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Tax Implication of Publicly Traded Partnerships: Why Purveyors of the US Tax Code Snarl at Investment Brokers – Part I



My friend Roger Botterbusch recently put together a most excellent presentation on the tax implications of owning Publicly Traded Partnerships (PTPs), also commonly referred to as Master Limited Partnerships (MLPs). As a result I developed a new profound distaste for investment brokers pedaling these things for their ‘prospective’ fat returns whilst simultaneously poo-pooing the heavy, heavy administrative burden they bring at tax time.

The most interesting point of the presentation was that all but two PTP’s traded in the United States kick out incredibly complicated year end K-1′s to the owner for reporting on the 1040. In preparation for the presentation a ridiculous case study was bandied around about a taxpayer who engaged in ‘day trading’ PTP’s. The ‘trading’ activities on their face were moderately successful but when taking into consideration that the tax practitioner had to process in excess of 100 very complicated K-1′s creating an unbelievably large tax preparation bill the result was a marginal investment return so much so that the taxpayer would have been better off simply leaving his investments in a money market account for the tax year in question.

The second most interesting point is that PTP’s kicking off in excess of $1,000 in the tax year of Unrelated Business Income (UBI) to the owner requires that the owner of the PTP not only process a complicated K-1 but also prepare IRS Form 990-T, that’s right folks you read it correctly 990-T, usually reserved for 501(c) non-profits.

The following are the top 18 points garnered from the power point presentation delivered to the Colorado Society of Enrolled Agents:

1. By IRS Rules, PTPs are publicly traded partnerships tied to Natural Resources activities including Oil & Gas, Mining, Real Estate and Others.

2. PTPs can be invested in individual stocks, mutual funds, and ETFs

3. Most investors don’t realize they have invested in a PTP until tax time!!!!!! Thanks to the wolves of wall street.

4. Reasons to Invest in a PTP:

◦High Yields (Mid to High Single Digits Plus)

◦Payments (usually Cash Distributions) have special tax treatment versus normal dividends

◦Some PTPs pay out distributions even monthly (most pay out quarterly)

4. Traditional PTPs:

◦Pay out Cash Distributions rather than Dividends

◦Cash Distributions are tax deferred until investment is sold (Note: Basis is decreased by Cash Distribution)

◦Under Investors SSN (1040), if investment held until death, no tax will be paid on Cash Distributions (not the case for retirement accounts or business entities)

5. Most Traditional PTPs Kick off Complex K-1s adding profound complexity (and headaches) to tax returns

6. Institutional PTPs Do Not Have K-1s. Cash Distributions paid are Stock Dividends that will be subject to Capital Gain rules at time of sale

7. Some Mutual Funds and ETFs pay Dividends rather than cash distributions which tend to pay lower yields than traditional PTPs

8. PTP K-1 Forms:

◦Generally come between Feb 15 and Apr 15

◦Some K-1 Forms from GP PTPs can run Apr 15+

◦Most PTPs provide web sites where you can get soft copies of K-1 packages when ready

◦Roger recommends using K-1 Support (out of Tulsa OK) for PTP tax issues or problems with K-1 forms as they are “Great Folks to Deal with on Problems.”

8. When PTPs are in Retirement Accounts most of the K-1 Form can be ignored.

–9. Unrelated Business Taxable Income (UBTI): Found on K-1 in Box 20, Code V. –If UBTI from ALL PTP K-1s in Retirement Account Adds up to $1000 or more, a Form 990 will be needed for the Retirement Account – Yes You Can End Up Paying Taxes on this UBTI each year. Note: Most Traditional PTPs will have UBTI < 0!

–Warning: Many Financial PTPs tend to Throw Off Lots of Positive UBTI each Year.

Part II will be a continuation of this list.

In accordance with Circular 230 Disclosure

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I am enrolled with the United States Treasury Department to practice before the IRS, governed by rules stipulated in United States Treasury Circular 230. As a Federally Authorized Tax Practitioner and a tax appeals specialist my Enrolled Agent License #85353 is issued by the United States Treasury. With this license I work for U.S. taxpayers everywhere to resolve tax matters and de-escalate stress about taxes or tax disputes for individuals and corporations with federal and state issues.

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