)(E) activity. An activity is

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25973

essential if it is necessary to (a)

physically complete the section
7704(d)(1)(E) activity (including in a
cost effective manner in order to make
the activity economically viable), or (b)
comply with federal, state or local law
regulating the section 7704(d)(1)(E)
activity. For example, water delivery
and disposal services are essential when
provided for use in fracturing because
the water must be used to complete the
drilling operations (a development
activity under section 7704(d)(1)(E)) and
because the water disposal services
must be performed to comply with
federal, state, or local law regulating
drilling and fracturing. Legal, financial,
consulting, accounting, insurance, and
other similar services are not essential
to a section 7704(d)(1)(E) activity
because the connection to completion of
the section 7704(d)(1)(E) activity is too
attenuated.
C. Significant Services
An activity meets the third
requirement of the intrinsic test if the
activity includes the provision of
significant services. 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 and the activities
of those personnel are necessary for the
partnership to provide its services or to
support the section 7704(d)(1)(E)
activity. A partnership that provides the
same services to multiple clients may
satisfy this test by performing the
activity through a rotating presence at
multiple sites. For this purpose,
determining whether services are
ongoing or frequent is determined under
all facts and circumstances, including
recognized best practices in the relevant
industry. The Treasury Department and
the IRS request comments on whether
and how this requirement could be set
forth as an objective standard.
In addition, the proposed regulations
acknowledge that a qualifying activity
in which the partnership engages could
require extensive offsite services.
Therefore, these proposed regulations
provide that the services may be
conducted offsite if the services are
performed on an ongoing or frequent
basis and offered exclusively for those
engaged in one or more section
7704(d)(1)(E) activities. For example,
monitoring services will satisfy the
significant services requirement if the
monitoring is done on an ongoing or
frequent basis only to support persons
engaged in one or more section
7704(d)(1)(E) activities.
The proposed regulations also
identify certain activities that do not
qualify as significant services because

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they involve the manufacture and sale

or temporary provision of a good. Thus,
the design, construction, manufacturing,
repair, maintenance, lease, rent, or
temporary provision of assets is not
taken into account when determining
whether a partnership has provided
significant services.

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Proposed Effective/Applicability Date

and Transition Rules
Except for rules concerning the
Transition Period, these regulations are
proposed to apply to income earned by
a partnership in a taxable year
beginning on or after the date these
regulations are published as final
regulations in the Federal Register.
These regulations also provide for a
Transition Period, which ends on the
last day of the partnerships taxable year
that includes the date that is ten years
after the date that these regulations are
published as final regulations in the
Federal Register.
The proposed regulations provide that
a partnership may treat income from an
activity as qualifying income during the
Transition Period if the partnership
received a private letter ruling from the
IRS holding that income from the
activity is qualifying income. In
addition, a partnership may treat
income from an activity as qualifying
income during the Transition Period if,
prior to May 6, 2015, the partnership
was publicly traded, engaged in the
activity, and treated the activity as
giving rise to qualifying income under
section 7704(d)(1)(E), and that income
was qualifying income under the statute
as reasonably interpreted prior to the
issuance of these proposed regulations.
In determining whether an
interpretation was reasonable, the
legislative history and interpretations
applied by the IRS prior to the issuance
of these proposed regulations are taken
into account. An interpretation was not
reasonable merely because a partnership
had a reasonable basis for that position.
With respect to an activity undertaken
prior to May 6, 2015, no inference is
intended that an activity that is not
described in these proposed regulations
as a qualifying activity did or did not
produce qualifying income under the
statute and legislative history.
A partnership that is publicly traded
and engages in an activity after May 6,
2015, but before the date these
regulations are published as final
regulations in the Federal Register may
treat income from that activity as
qualifying income during the Transition
Period if the income from that activity
is qualifying income under these
proposed regulations.

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Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866, as
supplemented by Executive Order
13563. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
proposed regulations. Because these
proposed regulations do not impose a
collection of information on small
entities, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
this notice of proposed rulemaking has
been submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
comments that are submitted timely to
the IRS as prescribed in this preamble
under the ADDRESSES heading. The IRS
and the Treasury Department request
comments on all aspects of the proposed
rules. All comments will be available at
[Link] or upon request. A
public hearing will be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of
the date, time, and place for the public
hearing will be published in the Federal
Register.
Drafting Information
The principal author of these
proposed regulations is Caroline E. Hay,
Office of the Associate Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the IRS
and Treasury Department participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:

Authority: 26 U.S.C. 7805 * * *

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Par. 2. Section 1.77044 is added to

read as follows:

Sfmt 4702

1.77044 Qualifying incomemineral

and natural resources.

