By Karyl Patredis
We all got a shocker when we found out that in the final hours of the Obama Administration, the IRS and Treasury released the final qualifying income regulations under Section 7704 of the US Code. *cue the dramatic music*
The story gets a bit more interesting because on January 20, 2017, our new President told all the heads of executive departments and agencies to intercept any regulations that’d been sent to the Federal Register but hadn’t been published. The purpose in doing this was for Trump or one of Trump’s staff to get their mitts on all regulations that were pending and have the opportunity to scrap anything misaligned with the administration’s plans.
Interestingly, despite the call for this freeze, the final regulations were published to the Federal Register on January 24. At first, I thought there might be some exciting/scandalous reason that these rules were published while others weren’t, but I learned it went through simply because the Office of Management and Budget (OMB) approved it. Evidently, the OMB has the power to override “freezes” like the one Trump put into play when the matter is “urgent.” In addition, the IRS said the effective date of the regulations was January 19, which predated the January 20 memo.
Anyhoo, the fact is that the rules are now published to the Federal Register, so it’s important for us to understand what they say. You might remember from previous posts that there were several hotly contested issues with the proposed regulations. Two of the most controversial were the idea that the proposed regulations contained an “exclusive list” of qualifying activities and that the processing of NGLs into ethylene wasn’t qualifying.
To the pleasure of many, the IRS addressed both of these issues in the final regulations. Those who’d shared opinions with the IRS during the comment period provided numerous logical reasons why an exclusive list of qualifying activities didn’t make sense. One great example is that technological advances may change the process by which something occurs without changing the final outcome. In other words, let’s say I wrote a report about elephants in 2nd grade using paper, pencil, and encyclopedias. Is my report substantially different from an elephant report my son wrote in 2017 using Word and the internet? The idea is that it is impossible for us to know how the means to the same end might look in the future, so it wouldn’t make sense for a list of limitations to exist. The IRS agreed with this logic and decided the list of activities should not be exclusive.
Also, in very happy news for Westlake Chemical Partners (WLKP) investors, the processing of NGLs into ethylene, propylene, and butadiene is now considered qualifying. If you look at this chart, it’ll help you understand what the problem was. Making ethylene, propylene, and butadiene from gas/NGLs wasn’t considered a qualifying activity, although creating the same three substances from crude oil was approved. It’d be like if you and a friend were both invited to a potluck dinner party and both asked to bring Sprite. You bought a two-liter bottle at Wal-Mart and your friend bought the same bottle at Target. When you arrived at the party, the hostess only accepted the friend’s bottle of Sprite. It wouldn’t make sense, right? Clearly, the IRS agreed with commenters’ assertions that the proposed regulations inappropriately favored crude oil over natural gas.
In addition to these two issues, several other comments on the proposed regulations were addressed. For example, more clarity was provided on pipeline compression services being a qualifying activity and the definitions of processing and refining were separated and expanded to be more inclusive. All in all, most people in MLP-land are happy with the final regulations. The majority of MLPs (unless they have a non-calendar fiscal year) will not be required to adhere to the new regulations until next year, as the rules will begin to apply “in a taxable year beginning on or after” January 24, 2017. Also, if an MLP is currently involved in an activity that is no longer qualifying under the new regs, they have a 10-year transition period where the activity will still be accepted as such.
Many speculate that the Trump Administration will not seek to re-write these regulations since the majority of stakeholders seem pleased with the final outcome. It doesn’t mean it couldn’t happen if both houses of Congress decided to pass a joint resolution of disapproval under the Congressional Review Act, but my guess is that Trump has bigger fish to fry than tweaking regulations that are generally energy-friendly.