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Kinder Morgan Energy Partners Message Board

  • kiteinvestor kiteinvestor Sep 3, 2013 10:56 AM Flag

    a UBIT question

    I am planning to own in my KMP in my iRA. Two things I could use some help from the investors here.
    One... Is UBIT on only profit from partnership and not the distribution? If this is correct , my guess is UBIT income is much less than distribution of $5.28 or so.
    Can any one tell me what the UBIT portion was in 2012 for approximately 1000 shares if they were owned for the whole year? This would be box 20 or something like that. I called their investors relations, and they could not answer the question because, they said, it depends on how long I have owened, when did I buy? etc. etc. Basically a run around. Do before buying I want to know what my UBIT would be for 1000 shares for a full year? Thanks all.

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    • In an IRA you should be using KMR or KMI, not a partnership. Besides you will get more shares for the same money with KMR. That is you will have a greater claim on the cashflow with the same risk. Look what Richard Kinder buys.

    • UBIT reported per unit in 2009 = -9.66
      UBIT reported per unit in 2010 = -8.46
      UBIT reported per unit in 2011 = -7.66
      UBIT reported per unit in 2012 = - 4.19

      2012 had additional shares purchased so it is full year for some and partial for "new" 20%.

    • 2 points. No one can tell you the UBTI per share for 2012 or any other year. It's complicated. All MLPs including KMP have made elections under Section 754 of the Tax Code, whereby they get to compute depreciation deductions based on how much you paid for your shares. This depreciation deduction gets specially allocated to you, and is recaptured as ordinary income when you sell. So the amount of income, and UBTI, that gets allocated to you depends, in part, on how much you paid for your units. So the loss that gets allocated to me will be different from the amount that gets allocated to you unless we both bought on the same day for the same price.

      Having said that, I have owned KMP off and on for more than 20 years. Line 1 of the K-1 (which is the basis for the UBTI shown on Line 20) has always been negative for me, so the annual UBTI would have been negative. But that's not the UBTI problem. The UBTI problem/exposure is when you sell. The IRS takes the position that depreciation recapture constitutes UBTI. As another poster has said, the IRS has shown no inclination to enforce this rule so far. But starting with the 2012 K-1s, the partner is identified as an IRA or other retirement plan. So that's the first step for the IRS to track the issue, if they decide there's enough money at stake.

      And the problem gets compounded as time goes on. This message is getting too long for Yahoo, so I'll finish in a separate post.

      • 1 Reply to jrad52
      • Part 2, if you're counting - And the problem gets compounded as time goes on. In general, a tax-exempt entity only owes UBIT when UBTI exceeds $ 1,000 in a given year. But when you sell, the ordinary income portion of your gain (which gets reported tio you on an attachment to the K-1, not on the face of the form), represents the cumulative amount of depreciation recapture over the entire period that you owned the MLP. So it's much more likely that the $ 1,000 threshold will be exceeded, and a tax might be due. Also, if the IRS ever does wake up and start to try to enforce its rules, you won't be protected on old years - when you sell, the MLP will report the entire ordinary income portion of your gain.

        The ordinary income on sale would be partially offset by loss carryovers from the annual K-1s, but to get that carryover, you would have to file UBIT tax returns each year, which no one does.

        I think this is a long-term issue because the IRS has not focused at all on this issue. But the change in the 2012 K-1 is an indication that at least they are trying to quantify the problem.

        For most MLPs, you have no alternative, so you might as well own the MLP in your IRA, and maybe sell and re-buy every year or 2 to limit your UBIT exposure. But with KMP, you do have 2 alternatives - KMR and KMI, both of which elimintae the UBIT exposure entirely. generally I own KMR in my IRAs. Currently, the KMP/KMR discount is low, so I wouldn't suggest buying KMR here. If you like KMP at today's price, I would suggest buying KMP now, and switching to KMR when the discount widens, and switching back to KMP when the discount shrinks. But you have no way of knowing if my investment advice is worth anything, so do as you like.


    • So far three comments but not answer to my question. Is there any one who owns KMP and had owned for a full year who can tell me their UBIT income for 2012 for one share? thnx. I know about KMR , and amounts are different depending on holding period and distribution. If you can just tell me the UBIT portion on 1000 shares or 100 shares, I can estimate and make an educated decision on KMR, vs. KMI, vs, KMP.

    • Why not just buy KMR for your IRA? Makes no sense to me to buy KMP over KMR in your situation. It's cheaper also which is a plus.

    • " I called their investors relations, and they could not answer the question because, they said, it depends on how long I have owened, when did I buy?"

      Not a run around, it's the truth. The amounts are different for everyone.

    • UBTI is a non issue until such time the IRS addresses the issue. Read my posts about this topic on other strings. UBTI is a short seller talking point.