(a) In general. For purposes of section

7704(d)(1)(E), qualifying income
includes only income and gains from
qualifying activities with respect to
minerals or natural resources as defined
in paragraph (b) of this section. For
purposes of section 7704(d)(1)(E),
qualifying activities include section
7704(d)(1)(E) activities (as described in
paragraph (c) of this section) and
intrinsic activities (as described in
paragraph (d) of this section).
(b) Mineral or natural resource. The
term mineral or natural resource
(including fertilizer, geothermal energy,
and timber) means any product of a
character with respect to which a
deduction for depletion is allowable
under section 611, except that such term
does not include any product described
in section 613(b)(7)(A) or (B) (soil, sod,
dirt, turf, water, mosses, minerals from
sea water, the air, or other similar
inexhaustible sources). For purposes of
this section, the term mineral or natural
resource does not include industrial
source carbon dioxide, fuels described
in section 6426(b) through (e), any
alcohol fuel defined in section
6426(b)(4)(A), or any biodiesel fuel as
defined in section 40A(d)(1).
(c) Section 7704(d)(1)(E) activities
(1) Definition. Section 7704(d)(1)(E)
activities include the exploration,
development, mining or production,
processing, refining, transportation, or
marketing of any mineral or natural
resource as limited to those activities
described in this paragraph (c) or as
provided by the Commissioner by notice
or in other forms of published guidance.
No other activities qualify as section
7704(d)(1)(E) activities.
(2) Exploration. An activity
constitutes exploration if it is performed
to ascertain the existence, location,
extent, or quality of any deposit of
mineral or natural resource before the
beginning of the development stage of
the natural deposit by:
(i) Drilling an exploratory or
stratigraphic type test well;
(ii) Conducting drill stem and
production flow tests to verify
commerciality of the deposit;
(iii) Conducting geological or
geophysical surveys;
(iv) Interpreting data obtained from
geological or geophysical surveys; or
(v) For minerals, testpitting,
trenching, drilling, driving of
exploration tunnels and adits, and
similar types of activities described in
Rev. Rul. 70287 (19701 CB 146), (see

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601.601(d)(2)(ii)(b) of this chapter) if
conducted prior to development
activities with respect to the minerals.
(3) Development. An activity
constitutes development if it is
performed to make accessible minerals
or natural resources by:
(i) Drilling wells to access deposits of
mineral or natural resources;
(ii) Constructing and installing
drilling, production, or dual purpose
platforms in marine locations, or any
similar supporting structures necessary
for extraordinary non-marine terrain
(such as swamps or tundra);
(iii) Completing wells, including by
installing lease and well equipment,
such as pumps, flow lines, separators,
and storage tanks, so that wells are
capable of producing oil and gas, and
the production can be removed from the
premises;
(iv) Performing a development
technique such as, for minerals,
stripping, benching and terracing,
dredging by dragline, stoping, and
caving or room-and-pillar excavation,
and for oil and natural gas, fracturing;
or
(vi) Constructing and installing
gathering systems and custody transfer
stations.
(4) Mining or production. An activity
constitutes mining or production if it is
performed to extract minerals or other
natural resources from the ground by:
(i) Operating equipment to extract
natural resources from mines and wells;
or
(ii) Operating equipment to convert
raw mined products or raw well effluent
to substances that can be readily
transported or stored (for example,
passing crude oil through mechanical
separators to remove gas, placing crude
oil in settling tanks to recover basic
sediment and water, dehydrating crude
oil, and operating heater-treaters that
separate raw oil well effluent into crude
oil, natural gas, and salt water).
(5) Processing or refining(i) In
general. Except as otherwise provided
in paragraph (c)(5) of this section, an
activity is processing or refining if it is
done to purify, separate, or eliminate
impurities. For an activity to be treated
as processing or refining for purposes of
this section, the partnerships position
that an activity is processing or refining
for purposes of this section must be
consistent with the partnerships
designation of an appropriate Modified
Accelerated Cost Recovery System
(MACRS) class life for assets used in the
activity in accordance with Rev. Rul.
8756, 19872 CB 27 (see
601.601(d)(2)(ii)(b) of this chapter).
For example, for an activity to be
processing or refining of crude oil under

