Taxation of the Partnership
We expect to be
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 units. Please read Tax Consequences of Unit OwnershipTreatment of Distributions and Disposition of Units).
Section 7704 of the Code provides that a publicly-traded partnership will be treated as a corporation 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 disposition of a capital asset (or property described in Section 1231(b) of the Code) held for the production of qualifying
income. We estimate that less than 6% 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 counsel that based upon the Code, existing Treasury Regulations, published revenue rulings and court decisions and
representations described below, the Partnership and our partnership and limited liability company operating subsidiaries, other than those that have been identified as corporations to Vinson & Elkins L.L.P., will each be classified as a
partnership or disregarded as an entity separate from its owner 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 operating subsidiaries, other than those that have been identified as corporations to Vinson & Elkins L.L.P., 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 the 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, other than those that have been
identified as corporations to Vinson & Elkins L.L.P., has elected or will elect to be treated as a corporation for federal income tax purposes;
(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; and
(c) Each hedging transaction that we treat as resulting in qualifying income has been and will be appropriately identified as a
hedging transaction pursuant to applicable Treasury Regulations, and has been and will be associated with oil, natural gas or products thereof that are held or to be held by us in activities that Vinson & Elkins L.L.P. has opined or will
opine result in qualifying income.
We believe that these representations are true and will be true in the future.