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Philip Trinder

 
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  • The 2 Most Tax Efficient Investments In The MLP Space [View article]
    Dividends#1,

    Thanks for the kind words and I am extremely glad to hear it has worked out so well for you and your wife!!!

    Best Regards,
    Phil
    Aug 21 12:05 PM | 1 Like Like |Link to Comment
  • Kinder Morgan Inc.'s Mega-Deal: Lower Cost Of Capital And Maximum Optionality [View article]
    JerryofNC,

    Yes absolutely, but they will also have the expertise to be able to handle using any accumulated passive losses over the life of the KMP investment to help to partially offset the ordinary income Recapture at sale, since the whole KMP position will be deemed as being sold in the merger transaction.

    Best Regards,
    Phil
    Aug 21 12:02 PM | Likes Like |Link to Comment
  • Kinder Morgan Inc.'s Mega-Deal: Lower Cost Of Capital And Maximum Optionality [View article]
    A lesson for you Vandooman. If your position in KMP is large enough and your self estimated taxes are substantial, hire tax professionals who have expertise in dealing with MLPs.
    Aug 21 01:03 AM | Likes Like |Link to Comment
  • MLPs - Yes, They're Okay In Your IRA And Other Tax Questions Answered [View article]
    David,

    I'm not exactly sure how the company was coming up with those estimated numbers in their presentation and what they mean by "average." I agree on your point about a bunch of small investor positions compared to 1 large position.

    LOL, also mean = average (Math is Fun! http://bit.ly/1nahumh).

    And yes, if the estimated "Average Tax Rate" is X% then to me that would mean that half of the total estimated dollar amount of taxes due would be at an effective tax rate less than the average tax rate number (i.e. a huge number of investors with tiny positions while the top half of the dollar amount of taxes due comes from a much smaller number of investors with much larger position sizes).

    I wonder where the unemployed homeless person collects their annual K-1s? They must download them on-line at the library from here: http://bit.ly/1nahumi. ;-)

    Best Regards,
    Phil
    Aug 20 12:15 PM | Likes Like |Link to Comment
  • Kinder Morgan Inc.'s Mega-Deal: Lower Cost Of Capital And Maximum Optionality [View article]
    Uncle Pie,

    When using the tax estimator how did you handle all of your historical accumulated passive losses for your KMP position?

    Your estimate of paying $40 per unit vs estimated closing consideration per unit of ~$101 seems a bit high, that is an effective tax rate of ~39.6% for the entire "sales price." That amount doesn't make sense to me because the amount of your final sale above your original cost basis per unit should be taxed at the long term capital gains tax rate.

    If you are coming up with a large dollar amount of taxes to be paid you may want to hire a tax firm with specialized expertise in MLPs to help you.

    I put some brief thoughts about the tax implications up here: http://bit.ly/1oOR1jG

    Best Regards,
    Phil
    Aug 20 11:39 AM | 2 Likes Like |Link to Comment
  • MLPs - Yes, They're Okay In Your IRA And Other Tax Questions Answered [View article]
    David,

    The ~$12 number you are looking at assumes KMI is $36.12 at closing, while KMI is currently at $41.71 and obviously going to be moving around between now and the actual closing date.

    Every KMP investor will have a unique tax impact at closing based on when they purchased every single unit they own and thus how long they have owned the units, the total passive losses they have accumulated over the time they have owned the units, their adjusted tax basis, etc., etc.

    Have you worked on tax returns for people who have sold MLPs from their taxable accounts?

    Did they sell their entire position within one tax year and use all of their accumulated passive losses from that specific MLP to offset some of the ordinary income recapture?

    Best Regards,
    Phil
    Aug 20 10:26 AM | Likes Like |Link to Comment
  • MLPs - Yes, They're Okay In Your IRA And Other Tax Questions Answered [View article]
    David,

    My guess is that Kinder Morgan made the estimates that they used in their presentation based on looking at aggregated data and averages provided by the accounting firm that prepares all the K-1s for KMP and EPB (probably PWC). I simply used the data Kinder Morgan provided and added a few more calculations related to the taxes.

    I am actually surprised by the Estimated Average Effective Tax Rate, it seems lower than what I had expected.

    Best Regards,
    Phil
    Aug 19 06:26 PM | Likes Like |Link to Comment
  • MLPs - Yes, They're Okay In Your IRA And Other Tax Questions Answered [View article]
    Bob,

    If you're happy, I'm happy. Be sure to use every single K-1 you have ever received for your KMP/EPB IRA position(s) so you can utilize historical passive losses for each position to offset the ordinary income / UBTI triggered by Recapture upon sale of each (thus lowering the total amount of UBTI that shows up to get taxed in your IRA).

    Also you may want to look into writing deep in the money call options at the lowest possible call strike price for your KMP/EPB IRA positions as a possible way to lower your sale price that gets reported to KMP/EPB (assuming you get called away by the options you sell). If the call option strike price is substantially below your initial cost basis per unit then that should help to reduce the Recapture UBTI calculation. If the positions are large I would recommend using a tax professional.

