The IRS lifted the pause on issuing private letter rulings allowing companies to form MLPs with their assets
The Internal Revenue Service lifted its ‘pause’ on private letter rulings (PLRs) regarding what businesses qualify for tax-free inclusion in energy master limited partnerships (MLPs). The IRS decided to put a pause on issuing PLRs last April after a huge spike in requests in order to develop standards for deciding whether or not a company qualified to form a MLP.
Forming MLPs has become an increasingly popular move among energy companies as it offers them a way to lower their cost of capital. The partnerships pay no taxes and offer large dividends to investors. Before the pause was initiated, companies could request a PLR from the IRS in order to see how tax laws applied to them, and whether or not they could form a MLP.
In a statement released Friday, the IRS said, “During the pause, we have spent significant time studying the issues and have worked with engineers in (Large Business and International) to develop workable standards to guide our ruling practice.”
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Several companies, including Antero Resources (ticker: AR) and SandRidge Energy (ticker: SD), were snared in the decision to pause PLRs. This created a backlog of companies looking to form MLPs, says Chris Freeman, Managing Director at Wunderlich. When asked by Oil&Gas360® about what might happen now that the IRS will continue to issue PLRs, Mr. Freeman said, “The door is not wide open [to the companies seeking to form MLPs], but many companies are going to start coming to market.”
Challenges still remain to companies seeking to form MLPs, though. “Many of the more commodity sensitive MLPs have cut their distribution during this recent downturn,” says Freeman. “This could throw up red flags with investors.” The low price environment may keep investors away from new MLPs, unless they are willing to offer higher dividends in order to attract investment.
So far, the IRS has not detailed what kinds of new rules and regulations it plans to put in place after lifting the pause on PLRs, but the decision to resume issuing the letters has removed some uncertainty in the market. Maria Halmo, Director of Research at Alerian, the company responsible for the Alerian MLP Index (AMZ), which tracks relative performance of MLPs, said that Alerian is looking forward to the clarity they expect to come from the PLR pause.
“Alerian, along with the rest of the MLP community, is looking forward to the clarity provided by the end of the PLR pause. If we see a broader interpretation of qualifying income, investors can expect to see more energy-adjacent assets enter the MLP structure, either via acquisitions by existing MLPs or via IPOs. If we see a stricter interpretation, a small number of MLPs could lose their tax status, as grandfathering was not explicitly assured in comments from the IRS. Regardless, the removal of uncertainty will enable companies to move forward with their plans, which we believe is a long-term positive for all stakeholders.”
The ruling process resumed Friday, and the IRS will issue proposed regulations in the near future, it said.
The National Association of Publicly Traded Partnerships told Reuters on Friday that its members are “very pleased that the long wait for rulings to resume is over.”
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