UPDATE 2-IRS puts damper on newer types of energy partnerships

Tue Apr 8, 2014 5:53pm EDT

Related Topics

* IRS does not say how long delays will last

* IPO market for MLPs may slow

* 'Pause' looking at less traditional companies (Adds IRS statement, expert opinions)

By Patrick Temple-West and Anna Driver

WASHINGTON/NEW YORK, April 8 (Reuters) - The Internal Revenue Service has temporarily stopped issuing private letter rulings (PLRs) that energy companies sometimes request when setting up master limited partnerships for their tax benefits.

Lawyers specializing in the oil and gas sector have said the IRS wants to review the scope of assets that can qualify as tax-free for master limited partnerships (MLPs), which have lured hundreds of billions of dollars from investors seeking high yields.

"There has been a pause," IRS Commissioner John Koskinen told reporters on Tuesday at a congressional hearing. He did not say how long the delay would last.

"(The pause) is to try to make sure the letter rulings are all consistent and to try to see if there is a way to give broader guidance to the industry."

The IRS is undertaking the review "given the proliferation of publicly traded partnerships and changes in the industries in which they tend to operate," the agency said in a statement.

Failing the qualifying test and having a PLR request rejected means companies must pay taxes like corporations.

On Monday, in a sign that some transactions might be delayed, SandRidge Energy Inc said an MLP it had considered setting up for its water disposal business was affected by the IRS action.

Timothy Fenn, a partner with Latham & Watkins in Houston, said the market could slow for initial public offerings of MLPs, which are widely listed on U.S. stock exchanges.

"It's causing uncertainty in the IPO market for new MLP IPOs who are waiting for a private letter ruling in order to go public," he said.

About 130 MLPs trade on major exchanges, the bulk of them being energy and natural resources companies, along with some financial and real estate firms, according to the National Association of Publicly Trade Partnerships.

Experts said plain-vanilla pipeline companies don't need to ask for private letter rulings because they clearly pass the IRS definition of qualifying income for MLPs.

TRADITIONAL OR NON-TRADITIONAL?

But in recent years other companies with businesses that may fall outside the IRS's guidelines have successfully won PLRs and pushed the envelope of what can qualify.

Among those are some oilfield services companies, who have won PLRs by arguing they are an integral part of the oil and gas production business. That subset of the MLP world may now be under review, experts said.

Still, another lawyer at a top energy firm said most public offerings of the partnerships do not need a PLR to list.

The MLP world has grown dramatically over the past 10 years, surging from investments of just $2 billion in 1994 to $445 billion now. Last year the tax agency issued 28 private letter rulings and so far this year there have been only five, according to Wells Fargo.

Cash-generating pipeline companies have traditionally used the structure, but now a range of companies are setting up MLPs and their complexity is growing, analysts say.

Energy companies form the MLPs because they are not taxed at the federal level, lowering their cost of capital and allowing them to invest more in infrastructure.

Investors, or unitholders, like them because they mostly provide higher payouts than dividend-paying companies, and the returns have been beating yields available on Treasuries and most corporate bonds. (Reporting By Patrick Temple West; Editing by Terry Wade, Meredith Mazzilli and Ken Wills)

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