Category Archives: Master Limited Partnerships (MLPs)

One of the hottest investment products being pitched by Wall Street, in the low interest environment that has persisted over the past few years, has been Energy Master Limited Partnerships (“MLPs”) – an investment product with above average yields and, all too often, above average commissions for the financial advisors who have touted them.

Unfortunately, for many investors, one of the material facts associated with MLPs, that never seems to have been included in the sales presentations of their financial advisors, is the fact that tax-exempt accounts, such as IRAs and employee benefit plans, may incur substantial income tax liabilities if they own a MLP.

There is a concept in the tax code (I.R.C. §§511-514) called “unrelated business income tax” (“UBIT”). Under the UBIT rules, tax-exempt organizations and retirement accounts must pay tax on their “unrelated business taxable income” (UBTI) – income from a business that is not related to their exempt purpose.

If your IRA invests in an MLP, it becomes a limited partner in that MLP, just as you would if you invested directly. Because an MLP, like all partnerships, is a pass-through entity (no tax paid by the partnership, all tax items flow through to the limited partners/shareholders, who pay tax on their share), the partners are treated by the tax code as if they are directly earning the MLP’s income. Thus, as a partner in the MLP, the IRA or other account is considered to be “earning” its share of the MLP’s business income. The MLP’s business is not related to the retirement account’s tax-exempt purpose; therefore the IRA’s share of the MLP’s income is treated as UBTI and is taxed accordingly.

The latest U.S. Securities & Exchange Commission filings by a number of energy-related MLPs provide a clear example of the undisclosed income tax ramifications that could potentially impact investors in these products.

A case in point is clearly illustrated, for example, by the specific risk factor disclosure that was contained within the annual report (“Form 10-K”) that was filed by Energy Transfer Partners, L.P. (NYSE:ETP) on February 29, 2016 for its fiscal year that ended on December 31, 2015:

Tax-exempt entities and non-U.S. persons face unique tax issues from owning Common Units that may result in adverse tax consequences to them.

“Investment in Common Units by tax-exempt entities, including employee benefit plans and individual retirement accounts (known as IRAs) and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to Unit holders who are organizations exempt from federal income tax, including IRAs and other retirement plans, will be ‘unrelated business taxable income’ and will be taxable to them . . . If you are a tax exempt entity or non-U.S. person, you should consult your tax advisor before investing in our common units.”

Another clear illustration is the specific risk factor disclosure that was contained within the annual report (“Form 10-K”) that was filed by Plains All American Pipeline L.P. (NYSE:PAA) on February 25, 2016 for its fiscal year that ended on December 31, 2015:

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.

“Investment in common units by tax-exempt entities, such as employee benefit plans and IRAs, and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them . . . Tax-exempt entities and non-U.S. persons should consult their tax advisor before investing in our common units.”

Finally there is the specific risk factor disclosure that was contained within the annual report (“Form 10-K”) that was filed by Buckeye Partners L.P. (NYSE:BPP) on February 25, 2016 for its fiscal year that ended on December 31, 2015:

Tax-exempt entities and non-U.S. persons face unique tax issues from owning our LP Units that may result in adverse tax consequences to them.

“Investment in LP Units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (“IRAs”), and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them . . . If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our LP Units.”

The common theme that emerges from all of these risk disclosures – investors in MLPs who hold these products in their retirement accounts or other tax-exempt accounts may owe taxes, in some instances substantial taxes, on the “unrelated business income” that is allocated to their holdings.

If you are an individual or institutional investor who has any concerns about your investment in any Master Limited Partnership investment, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

One of the hottest investment products being pitched by Wall Street, in the low interest environment that has persisted over the past few years, has been Energy Master Limited Partnerships (“MLPs”) – an investment product with above average yields and, all too often, above average commissions for the financial advisors who have touted them.

Unfortunately, for many investors, one of the material facts associated with MLPs, that never seems to have been included in the sales presentations of their financial advisors, is the fact that investors in these products often have to file income tax returns in every state where the MLP conducts its business.

The latest U.S. Securities & Exchange Commission filings by a number of energy-related MLPs provide a clear example of the undisclosed income tax ramifications that could potentially impact investors in these products.

A case in point is clearly illustrated, for example, by the specific risk factor disclosure that was contained within the annual report (“Form 10-K”) that was filed by Energy Transfer Partners, L.P. (NYSE:ETP) on February 29, 2016 for its fiscal year that ended on December 31, 2015:

Unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of investing in our Common Units.

“In addition to federal income taxes, the Unit holders may be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if they do not live in any of those jurisdictions. Unitholders may be required to file state and local income tax returns and pay state and local income taxes in some or all of the jurisdictions. We currently own property or conduct business in many states, most of which impose an income tax on individuals, corporations and other entities. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal or corporate income tax. Further, Unitholders may be subject to penalties for failure to comply with those requirements. It is the responsibility of each Unitholder to file all federal, state and local tax returns.”