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paragraph (c)(5)(iii) of this section, the

assets used in that process must also
have a MACRS class life of 13.3,
Petroleum Refining. Unless otherwise
provided in this paragraph (c)(5), an
activity will not qualify as processing or
refining if the activity causes a
substantial physical or chemical change
in a mineral or natural resource, or
transforms the extracted mineral or
natural resource into new or different
mineral products or into manufactured
products.
(ii) Natural Gas. An activity
constitutes processing of natural gas if it
is performed to:
(A) Purify natural gas, including by
removal of oil or condensate, water, or
non-hydrocarbon gases (including
carbon dioxide, hydrogen sulfide,
nitrogen, and helium);
(B) Separate natural gas into its
constituents which are normally
recovered in a gaseous phase (methane
and ethane) and those which are
normally recovered in a liquid phase
(propane, butane, pentane, and gas
condensate); or
(C) Convert methane in one integrated
conversion into liquid fuels that are
otherwise produced from petroleum.
(iii) Petroleum(A) Qualifying
activities. An activity constitutes
processing or refining of petroleum if
the end products of these processes are
not plastics or similar petroleum
derivatives and the activity is performed
to:
(1) Physically separate crude oil into
its component parts, including, but not
limited to, naphtha, gasoline, kerosene,
fuel oil, lubricating base oils, waxes and
similar products;
(2) Chemically convert the physically
separated components if one or more of
the products of the conversion are
recombined with other physically
separated components of crude oil in a
manner that is necessary to the cost
effective production of gasoline or other
fuels (for example, gas oil converted to
naphtha through a cracking process that
is hydrotreated and combined into
gasoline); or
(3) Physically separate products
created through activities described in
paragraph (c)(5)(iii)(A)(1) or (2) of this
section.
(B) Non-qualifying activities. For
purposes of this section, the following
products are not obtained through
processing of petroleum:
(1) Heat, steam, or electricity
produced by the refining processes;
(2) Products that are obtained from
third parties or produced onsite for use
in the refinery, such as hydrogen, if
excess amounts are sold; and

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(3) Any product that results from

further chemical change of the product
produced from the separation of the
crude oil if it is not combined with
other products separated from the crude
oil (for example, production of
petroleum coke from heavy (refinery)
residuum qualifies, but any upgrading
of petroleum coke (such as to anodegrade coke) does not qualify because it
is further chemically changed).
(iv) Ores and minerals. An activity
constitutes processing or refining of ores
and minerals if it meets the definition
of mining processes under 1.613
4(f)(1)(ii) or refining under 1.613
4(g)(6)(iii). Generally, refining of ores
and minerals is any activity that
eliminates impurities or foreign matter
from smelted or partially processed
metallic and nonmetallic ores and
minerals, as for example the refining of
blister copper.
(v) Timber. An activity constitutes
processing of timber if it is performed to
modify the physical form of timber,
including by the application of heat or
pressure to timber, without adding any
foreign substances. Processing of timber
does not include activities that add
chemicals or other foreign substances to
timber to manipulate its physical or
chemical properties, such as using a
digester to produce pulp. Products that
result from timber processing include
wood chips, sawdust, rough lumber,
kiln-dried lumber, veneers, wood
pellets, wood bark, and rough poles.
Products that are not the result of timber
processing include pulp, paper, paper
products, treated lumber, oriented
strand board/plywood, and treated
poles.
(vi) Fertilizer. [Reserved]
(6) Transportation. Transportation is
the movement of minerals or natural
resources and products produced under
paragraph (c)(4) or (5) of this section,
including by pipeline, barge, rail, or
truck, except for transportation (not
including pipeline transportation) to a
place that sells or dispenses to retail
customers. Retail customers do not
include a person who acquires oil or gas
for refining or processing, or a utility.
The following activities qualify as
transportation
(i) Providing storage services;
(ii) Terminalling;
(iii) Operating gathering systems and
custody transfer stations;
(iv) Operating pipelines, barges, rail,
or trucks; and
(v) Construction of a pipeline only to
the extent that a pipe is run to connect
a producer or refiner to a preexisting
interstate or intrastate line owned by the
publicly traded partnership
(interconnect agreements).

