Wall Street Journal Tax Report, The ‘Tax-Free’ Investment Causing Massive Tax Headaches:
Investors seeking both high income and low taxes poured billions of dollars into publicly traded energy master limited partnerships. Now many have tax headaches—surprisingly big bills from Uncle Sam and return preparers.
Two new MLP deals, from Williams Companies and Enbridge are the latest to trigger these headaches. In these deals, known as roll-ups, the corporation sponsoring an MLP pulls it back into the corporate fold, and MLP investors exchange their units for corporate stock.
These consolidations will provide tax and other benefits to the parent corporations and their shareholders. Williams said that as a result of the deal, it expects not to owe cash taxes through 2024.
But for these MLPs’ investors, the deals are taxable and neither one includes a cash payment to help with their own tax bills.
“In each case, the corporation and its investors will reap tax benefits at the expense of one segment of stakeholders,” says Robert Willens, an independent tax analyst. ...
To be fair, MLPs have performed well for many investors. But when units must be sold, the act of selling often brings a complex and costly reckoning with the Internal Revenue Service. “In the end, many MLP investors don’t do as well as they expected to,” says Mark Cook, a CPA with SingerLewak in Irvine, Calif....
These consolidations once again show the downside of the innovative MLP format. They were originally conceived as a way to attract investment to income-producing energy assets like pipelines. As partnerships, MLPs bypassed a layer of corporate taxes, and high depreciation plus special breaks helped defer taxes on hefty income payouts. ...
After an MLP sale, say Mr. Willens and Mr. Cook, some investors wind up with an unwelcome tax result: large gains taxed at higher ordinary income rates, and capital losses that can’t be used to offset them.