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I have owned both KMP and KMR, continuously since 2002 and in the 1990's (but I have lost the 1990's records). I now own MLP's for the income; I am semi-retired and I use the distributions to "go to the grocery store".
Currently, I have a slight preverence for KMR (I own KMR and I do not currently own any KMP).
KMP pays a cash distribution and issues a K-1 annually. KMR pays a stock distribution (technically for tax purposes it is a stock split), and does not issue a K-1 annually.
KMR advantages -
- At the current Unit market prices the yield on KMR is substantially higher (KMR $1.05/$43.47 = 9.66%; KMP $1.05/$49.55 = 8.48%).
- KMR ownership means no K-1 to deal with annually; this advantage is largely offset by adjusting tax basis each quarter with the receipt of stock distribution (split).
- I plan to sell approx the distribution shares each quarter (again this is done in order to be able to go to the grocery store). This will generate a gain/loss on sale, again offsetting the advantage of no K-1.
- There is some risk of a modest reduction in the yield advantage due to the fact the sales price formula may be unfavorable, although this quarter it appears to be slightly favorable (I will find out tomorrow - Feb 2, 2009). However, the overall yield advantage will remain significantly favorable - this is my primary reason for favoring KMR over KMP currently.
I don't want to split too many hairs, but I did want to respond to a couple of points raised in this thread.
"KMR pays a stock distribution (technically for tax purposes it is a stock split), and does not issue a K-1 annually."
That is not 100% true. It is absolutely true KMR does NOT issue a K-1 or a 1099, but KMR's dividend (and it is a dividend, not a distribution like their big sister KMP pays) is not technically a stock split. It is a payment-in-kind form of dividend. As a PIK there is no cash ever changing hands, so there is no taxable event. In a DRIP there is a "we give you cash, and you give it back" so there is a taxable event. In a PIK only paper changes hands, and you don't pay income tax merely for getting more paper. The logic is similar to a stock split, but it is not a split in tax law.
Your cash basis in your KMR investment is unchanged after you receive your PIK shares. The PER SHARE basis goes down though...your same initial $$ investment cost is now divided by a larger number of shares. When you sell you will owe capital gains tax on the total increase between your net selling price and your basis (original cost). Your net increase will include both the sale of all the PIK shares you got over the years plus (hopefully) price appreciation on your original shares plus the PIK shares you got along the way.
It is not, however, exactly like a stock split. In a split nothing "real" is occurring...you once had 1 share,now you have 2, and the total value stays the same. With the KMR PIK however, a real event is going on...you are receiving something additional of real value (about 0.02 shares per share you own). Getting you head around why something real is going on can be confusing though. All other things equal, when KMR goes x-div the price will drop by about the same amount of the value of the KMP distribution (which is the basis of the KMR dividend value) just like a conventional dividend paying stock. The price has to adjust ...otherwise a buyer the day before the dividend would get a sudden windfall gain or loss.
The "real" change is that by retaining some cash (rather than paying more KMP distributions) the KM* enterprise has effectively raised more capital. We, the KMR investors, now own a bit more (0.02% more) of a larger entity...the KMP+KMR enterprise. If KM* is doing smart things with their (our) money, they can take the cash they raised by selling more shares and do something good with it...pay down debt, build a new pipeline somewhere (well, perhaps buy a new gasket given the amount of my personal investment), or make some other good investment with their now larger war chest of cash.
One odd wrinkle in all this. KMR pays out fractional shares without a problem; they announce their dividend in terms of # of new shares per unit already owned, and give investors exactly that amount. But KMR sends them directly to your broker, not to you. Most brokerages have no problem allocating you your fractional shares. Some brokerages however, refuse to deal with fractional shares of KMR (even if they allow fractional shares of other dividend-paying stocks where your fractions are acquired through a DRIP or regular dividend reinvestment. At such brokerages, they sell your newly gained fractional shares (without commission), and give you the proceeds. Then, however, you have a sale...and a short term sale to boot. Your basis for that sale is $0, so they report the proceeds as a 100% short term capital gain on the sale. AG Edwards did this to my account (I don't know if Wachovia...who bought AGE...still does, but I expect they do). As I said many brokers don't do this mickey mouse forced sale, but a few do.
Disclosure: I own KMR. I previously owned KMP, but decided to sell and repurchase KMR. All this is inside an IRA; I decided to switch to KMR to avoid UBTI in the IRA.
>Your cash basis in your KMR investment is >unchanged after you receive your PIK shares. >The PER SHARE basis goes down though...your >same initial $$ investment cost is now >divided by a larger number of shares. When >you sell you will owe capital gains tax on >the total increase between your net selling >price and your basis (original cost). Your >net increase will include both the sale of >all the PIK shares you got over the years >plus (hopefully) price appreciation on your >original shares plus the PIK shares you got >along the way.
If I were to sell a small portion of a KMR holding (In a non-IRA type account.) can I use a first in first out logic and only be taxed on the capital gain of the difference between the original purchase price and the sell price ? ( I would assume that the dividend shares would have a base price of zero, when FIFO depleted all the originally purchased
shares.) Or do I miss the point ?
Sooner. If kmr issues a stock split is it treated like a DRIP and what is the tax treatment. I like the return of capt. on the kmp> I am retired and would hope would never have to pay the tax. My estate can do that. I am thinking abt some of both KMP %KMR
For tax purposes, I do not believe it is treated like a drip (even though it functions like a DRIP).
For tax purposes, a stock split re-allocates the cost basis over the shares owned after the split.
Gain or loss is only calculated upon a sale. The gain/loss would always be capital (either short or long term depending on holding period).
The only tax you would pay would be upon a sale of some or all shares.