A year ago this time, the midstream energy industry was facing the challenge of the early stages of another crude oil price cycle—this one caused by an imbalance of growing global crude oil supplies in combination with slower demand growth. Industry participants and investors were trying to deter mine if this cycle would be a shorter V-shaped, a U-shaped, or a prolonged L-shaped curve.

In Washington, D.C., we were awaiting the release of the Internal Revenue Service’s (IRS) proposed regulations on qualifying income activity for MLPs. As we begin 2016 and we recap the year behind us, the picture that emerges is of an industry that is weathering a very challenging marketplace, including a higher cost of capital to fund the ongoing construction of critical midstream energy infrastructure.

Working through the Master Limited Partnership Association (MLPA), the industry remains poised to continue advocating for a favorable public policy environment.

2015 in review

Although tax reform received the most attention in Washington heading into 2015, the talk did not result in action, and most likely will not in the near future. While the need for comprehensive tax reform is frequently mentioned, enacting tax reform legislation is very difficult. Since the Internal Revenue Code as we know it was first codified in 1939, comprehensive tax reform has only been enacted twice, with the most recent reform occurring almost 30 years ago.

On each of these occasions, the White House—not Congress—provided the leadership for tax reform. In recent years, most of the discussion of tax reform has been led by Congress, with the White House providing little if any leadership. Moreover, Congress remains sharply divided along partisan lines on just about every issue, including taxation.

A confluence of political gridlock over the debt ceiling and highway funding, leadership changes in Congress and eyes already turning to this year’s elections led to very little in the way of meaningful legislation. Instead, the most consequential policy issues facing MLPs in 2015 were the IRS’ proposed regulations on qualifying income activity for MLPs and legislation containing large partnership audit provisions.

Pushing back

Pushing backWith regard to the 2015 IRS proposal, MLPA and its members worked to firmly push back on certain portions of the regulations that are inconsistent with the original legislation and congressional record.

Submitting formal comments to the IRS and working with lawmakers, the association expressed how MLPs have consistently operated—as intended—under Section 7704 of the tax code for three decades. During that time, the IRS has provided workable guidance on qualifying income via private letter rulings (PLRs). The 2015 proposed regulations, however, run counter to both previous PLRs and congressional intent.

Two points are important:

• First, MLPA stated that the IRS’ proposal to create exclusive lists of qualifying activities would not make the regulations flexible enough to accommodate the development of new technologies. In an innovative and ever-shifting industry like energy, this proposal would risk the regulations being outdated by the time final rules are written.

• Second, the proposed regulations include a far too narrow definition of qualifying income regarding processing and refining for minerals and natural resources. Many other commenters shared MLPA’s positions. The proposed regulations have also prompted letters of concern from a number of members of the House Committee on Ways and Means and from the Louisiana congressional delegation.

The introduction of the Partnership Audit Simplification Act in June 2015 presented another potential concern for MLPs. The legislation, as introduced, would have had the harmful consequence of imposing joint and several liabilities on partners and partnerships and forcing MLPs to pay any additional tax owed after an audit at the entity level. Again, MLPA, along with other interested organizations, worked with lawmakers and staff, pointing out the problems with the proposed legislation and its harm to MLPs.

The bill did not advance out of committee at that time, but it came up again in late October as part of the budget deal negotiated with the Obama administration by outgoing House Speaker John Boehner and passed by Congress. The provisions as enacted are a great improvement over the original bill, as they do not compromise limited liability.

The year ahead

Shifting attention to 2016, all eyes in Washington will be on November’s elections. This focus on presidential politics means that any meaningful policy shifts will likely be pushed to 2017 and the 115th Congress. Despite the election year distractions, MLPs will concentrate on the same issues as 2015, and MLPA expects to see final—and hopefully improved—Section 7704 regulations from the IRS, in addition to clarifications relating to how the partnership audit provisions will work.

This year, MLPA will continue to advocate for a favorable policy environment for MLPs and for policies that will enhance our energy security and energy independence, as well as facilitate capital formation for energy infrastructure.

Comments