ETHANOL BLENDERS can organize themselves as master limited partnerships, the IRS confirmed in September.

However, the real breakthrough would be if master limited partnerships can be used to “roll up” plants that produce ethanol, not just refineries that blend it with gasoline. The ruling suggests that it may be possible to have such a roll up by combining refineries that blend ethanol in the same partnership with one or more plants to produce ethanol.

Master limited partnerships are large partner- ships with units that are publicly traded on a stock exchange or over-the-counter market. They have been used by energy companies to acquire gas pipelines, propane distributors, coal reserves and other properties. They can raise equity more cheaply than other businesses can. Since they operate as partnerships, their earnings are taxed only once (unlike corporate earnings that end up being taxed both to the corporation and again to investors when the earnings are distributed as dividends). Investors are also willing to pay more for interests for which there is a liquid market.

MLPs are suitable for projects that earn at least 90% of their income from the “exploration, development, mining or production, processing, refining, transportation . . . or the marketing of any mineral or natural resource.” Crops are not considered natural resources for this purpose.

The IRS confirmed in a private letter ruling made public in September that fees that a partnership earns for injecting additives or blending ethanol with fuel are qualifying income for an MLP. This raises the question whether the partnership would qualify as an MLP if its revenue is entirely from sales of ethanol blends and the partnership makes its own ethanol. The ruling is PLR 200638018.