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(7) Marketing. An activity constitutes

marketing if it is performed to facilitate
sale of minerals or natural resources and
products produced under paragraph
(c)(4) or (5) of this section, including
blending additives into fuels. Marketing
does not include activities and assets
involved primarily in retail sales (sales
made in small quantities directly to end
users), which includes, but is not
limited to, operation of gasoline service
stations, home heating oil delivery
services, and local gas delivery services.
(d) Intrinsic activities(1) General
requirements. An activity is an intrinsic
activity only if the activity is specialized
to support a section 7704(d)(1)(E)
activity, is essential to the completion of
the section 7704(d)(1)(E) activity, and
requires the provision of significant
services to support the section
7704(d)(1)(E) activity. Whether an
activity is an intrinsic activity is
determined on an activity-by-activity
basis.
(2) Specialization. An activity is a
specialized activity if:
(i) The partnership provides
personnel to perform or support a
section 7704(d)(1)(E) activity and those
personnel have received training unique
to the mineral or natural resource
industry that is of limited utility other
than to perform or support a section
7704(d)(1)(E) activity; and
(ii) To the extent that the activity
includes the sale, provision, or use of
property, either:
(A) The property is primarily tangible
property that is dedicated to, and has
limited utility outside of, section
7704(d)(1)(E) activities and is not easily
converted (based on all the facts and
circumstances, including the cost to
convert the property) to another use
other than supporting or performing the
section 7704(d)(1)(E) activities; or
(B) The property is used as an
injectant to perform a section
7704(d)(1)(E) activity that is also
commonly used outside of section
7704(d)(1)(E) activities (such as water,
lubricants, and sand) and, as part of the
activity, the partnership also collects
and cleans, recycles, or otherwise
disposes of the injectant after use in
accordance with federal, state, or local
regulations concerning waste products
from mining or production activities.
(3) Essential(i) An activity is
essential to the section 7704(d)(1)(E)
activity if it is required to
(A) Physically complete a section
7704(d)(1)(E) activity (including in a
cost effective manner, such as by
making the activity economically
viable), or

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(B) Comply with federal, state, or

local law regulating the section
7704(d)(1)(E) activity.
(ii) Legal, financial, consulting,
accounting, insurance, and other similar
services do not qualify as essential to a
section 7704(d)(1)(E) activity.
(4) Significant services(i) An
activity requires significant services to
support the section 7704(d)(1)(E)
activity if it must be conducted on an
ongoing or frequent basis by the
partnerships personnel at the site or
sites of the section 7704(d)(1)(E)
activities. Alternatively, those services
may be conducted offsite if the services
are performed on an ongoing or frequent
basis and are offered exclusively to
those engaged in one or more section
7704(d)(1)(E) activities. Whether
services are conducted on an ongoing or
frequent basis is determined based on
all the facts and circumstances,
including recognized best practices in
the relevant industry.
(ii) Partnership personnel perform
significant services only if those
services are necessary for the
partnership to perform an activity that
is essential to the section 7704(d)(1)(E)
activity, or to support the section
7704(d)(1)(E) activity.
(iii) An activity does not constitute
significant services with respect to a
section 7704(d)(1)(E) activity if the
activity principally involves the design,
construction, manufacturing, repair,
maintenance, lease, rent, or temporary
provision of property.
(e) Examples. The following examples
illustrate the provisions of this section:
Example 1. Petrochemical products
sourced from an oil and gas well. (i) Z, a
publicly traded partnership, chemically
converts a mixture of ethane and propane
(obtained from physical separation of natural
gas) into ethylene, propylene, and other gases
through use of a steam cracker.
(ii) Zs activities chemically convert
physically separated components of natural
gas. The chemical conversion of physically
separated components of natural gas (ethane
and propane) is not an activity that gives rise
to qualifying income under paragraph
(c)(5)(ii) of this section. Therefore, the
income Z receives from the sale of ethylene
and propylene is not qualifying income for
purposes of section 7704(d)(1)(E).
Example 2. Petroleum streams chemically
converted into refinery grade olefins
byproducts. (i) Y, a publicly traded
partnership, owns a petroleum refinery. Y
classifies Ys assets used in the activity
described in this paragraph under MACRS
class 13.3 (Petroleum Refining). The refinery
physically separates crude oil, obtaining
heavy gas oil. The refinery then uses a
catalytic cracking unit to chemically convert
the heavy gas oil into a liquid stream suitable
for gasoline blending and a gas stream
containing ethane, ethylene, and other gases.

