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Kinder Morgan Energy Partners Message Board

  • grleader grleader Dec 10, 2010 11:56 AM Flag

    Obama may propose tax overhaul

    The NY Times lead headline today is "Obama weighing broad overhaul for income tax," and the article says that business taxes would also be overhauled.

    Are there any thoughts regarding the chance that MLP's may lose their special tax treatment?

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    • BTE was a Canadian oil trust, has maintained its dividend and has skyrocketed. Losing the tax advantaged status in Canada or here opens US MLP investments to tax exempt endowments, think Harvard, and all mutual funds. This could potentially offset the selling pressure from the loss of the tax status.

      That said, ethanol was just granted MLP status, somewhat indicating Congress wants to continue this tax advantage.

      Finally, this will not generate any sort of sizable revenue relative to $1 trillion plus annual dividends. It would make good press.

    • The Canadian income trusts are primarily upstream E&P businesses.
      They, like US E&P businesses, enjoy special tax benefits. Many investors who are concerned about the tax status of US pipeline MLP's refer to what happened in Canada. This is like comparing an apple with an orange.

    • My point was that most publicly-traded corporations cannot convert to partnership status, which was the point you had made.

      As to impact on prices, look at the price/cash flow ratios of pipeline MLPs compared to corporate pipeline operators like OKE. The market simply pays more for the partnerships. That's why so many corporations have sponsored MLPs; the assets are worth more in the MLP structure.

      More importantly, look at the Canadian income trusts and what happened immediately after they lost their entity-level tax exemption. Even though the change was only going to take effect 4 years later, they got clocked. To an extent, they have come back, but people tend to sell first and think later.

      I still don't think the goivernment will kill the MLP structure, by the way. My original post was in repsonse to someone who was asking about what would happen if the law changed.

    • You are saying than pipeline MLP's could be taxed as corporations. Assuming profits of 30% of cash flow their tax would be about 10% of cash flow. The shareholder would receive a $90 distribution compared to a previous $100 distribution. The $90 disribution would be $70 return of capital and $20 qualified dividend income taxed at 15% or $3. His after-tax return would be $87. Previously his $30 ordinary income was taxed at $10 for an after-tax return of $90.
      He has a loss of $3 but is assured capital gains treatment on sales of stock rcapturing return of capital.
      He appears to be in pretty good shape.

    • What tax advantage? Any business can elect to be taxed as a partnership. For pipeline MLP's their tax advantage is the same as for any business: depreciation of the pipelines. Obama is suggesting immediate write offs.

      I think many on this board are confusing pipeline MLP's with E&P MLP's which are benefited by percentage depletion and write offs of intangible drilling costs.

      • 1 Reply to DONEDEALER
      • Well according to this MLP primer there are definitely tax advantages:

        http://www.steelpath.com/wp-content/uploads/MLP-Primer.pdf

        P.8:
        "MLPs in their current form were created by Congress in
        1986. Structured as partnerships, all income, losses, gains,
        and deductions are passed on to limited partners and
        are only taxed at that level (i.e. no entity-level taxation),
        meaning that investors in MLPs avoid the double taxation
        of investing in corporations. Congress created this structure
        to encourage investment in US natural resources and
        energy infrastructure."

        P. 26 (under "Risks"):
        "There is a risk that there could be legislative changes to the
        1986 Tax Act that would alter the MLP structure and eliminate
        the ability to pass through tax liabilities. There are
        several reasons that we view this as an unlikely event. Just
        as REITs became a tax-advantaged institutional product
        (very few would argue that the US needs tax incentives for
        real estate investment today) and it would prove disastrous
        to a substantial portion of equity holders’ portfolio value
        if tax laws changed, MLPs are similarly becoming institutionalized
        and it would be very difficult to push through
        such legislation. Also, a tax law change would not result
        in a windfall for Treasury revenues, as MLP investors pay
        taxes to the US government based on the income that the
        partnership produces. We would also view it as very difficult
        for Congress to knowingly increase the cost of capital
        to US energy infrastructure investment at a time when such
        investment is of crucial necessity to alleviate the commodity
        price pressures."

        But I still can't understand why if MLPs were taxed as corporations they would have taxable income after the deduction of depreciation expense.

    • Always a possibility but Mpl's deliver much needed products through the pipelines funded by the tax favored Mpl's.Republicans could be sympthetic.

      • 1 Reply to lukeleia1
      • Perhaps someone can answer this dumb newbie question. If the tax status of MLPs was changed, what would be the impact? As I understand it, the main tax advantage is that because MLPs are taxed as partnerships, there is no tax at the entity level as there is in a corporation and all the income is passed through to the limited partners like us. But as I also understand it, there's little if any taxable income at the entity level. That's because MLPs pay distributions out of cash flow but when calculating taxable income they can offset non-cash expenses like depreciation against their cash flow. Every time they make new investments there's more depreciation. Therefore, since there's hardly any taxable income, the distributions are deemed to be a return of capital which isn't taxed to the limited partners until they either sell their shares or their basis gets to zero. So if the law was changed to provide for MLPs to be taxed like corporations, wouldn't the corporation's taxable income still be zero or close to it, and the dividends still be mostly return of capital?

        TIA.

 
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