Another clear illustration is the specific risk factor disclosure that was contained within the annual report (“Form 10-K”) that was filed by Buckeye Partners, L.P. (NYSE:BPL) on February 25, 2016 for its fiscal year that ended on December 31, 2015:

You will likely be subject to state and local taxes and income tax return filing requirements in jurisdictions where you do not live as a result of investing in our LP Units.

“In addition to U.S. federal income taxes, you may be subject to other taxes, including non-U.S., state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if you do not live in any of those jurisdictions.  You will likely be required to file non-U.S., state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions.  Further, you may be subject to penalties for failure to comply with those requirements.  We own property and conduct business in a number of states in the United States.  Most of these states impose an income tax on individuals, corporations and other entities . . . As we make acquisitions or expand our business, we may own assets or conduct business in additional states or non-U.S. jurisdictions that impose a personal income tax.  It is a unit holder’s responsibility to file all non-U.S., federal, state and local tax returns.”

Finally there is the specific risk factor disclosure that was contained within the annual report (“Form 10-K”) that was filed by Enterprise Product Partners L.P. (NYSE:EPD) on February 26, 2016 for its fiscal year that ended on December 31, 2015:

Our common unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of an investment in our common units.

“In addition to federal income taxes, our common unit holders will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes imposed by the various jurisdictions in which we do business or own property even if the unit holder does not live in any of those jurisdictions.  Our common unit holders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions.  Further, our unit holders may be subject to penalties for failure to comply with those requirements. We currently own property or conduct business in many states, most of which impose an income tax on individuals, corporations and other entities.  As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal or corporate income tax.  It is the responsibility of each unit holder to file its own federal, state and local tax returns, as applicable.”

The common sense interpretation of this complicated legalese – investors in MLPs may owe state and local taxes, in some instances substantial taxes, in every state where their MLP conducts its business and may incur substantial penalties if they fail to file the required tax returns in all of the applicable states.

If you are an individual or institutional investor who has any concerns about your investment in any Master Limited Partnership investment, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

Recent statistics indicate that there are over 110 MLPs trading on major exchanges, with oil & gas midstream activities – gathering, processing, natural gas compression, pipelines, storage, refining, distribution, and marketing – representing the dominant activity.

The latest U.S. Securities & Exchange Commission filings by a number of Energy Master Limited Partnerships (“MLPs”), however, provide yet another example of the treacherous income tax ramifications that could potentially whip saw investors if oil and natural gas prices continue to be depressed.

A case in point is clearly illustrated, for example, by the specific risk factor disclosures that were contained within the annual report (“Form 10-K”) that was filed by Energy Transfer Partners, L.P. (NYSE:ETP) on February 29, 2016 for its fiscal year that ended on December 31, 2015.

These risk factor disclosures included the following two (2) specific warnings:

Unitholders may be required to pay taxes on their share of our income even if they do not receive any cash distributions from us.

“Unit-holders will be required to pay any federal income taxes and, in some cases, state and local income taxes on their share of our taxable income even if they receive no cash distributions from us. Unit-holders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from the taxation of their share of our taxable income.

In response to current market conditions, we may engage in transactions to delever the Partnership and manage our liquidity that may result in income and gain to our Unit-holders without a corresponding cash distribution. For example, if we sell assets and use the proceeds to repay existing debt or fund capital expenditures, you may be allocated taxable income and gain resulting from the sale without receiving a cash distribution. Further, taking advantage of opportunities to reduce our existing debt, such as debt exchanges, debt repurchases, or modifications of our existing debt could result “cancellation of indebtedness income” (also referred to as “COD income”) being allocated to our Unit-holders as taxable income. Unit-holders may be allocated COD income, and income tax liabilities arising therefrom may exceed cash distributions. The ultimate effect of any such allocations will depend on the Unit-holder’s individual tax position with respect to its units.”

– and –

Tax gain or loss on disposition of our Common Units could be more or less than expected.

“If Unit-holders sell their Common Units, they will recognize a gain or loss equal to the difference between the amount realized and the tax basis in those Common Units. Because distributions in excess of the Unit-holder’s allocable share of our net taxable income result in a decrease in the Unit-holder’s tax basis in their Common Units, the amount, if any, of such prior excess distributions with respect to the units sold will, in effect, become taxable income to the Unit-holder if they sell such units at a price greater than their tax basis in those units, even if the price received is less than their original cost. In addition, because the amount realized includes a Unit-holder’s share of our nonrecourse liabilities, if a Unit-holder sells units, the Unit-holder may incur a tax liability in excess of the amount of cash received from the sale.

A substantial portion of the amount realized from the sale of your units, whether or not representing gain, may be taxed as ordinary income to you due to potential recapture items, including depreciation recapture. Thus, you may recognize both ordinary income and capital loss from the sale of your units if the amount realized on a sale of your units is less than your adjusted basis in the units. Net capital loss may only offset capital gains and, in the case of individuals, up to $3,000 of ordinary income per year. In the taxable period in which you sell your units, you may recognize ordinary income from our allocations of income and gain to you prior to the sale and from recapture items that generally cannot be offset by any capital loss recognized upon the sale of units.”

The common sense interpretation of this complicated legalese – investors in MLPs may owe taxes, in some instances substantial taxes, on income that they never received.