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The refinery also further physically separates

the gas steam without additional chemical
change, resulting in refinery grade ethylene.
Y sells the ethylene to a third party.
(ii) Ys activities are performed to
physically separate crude oil into its
component parts and to chemically convert
the separated heavy gas oil into a liquid
stream for recombining with other physically
separated components of crude oil. Y has
classified its assets used in that activity
under an appropriate MACRS code pursuant
to paragraph (c)(5)(i) of this section. Income
Y receives from the liquid stream is
qualifying income pursuant to paragraph
(c)(5)(iii)(A)(2) of this section. Ys further
physical separation of the gas stream
produces ethane, ethylene, and other gases.
Pursuant to paragraph (c)(5)(iii)(A)(3),
income Y receives from the physically
separated gases is qualifying income because
the heavy gas oil was chemically converted
as part of a processing activity pursuant to
paragraph (c)(5)(iii)(A)(2) of this section.
Example 3. Processing methane gas into
synthetic fuels through chemical change. (i)
Y, a publicly traded partnership, chemically
converts methane into methanol and
synthesis gas, and further chemically
converts those products into gasoline and
diesel fuel. Y receives income from sales of
gasoline and diesel created during the
conversion processes, as well as from sales of
methanol.
(ii) With respect to the production of
gasoline or diesel, Y is engaged in the
processing of natural gas as provided in
paragraph (c)(5)(ii)(C) of this section. The
production and sale of methanol, an
intermediate product in the conversion
process, is not a section 7704(d)(1)(E) activity
because methanol is not a liquid fuel
otherwise produced from the processing of
crude oil.
Example 4. Delivery of refined products. (i)
X, a publicly traded partnership, sells diesel
and lubricating oils to a government entity at
wholesale prices and delivers those goods in
bulk.
(ii) Xs sale of refined products to the
government entity is a section 7704(d)(1)(E)
activity because it is a bulk transportation
and sale as described in paragraphs (c)(6) and
(7) of this section and is not a retail sale.
Example 5. Delivery of water. (i) X, a
publicly traded partnership, owns interstate
and intrastate natural gas pipelines. X built
a water delivery pipeline along the existing
right of way for its natural gas pipeline to
deliver water to A for use in As fracturing
activity. A uses the delivered water in
fracturing to develop As natural gas reserve
in a cost-efficient manner. X earns income for
transporting natural gas in the pipelines and
for delivery of water.
(ii) Xs income from transporting natural
gas in its interstate and intrastate pipelines
is qualifying income for purposes of section
7704(c) because transportation of natural gas
is a section 7704(d)(1)(E) activity as provided
in paragraph (c)(6) of this section.
(iii) The income X obtains from its water
delivery services is not a section
7704(d)(1)(E) activity as provided in
paragraph (c) of this section. However,
because Xs water delivery supports As

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development of natural gas, a section
7704(d)(1)(E) activity, Xs income from water
delivery services may be qualifying income
for purposes of section 7704(c) if the water
delivery service is an intrinsic activity as
provided in paragraph (d) of this section. An
activity is an intrinsic activity if the activity
is specialized to narrowly support the section
7704(d)(1)(E) activity, is essential to the
completion of the section 7704(d)(1)(E)
activity, and requires the provision of
significant services to support the section
7704(d)(1)(E) activity. Under paragraph
(d)(2)(ii)(B) of this section, the provision of
water used in a section 7704(d)(1)(E) activity
is specialized to that activity only if the
partnership also collects and cleans, recycles,
or otherwise disposes of the water after use
in accordance with federal, state, or local
regulations concerning waste products from
mining or production activities. Because X
does not collect and clean, recycle, or
otherwise dispose of the delivered water after
use, Xs water delivery activities are not
specialized to narrowly support the section
7704(d)(1)(E) activity. Thus, Xs water
delivery is not an intrinsic activity.
Accordingly, Xs income from the delivery of
water is not qualifying income for purposes
of section 7704(c).
Example 6. Delivery of water and recovery
and recycling of flowback. (i) Assume the
same facts as in Example 5, except that X also
collects and treats flowback at the drilling
site in accordance with state regulations as
part of its water delivery services and
transports the treated flowback away from
the site. In connection with these services, X
provides personnel to perform these services
on an ongoing or frequent basis that is
consistent with best industry practices. X has
provided these personnel with specialized
training regarding the recovery and recycling
of flowback produced during the
development of natural gas, and this training
is of limited utility other than to perform or
support the development of natural gas.
(ii) The income X obtains from its water
delivery services is not a section
7704(d)(1)(E) activity as provided in
paragraph (d) of this section. However,
because Xs water delivery supports As
development of natural gas, a section
7704(d)(1)(E) activity, Xs income from water
delivery services may be qualifying income
for purposes of section 7704(c) if the water
delivery service is an intrinsic activity as
provided in paragraph (d) of this section.
(iii) An activity is an intrinsic activity if
the activity is specialized to narrowly
support the section 7704(d)(1)(E) activity, is
essential to the completion of the section
7704(d)(1)(E) activity, and requires the
provision of significant services to support
the section 7704(d)(1)(E) activity. Under
paragraph (d)(2)(ii)(B) of this section, the
provision of water used in a section
7704(d)(1)(E) activity is specialized to that
activity only if the partnership also collects
and cleans, recycles, or otherwise disposes of
the water after use in accordance with
federal, state, or local regulations concerning
waste products from mining or production
activities. Xs provision of personnel is
specialized because those personnel received
training regarding the recovery and recycling

