Responce From The Author
May 15, 2003
Mr. Fogarty is correct. According to my legal sources, a literal reading of Section 7704(d)(1)(E) indicates that income from electric properties would not be "qualifying income." The section defines qualifying income as income and gains from the exploration, mining or production, processing, refining, transportation, or marketing of any "mineral or natural resource" [including fertilizer, geothermal energy and timber]. Mineral and natural resources are usually defined as any product for which a depletion deduction is allowable under Section 611. Further, legislative history suggests that qualifying income does not include income from hydroelectric, solar, wind or nuclear power production. [See H. Rept. No. 100-795 (PL 100-647) p.400.]
However, while income from electric properties is not specifically included within the definition of qualifying income, neither has it been addressed in the Treasury regulations. The interpretation of qualifying income is not statutory in origin, per se. If MLPs make sense for the management of broader classes of assets, then regulations and protocols could be changed to accommodate this need. I'm not aware of any proposed rule changes at this time, but inquiries from the industry could prompt a review of the rules.
In any case, the MLP structure is only one approach to securitizing assets. Similar benefits might be gained through the use of other limited partnership structures.
Of course, Mr. Fogarty and anyone else should seek independent counsel from accounting and tax professionals.
Michael T. Burr
Contributing Editor
Fortnightly Magazine
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