We’re a long way from May, when people seriously worried about the risk to MLPs from the Internal Revenue Service.

It’s clear now that commodity markets and some within the MLP investor base in fact posed a much bigger threat; certainly the IRS cannot be blamed for the sharp subsequent drop in unit prices.

The government is, however, continuing to refine its proposed rules for the range of activities qualifying MLPs for their favorable tax treatment as pass-through partnerships.

An IRS attorney recently acknowledged that the definitions proposed in May might have been too arbitrary and restrictive, disqualifying the processing of natural gas liquids into olefins, for example, but not the production of the same chemicals in the process of crude refining.

The agency has reportedly been consulting with industry engineers, but in a public hearing set at its Washington, D.C. headquarters on Oct. 27 it will be industry lawyers who will likely do most of the talking.

Their objections run the gamut from IRS plans to draw up a specific list of qualifying activities, to the conflict between its definitions and those legislated elsewhere in the tax code and the feds’ intent for the new rules to supersede  prior private letter rulings – opinions offered by the IRS at the request of businesses about their particular situation.

Some of the industry objections filed ahead of the hearing read a lot like legal briefs for court challenges that will certainly be coming if the Treasury and the IRS aren’t sufficiently accommodating.

Meanwhile, some of the unconventional MLPs most at risk continue to absorb market poundings not because they might lose their tax status but because industry conditions are so awful. Ethylene producer Westlake Chemical Partners (NYSE: WLKP) got no lasting lift from news that the IRS may be softening its position, its price still down 36% since May, when news first broke that its MLP status is at risk. Although virtually all of its revenue and profit is backed by contracts with  sponsor Westlake Chemical (NYSE: WLK), the sponsor has been ailing as low crude prices reduce the cost advantage of the ethylene derived from cheap U.S. natural gas.

Similarly, even if coal coke suppler SunCoke Energy Partners (NYSE: SXCP) is only given 10 years to continue operating as an MLP, the struggles of the U.S. steel makers it serves amid a global glut would remain a much more pressing issue. The unit price is down 42% since the IRS released its proposed MLP rules in early May; sponsor SunCoke Energy (NYSE: SXC) has depreciated 64% over the same time frame.

The IRS is no longer keen on all the newfangled MLPs that sprang up with its blessings in recent years, and neither, it appears, are many of the investors who once owned them.

And even as the IRS was sending signals that it’s reconsidering some of the restrictions it’s proposed it also last month closed a loophole that had allowed some investment funds to put as much as half of their assets in MLPs and other partnerships without incurring a tax liability on their distributions.

Normally funds operating as registered investment companies (RICs) may invest no more than 25% of their assets in such pass-through entities without incurring a tax bill. But some funds started getting around that limit by investing as much as another 25% of the portfolio in a wholly-owned subsidiary that would in turn own more partnerships. The IRS has now formally banned the practice, giving the funds in question until the end of May to bring their holdings into compliance.

It’s possible that that action contributed to the selling pressure on MLPs late last month, even though only 23 mutual or close-end funds with aggregate assets a shade below $11 billion were recently operating as RICs subject to the restriction.  In times of market stress any incremental selling matters, especially if  the pressure comes from institutional investors with plenty to sell.

The closing of the portfolio loophole should eventually improve demand for corporate midstream equity not subject to such limits, whether from Kinder Morgan (NYSE: KMI) or the new tracking stock to be distributed by Energy Transfer Equity (NYSE: ETE) in its pending buyout of Williams (NYSE: WMB).

But most buyers will likely want to see either a rebound in energy prices or proof that the midstream sector can prosper without one before taking the plunge.  Until the fundamentals improve and sentiment lifts the IRS can only add insult to injury.