Taxation of the Partnership
Partnership Status
We are treated
as a partnership for U.S. federal income tax purposes and, therefore, subject to the discussion below under Administrative MattersInformation Returns and Audit Procedures, generally will not be liable for entity-level federal
income taxes. Instead, as described below, each of our unitholders will take into account its respective share of our items of income, gain, loss and deduction in computing its federal income tax liability as if the unitholder had earned such income
directly, even if we make no cash distributions to the unitholder. Distributions we make to a unitholder will not give rise to income or gain taxable to such unitholder, unless the amount of cash distributed exceeds the unitholders adjusted
tax basis in its common units. Please read Tax Consequences of Common Unit OwnershipTreatment of Distributions and Disposition of Common Units).
Section 7704 of the Code generally provides that publicly-traded partnerships will be treated as corporations for federal income tax
purposes. However, if 90% or more of a partnerships gross income for every taxable year it is publicly-traded consists of qualifying income, the partnership may continue to be treated as a partnership for federal income tax
purposes (the Qualifying Income Exception). Qualifying income includes, (i) interest, (ii) dividends, (iii) real property rents within the meaning of Section 856(d) of the Code, as modified by Section 7704(d)(3) of
the Code, (iv) gains from the sale or other disposition of real property, (v) income and gains derived 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, and (vi) gains from the sale or other disposition of capital assets (or property described in Section 1231(b) of the Code) held for the production
of income that otherwise constitutes qualifying income. We estimate that less than 3% of our current gross income is not qualifying income; however, this estimate could change from time to time.
No ruling has been or will be sought from the IRS with respect to our classification as a partnership for federal income tax purposes or as to
the classification of our partnership and limited liability company operating subsidiaries. Instead we have relied on the opinion of Vinson & Elkins L.L.P. that, based upon the Code, existing Treasury Regulations, published revenue rulings
and court decisions and representations described below, the Partnership and each of our partnership and limited liability company operating subsidiaries, will be classified as a partnership or disregarded as an entity separate from us for federal
income tax purposes.
Vinson & Elkins L.L.P. is of the opinion that we will be treated as a partnership for federal income
tax purposes and each of our partnership and limited liability company operating subsidiaries, will be treated as a partnership or will be disregarded as an entity separate from us. In rendering its opinion, Vinson & Elkins L.L.P. has
relied on factual representations made by us and our general partner, including, without limitation:
(a) Neither we nor
any of our partnership or limited liability company operating subsidiaries, has an existing election in place or will elect to be treated as a corporation for federal income tax purposes; and
(b) For each taxable year since and including the year of our initial public offering, more than 90% of our gross income has
been and will be income of a character that Vinson & Elkins L.L.P. has opined is qualifying income within the meaning of Section 7704(d) of the Code.
We believe that these representations are true and will be true in the future.
If we fail to meet the Qualifying Income Exception, other than a failure that is determined by the IRS to be inadvertent and that is cured
within a reasonable time after discovery (in which case the IRS may also require us to make adjustments with respect to our unitholders or pay other amounts), we will be treated as transferring all of our assets, subject to all of our liabilities,
to a newly formed corporation, on the first day of the year in which we fail to meet the Qualifying Income Exception in return for stock in that corporation and then as distributing that stock to our unitholders in liquidation of their interests in
us. This deemed contribution and liquidation
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