Proposed Legislation Would Allow Master Limited Partnership Structures for Renewable Energy Investments; House Subcommittee Holds Extenders Hearing

June 15, 2012


On June 7, 2012, U.S. Senators Chris Coons (D-Del.) and Jerry Moran (R-Kan.) introduced legislation (the Master Limited Partnerships Parity Act)[1] that would allow investors in renewable energy projects to utilize the master limited partnership (“MLP”) structure. The use of the MLP structure for renewable energy investments would allow renewable energy investors to invest in an entity with interests that are freely traded on securities markets like corporate stock, but the MLP would be taxed as a partnership for U.S. federal income tax purposes (i.e., the MLP should not be subject to corporate taxation if certain requirements are met). If enacted, the MLP structure, which is already available to entities engaged in the development of certain non-renewable natural resources, may provide access to a broader range of investors and capital with respect to renewable energy projects.

Under section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”), a partnership is generally treated as a corporation for U.S. federal income tax purposes if equity interests in the partnership are traded on an established securities market (for instance, a stock exchange) or readily tradable on a secondary market (i.e., if there exists a person standing ready to make a market in the interest) unless 90 percent or more of the partnership’s income for the taxable year (and for each previous taxable year during which the partnership was a publicly traded partnership) is “qualifying income” as defined in section 7704(d) of the Code. Qualifying income is generally “passive-type” income, including, among other items of income, interest, dividends and real property rents.[2] However, qualifying income is also defined to include income from “the exploration, development, mining or production, processing, refining, transportation (including pipelines transporting gas, oil, or products thereof), or the marketing of any mineral or natural resource.”[3] Thus, MLP status is currently available to investors in certain non-renewable energy projects, such as oil pipelines or coal extraction projects. In addition, income derived from the storage of certain renewable and alternative fuels (including ethanol and biodiesel) is also currently treated as qualifying income. However, income derived from the production of electricity using renewable resources such as wind or solar power, is not included in the definition of qualifying income. Therefore, under current law a publicly traded partnership engaged primarily in the production of energy from renewable resources would generally be treated as a corporation for U.S. federal income tax purposes and the partnership’s income would be subject to two levels of tax (i.e., once at the partnership level when the income is realized and again at the partner level when the income is distributed).

The Master Limited Partnerships Parity Act would expand the definition of qualifying income to include income derived from the generation, storage or transmission of electricity utilizing resources or energy property described in the production tax credit[4] or investment tax credit[5] provisions of the Code. Under the proposed legislation, a publicly traded partnership that derives 90 percent or more of its income from projects utilizing wind, closed or open loop biomass, geothermal energy, solar energy or certain other renewable energy resources could take advantage of the broader access to capital offered by publicly traded investment vehicles, while preserving the single level of taxation applicable to partnerships.

According to a white paper released by Senator Coons, there is an estimated $350 billion in MLP capital currently on the market.[6] The potential increased access to capital may further encourage investment in renewable energy projects. It must be noted, however, that even if the Master Limited Partnerships Parity Act were passed, the viability of most renewable energy projects would still be dependent upon the many federal and state renewable energy incentives that are currently in place and could be subject to certain other limitations applicable to partnerships in general (e.g., the “passive activity loss” and “at risk” rules that apply to individual taxpayers).

Under current law, investments in renewable energy projects are largely economically feasible only as a result of the many federal and state tax and other incentives that are currently available. Among the federal statutory incentives are production tax credits based on the production and sale of energy produced from specified renewable resources,[7] investment tax credits based on the cost of certain energy property placed into service[8] and cash grants provided in lieu of these credits with respect to certain projects where construction commenced prior to 2012.[9] The proposed MLP legislation coincides with the June 8th hearings held before the House Ways and Means Select Revenue Measures Subcommittee on whether these tax credits, all of which are subject to phase-out dates under current law, should be extended.[10]

In reference to this issue, Interior Secretary Ken Salazar recently made remarks advocating that the production tax credit for wind energy projects, which is currently scheduled to be unavailable for projects placed into service after December 31, 2012, be extended, without advocating any phase-out provision.[11] Senator Lisa Murkowski (R-Alas.), the ranking minority member of the Senate Energy and Natural Resources Committee, indicated that there must be a sustainable plan permitting energy tax incentives that may be eliminated eventually.[12] These extensions for renewable energy tax credits and the availability of the MLP structure for renewable energy projects represent significant developing issues in the field of renewable energy investments. Should the MLP structure become available for renewable energy investments, the interplay between currently available federal and state incentives with respect to renewable energy projects and the MLP rules under the Code will likely be an area of much focus and debate going forward.

[1] Master Limited Partnerships Parity Act, S. 3275, 112th Cong. (2d. Sess. 2012). The text of the proposed legislation is available here.
[2] I.R.C. § 7704(d)(1).
[3] I.R.C. § 7704(d)(1)(E).
[4] I.R.C. § 45(c)(1).
[5] I.R.C. § 48. 
[6] U.S. SENATOR CHRIS COONS, MASTER LIMITED PARTNERSHIPS PARITY ACT (2012). The white paper is available at http://coons.senate.gov/download/mlp-white-paper.
[7] I.R.C. § 45.
[8] I.R.C. § 48.
[9] American Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, § 1603, 123 Stat. 115 (2009).
[10] See Michael Beller, Extenders Should Get Individual Scrutiny, Witnesses Tell W&M Panel, Tax Notes Today, June 11, 2012.
[11] See Michael Beller, Interior Secretary Urges Extension for Energy Production Tax Credit; Others Want Limits, Tax Notes Today, June 6, 2012.
[12] Id.