If you are an individual or institutional investor who has any concerns about your investment in any Master Limited Partnership investment, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

As noted in an April 1, 2016 article in The Wall Street Journal (“MLP Investors’ Maze of Tax Trouble Keeps Getting Worse”), investors are learning the hard way that energy MLPs, set up to shield companies from Uncle Sam, could have unexpected tax consequences when times get tough.

It is yet another sign investors didn’t fully understand what they were getting into when they poured billions of dollars into master limited partnerships before the oil bust.

According to the article, “the implications are getting a test case in Linn Energy. When the Houston-based oil and gas producer announced plans to restructure its debt on March 22, it offered its 350,000 investors a deal many will likely jump to accept: swap their units in the MLP for an equal number of shares in LinnCo, the firm’s corporate parent. The swap will let those investors avoid a tax bill for their share of the forgiven debt, which counts as a gain. But there is a catch. Investors who exchange their Linn MLP units for shares could trigger another tax hit, because the swap counts as a sale.”

Investors in other energy-related MLPs could soon be facing similar choices.

“The energy partnerships are structured to avoid corporate income taxes by passing much of their tax burdens along with the bulk of their earnings through to investors. That arrangement worked well when oil and gas prices were rising. But with prices falling and some MLPs nearing a restructuring or bankruptcy, investors face the possibility of being left with units that have lost value and a tax bill as well, a double-hit that has surprised many investors.

The rub is the exchange of units for shares counts as a sale, and the sale of partnership units is far more complex than the sale of regular stock. For example, it can trigger a ‘recapture’ of benefits that investors have already received in their annual tax-deferred payouts for things like depletion and depreciation. Investors who exit a partnership also must take into account their units’ share of its liabilities.

At worst, an investor who opts for Linn’s offer could face both ordinary taxable income due to recapture and a capital loss, because of a steep decline in the value of the units, that can’t be used to offset it.

Investors holding Linn units in an IRA or Roth IRA could also face tax bills on the exchange of units for shares. To prevent abuses, the law imposes a special levy on certain partnership income if the total in all IRAs exceeds $1,000 a year. Even if investors holding MLPs in an IRA haven’t owed this levy on their annual payouts, a sale of units could come with a tax and capital losses within an IRA aren’t deductible.”

While the majority of IRA owners are unaware of these rules, IRA custodians are charged with enforcing them and some are reportedly watching more closely than they have in the past. Last year, Pershing reportedly filed tax forms for about 5,000 investors holding Kinder Morgan Energy Partners in IRAs after its 2014 restructuring and, most recently, Fidelity Investments has announced additional oversight of partnerships in IRAs for 2016.

If you are an individual or institutional investor who has any concerns about your investment in any energy related Master Limited Partnership investment, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).

On March 9, 2016, the Wall Street Journal reported that investors in energy-related Master Limited Partnerships (“MLP Investors Face Tax Hit on Top of Big Losses”) face the prospect of “worse things than going to zero” as a prospective “wave of expected bankruptcy filings and debt restructurings could trigger taxes for investors at a number of energy firms”

Master Limited Partnerships (MLPs) are a corporate structure that do not pay any taxes at the corporate level, but instead pass along their income – and certain tax burdens – to shareholders.

Unfortunately, the “collapse in oil and gas prices has exposed the structure’s double-sided risk: Investors with potentially worthless shares – or units, as they are known – may nonetheless owe taxes on debt that is forgiven in a bankruptcy or an out-of-court restructuring” since “debt forgiven in a restructuring counts as noncash income, or cancellation of debt income, which creates a tax liability for investors without an associated cash distribution.”

As noted by the Wall Street Journal, “the roughly 60% plunge in oil prices since the summer of 2014 already has sent a number of energy companies into bankruptcy court, and more are expected to follow.”

Clearly investors have soured on MLPs, which sometimes yielded more than 10% a year at a time when Treasury bonds were yielding pennies on the dollar, as many of them have cut or halted their distributions to investors. For example, the “Alerian MLP Index, which tracks about 50 large energy partnerships, has lost nearly half its value over the past 18 months.”

Among the energy vulnerable MLPs cited in the article, whose “debt is trading at distressed levels,” are Linn Energy LLC (NASDAQ – LINE), Breitburn Energy Partners LP (NASDAQ – BBEP) and Atlas Resource Partners LP (NYSE – ARP).

Many retail investors clearly “weren’t told they were buying a high-risk product with potential tax traps” and a number of industry professionals openly have questioned whether MLPs should ever have been recommended to investors in an account that was not tax-deferred (such as a retirement account) which would have shielded them from the negative tax implications.

As Merrill Lynch recently noted in a February 17^th research report (“Master Limited Partnerships: Malaise, Loathing, Pessimism”) which accompanied the downgrading of 7 MLPs, this is a “humiliated asset class” for which “the humiliation continues.”

For many retail investors, the question remains just how expensive will their financial humiliation ultimately be.

If you are an individual or institutional investor who has any concerns about your investment in any Master Limited Partnership (MLP), please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).