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of flowback produced during the

development of natural gas, and this training
is of limited utility other than to perform or
support the development of natural gas. The
provision of water is also specialized because
water is an injectant used to perform a
section 7704(d)(1)(E) activity, and X also
collects and treats flowback in accordance
with state regulations as part of its water
delivery services. Therefore, X meets the
specialized requirement. The delivery of
water is essential to support As development
activity because the water is needed for use
in fracturing to develop As natural gas
reserve in a cost-efficient manner. Finally,
the water delivery and recovery and
recycling activities require significant
services to support the development activity
because Xs personnel provide services
necessary for the partnership to perform the
support activity at the development site on
an ongoing or frequent basis that is consistent
with best industry practices. Because Xs
delivery of water and Xs collection,
transport, and treatment of flowback is a
specialized activity, is essential to the
completion of a section 7704(d)(1)(E) activity,
and requires significant services, the delivery
of water and the transport and treatment of
flowback is an intrinsic activity. Xs income
from the delivery of water and the collection,
treatment, and transport of flowback is
qualifying income for purposes of section
7704(c).

(f) Proposed Effective/Applicability

Date and Transition Rule(i) Except as
provided in paragraph (f)(ii) of this
section, this section is proposed to
apply to income earned by a partnership
in a taxable year beginning on or after
the date these regulations are published
as final regulations in the Federal
Register. Paragraph (f)(ii) of this section
applies during the Transition Period,
which ends on the last day of the
partnerships taxable year that includes
the date that is ten years after the date
that these regulations are published as
final regulations in the Federal Register.
(ii) A partnership may treat income
from an activity as qualifying income
during the Transition Period if:
(A) The partnership received a private
letter ruling from the IRS holding that
the income from that activity is
qualifying income;
(B) Prior to May 6, 2015, the
partnership was publicly traded,
engaged in the activity, and treated the
activity as giving rise to qualifying
income under section 7704(d)(1)(E), and
that income was qualifying income
under the statute as reasonably
interpreted prior to the issuance of these
proposed regulations; or
(C) The partnership is publicly traded
and engages in the activity after May 6,
2015 but before the date these
regulations are published as final
regulations in the Federal Register, and
the income from that activity is

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25977

qualifying income under these proposed

regulations.
John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 201510592 Filed 5515; 8:45 am]
BILLING CODE 483001P

FEDERAL COMMUNICATIONS
COMMISSION
47 CFR Part 20
[PS Docket No. 0851; FCC 1543]

911 Call-Forwarding Requirements for

Non-Service-Initialized Phones
Federal Communications
Commission.
ACTION: Proposed rule.
AGENCY:

The Commission seeks

comment on whether the obligation to
transmit 911 calls from non-serviceinitialized (NSI) devices still serves an
important public safety objective.
Because the cumbersome call validation
methods extant when the rules were
adopted in the late 1990s are no longer
in use, and because of the current
ubiquity of low-cost options for wireless
services, the Commission proposes to
sunset the obligation to transmit 911
calls from an NSI device within six
month, accompanied by consumer
outreach and education. Public safety
representatives have indicated that NSI
devices are frequently used to make
fraudulent or otherwise non-emergency
calls, causing a significant waste of
limited public safety resources.
DATES: Submit comments on or before
June 5, 2015 and reply comments by
July 6, 2015. Written comments on the
Paperwork Reduction Act proposed
information collection requirements
must be submitted by the public, Office
of Management and Budget (OMB), and
other interested parties on or before July
6, 2015.
ADDRESSES: Submit comments to the
Federal Communications Commission,
445 12th Street SW., Washington, DC
20554. Comments may be submitted
electronically through the Federal
Communications Commissions Web
site: [Link] In
addition to filing comments with the
Secretary, a copy of any comments on
the Paperwork Reduction Act
information collection requirements
contained herein should be submitted to
the Federal Communications
Commission via email to PRA@[Link].
For detailed instructions for submitting
comments and additional information
on the rulemaking process, see the
SUMMARY:

E:\FR\FM\[Link]

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