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SandRidge Mississippian Trust I Message Board

  • porttoport2002 porttoport2002 Mar 6, 2012 10:13 AM Flag

    K-1 tax effects

    I just placed my SDT K-1 into turbo tax. I received 3 distributions of about $1,400 and just saw my refund move down by $400. That's a 28% tax rate.

    Is SDT's distibution's not tax advantaged? My other MLP's barely move the refund up or down.

    What are other's seeing?

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    • To avoid the headaches brought upon by the tax season, create a portfolio in your 401 k or IRA accounts...

    • Nothing was taxed as a dividend unless box 6 on your K-1 has a value.

      Note that you are not taxed on distributions as such. You are taxed on the income numbers in boxes 1 - 10 on the K-1. For SDT the main ones will be interest and royalties (not dividends).

    • phonore@sbcglobal.net phonore Mar 26, 2012 2:47 PM Flag

      Distributions from a partnership are not taxable when received as long as you basis exceeds zero, but they do lower your basis and will increase your gain and effectivly are taxed when you sell. At the same time, partnerships do pass through items of income which increase your basis (operating income, interest, royalties, etc) and items of expense which decrease your basis (depletion, etc) to their partners which get reported on your tax return

    • Thanks for the response. I read your other post.
      But it still puzzles me, if a portion of the distribution is interest income, then wouldn't I be double taxed on that. Once as dividend and once as interest income?

      • 1 Reply to aliy66
      • As unit holder, you own the reserve, and the operator manages the production for you and deduct his operating expenses from the oil, NG or/and NGL sales. The operator SD gets on top of the expenses an amount to pay for his management staff plus a profit.
        The distribution is not a dividend; it is not a share of the profits, it is a share of the sale of the oil, NG or NGL that you, as unit holder, own. The tax is the capital gain on the plus value of the reserve, your capital. Naturally, it is understood that, more you sale, less reserve, less capital available for sale. When there is no more, or when the quantity of oil, NG or NGL for sale, the US Royal Trust is terminated.
        A dividend from XOM, for example, is a share of XOM profits. The holder of a share of XOM, own a very small portion of all the assets of XOM.
        MLP is again different, as unit holder you own the declared assets disclosed in the bylaws that may change in time. That may include: the reserve, some infrastructure and even a corporation. As units holder you share the cost of production and the sales of the reserve. You share the amortization of the declared assets as well.
        Liza likes MLP, I assume it is because a MLP does not have a termination date, the assets of a MLP can be changes or added to show profits for as long as the MLP manager wants it. My take is that MLP is a way to generate a capital to invest in a commodity production project.

        Sentiment: Buy

    • When did the SDT K-1 forms arrive? I am waiting for it so that I may complete my taxes.

      Thanks,

    • I made a similar post on the PER board. I believe the result is due to the way these trusts are structured. There is a section in the prospectus that describes the tax treatment. Basically, there are two different types of wells in these trusts. For one type of well, the income you receive is a royalty (this is like most of the older trusts like HGT, SBR PBT etc.). For the other type of well, the income is treated like bond interest. The bond interest is taxable at your normal income tax rates. After putting the numbers in Turbo Tax, I expect that you see it as an entry on your Schedule B Interest. The depletion deduction probably only applies toward the part of the income that comes from the royalty part, so that's why it's not as large.

      Your post highlights an interesting issue. Will investors start to reprice these trusts now that they have figured out that the after-tax yield is not as high as the gross yield. Will that put a cap on the price appreciation of some of the new trusts that are in the pipeline or will investors not realize this lesson and continue to bid new trusts up like their predecessors? Maybe it's better to hold these in retirement accounts where it won't effect your taxes.

      • 2 Replies to marklibera
      • While I hold SDT more in my tax qualified accounts I do hold some in my regular accounts just to provide income that is greater then the other entities or products out there. Like dividends they are fun to see them going into the accounts. Now if it ever pushes my tax rate to the higher levels, then I will pull back but in the end like they ol saying, I never met anyone who was sad they made an profit and cash is considered part of that. I didn't think they were tax advantaged and now who wants to make the higher amount if it ultimately punishes you for that higher tax rate. Obviously most of the politicians don't give an dam and tells you they probably don't have these products in their portfolio. Of course one party doesn't even care for our investment as they hate it without really giving an sensible explanation. It is still the favorite of most though because it is the cheapest overall.

      • "I made a similar post on the PER board. I believe the result is due to the way these trusts are structured. There is a section in the prospectus that describes the tax treatment. Basically, there are two different types of wells in these trusts. For one type of well, the income you receive is a royalty (this is like most of the older trusts like HGT, SBR PBT etc.). For the other type of well, the income is treated like bond interest. The bond interest is taxable at your normal income tax rates. After putting the numbers in Turbo Tax, I expect that you see it as an entry on your Schedule B Interest. The depletion deduction probably only applies toward the part of the income that comes from the royalty part, so that's why it's not as large.

        Your post highlights an interesting issue. Will investors start to reprice these trusts now that they have figured out that the after-tax yield is not as high as the gross yield. Will that put a cap on the price appreciation of some of the new trusts that are in the pipeline or will investors not realize this lesson and continue to bid new trusts up like their predecessors? Maybe it's better to hold these in retirement accounts where it won't effect your taxes. "


        I don't think it will affect pricing. The average investor avoids buying MLPs and trusts because K1s scare them. Even though some advisors do not recommend buying MLPs and Trusts in a tax sheltered account, it has worked well for me. It eliminates the tax hassels associated with K1s. There is a slight risk of UBTI tax, but it is rare.

        I buy stocks with qualified divis and munis in my taxable account.

        I think the tax law changes that will probably occur on January 1, 2013 will have a much greater effect on the overall market.

    • It is not an MLP.
      There is some tax shielding due to depletion but not as much as with the majority of MLPs. In addition we don't get to claim intangible drilling costs like E&P MLPs.

      In my case, depletion was about 35% of the distributions. So 65% of the distribution is taxable.

      Only thing I'm unsure of is why the depletion is relatively low, even right at the beginning of this trust. I would have thought it would be larger. With the non-partnership trusts, the depletion has been higher in my experience - sufficient to offset most or all of the distribution in the early years. Perhaps because in my K-1, interest income is almost as high as royalties - not sure why they have so much interest.

 
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