    I just put some brief thoughts about the Kinder Morgan Tax Implications up here: http://bit.ly/1oOR1jG

    Best Regards,
    Phil
    Aug 19 05:40 PM | Likes Like |Link to Comment
  • MLPs - Yes, They're Okay In Your IRA And Other Tax Questions Answered [View article]
    David,

    I am chuckling because I have a similar mindset and typically try to err on being conservative and taking lower deductions / paying more in taxes, it drives my wife a little crazy. I just view it as paying a little bit of extra protection money to my Uncle Sam.

    The Wesley Snipes example always jumps to mind for me because he listened to some crazy aggressive accountant and an anti-tax ideologue adviser and who went to jail? The client!!! Oops. It is of course an extreme case.

    I also agree with you that the KMP/EPB transactions will be a watershed event within the MLP universe. Given KMP's size it seems likely that some large percentage of their K-1s may go to IRA accounts so the transaction being fully taxable for KMP and EPB holders and thus triggering the Recapture UBTI in IRAs may suddenly jump up and be an issue for a large number of investors (although I expect many will not handle it correctly and get away with it and then they may post things on Seeking Alpha about how it is fine to hold MLPs in their IRA).

    The rest of the energy MLP universe should be lobbying Congress to show them "see we are not a tax loophole unless the investor dies, it's just a tax deferral, you guys can still get your tax money in some cases, even when investors accidentally hold MLPs in their IRAs."

    Investors holding MLPs in an IRA that are planning to "never sell and pass away" may have an issue with their estate because the step-up in tax basis request sent to the MLP from the IRA will likely trigger Recapture UBTI simply because the MLP is in an IRA (no UBTI issue if in taxable accounts). But if that's your plan you're dead and gone when the problem shows up so it's a final way to punish your children again for when they were teenagers (be sure to leave a funny note and anecdote for them in your will). And again, it is all a matter of how many dollars we are talking about, if you never invest more than $1,000 total into MLPs in an IRA you will likely be fine (the $1,000 amount is being used to match the "UBTI allowance for tax advantaged accounts" of $1,000 such that the maximum Recapture UBTI calculation would thus be roughly the same $1,000).

    Perhaps the way to frame the "MLPs in IRAs Issue" is to say a very rough rule of thumb to use would be take the total amount of money that you ever invest into MLPs within your IRAs and add that together. That total dollar amount is a very rough estimate of the maximum Recapture UBTI that could show up in your IRA if you hold the MLPs forever and eventually get to a zero tax basis for all of them. If you are certain you can make so much in capital gains above your total initial investments that any taxes taken out of the IRA won't matter to you or your heirs then that is your plan, just be aware that your Uncle Sam will eventually try to take a cut out of your IRA(s).

    Death and taxes: the only two certainties within civilized society...

    Best Regards,
    Phil

    Note: Using IRA to mean any tax advantaged account of any kind.
    Aug 19 01:19 PM | Likes Like |Link to Comment
  • MLPs - Yes, They're Okay In Your IRA And Other Tax Questions Answered [View article]
    GD,

    I've never looked at or discussed with any professionals the tax treatment/effects of transferring an MLP from an IRA to a taxable acct, and then paying ordinary tax. I absolutely never hold any K-1 investment in my IRA so it will never be an issue for me.

    David,

    I think the reason we have not been hearing of horror stories more often is the extremely small number of 990-Ts that get audited by the IRS. It seems that many IRS Fiduciaries may prepare them incorrectly and inadvertently leave out the Recapture concepts for UBTI. In a comment on the most recent Weekly Intelligence article, MLP Data mentioned discussions with a variety of tax firms that have told them the recapture concepts for 990-Ts may actually be the burden of the IRS beneficiary so they would have to tell their IRS Fiduciary to get the 990-T done correctly.

    Even some tax preparation firms that handle small investors may also not have the expertise to handle the complexities of K-1s in an IRA correctly. The trick though is that the risk of underpaying taxes can come back to really hurt the investor if they do get audited and then have to pay penalties on top of the correctly calculated taxes.

    In your article you state:

    "Also for the past 15 years I have worked as a tax preparer for HRBlock and have consulted with other preparers and prepared tax returns for clients that own MLPs. My clients are "typical" individual investors and not family trusts or other large entities."

    What is the typical H&R Block tax preparation fee per year?

    What percentage of H&R Block clients get audited each year?

    For the "typical" individual investor client of H&R Block what is the average net worth and what is the highest net worth?

    How large is their average total IRA balance?

    What percentage of their IRAs are invested in K-1 generating investments?

    What percentage of H&R Block clients have to file 990-Ts?

    Has H&R Block been correctly handling the recapture UBTI calculations when preparing 990-Ts for its clients over the last 15 years?

    The audit risk for the individuals typically handled by H&R Block may be very low because the IRS auditors are more likely to go after larger, higher net worth targets to make their audit more worthwhile since they could get larger penalties, settlements, etc.

    The US Tax system is voluntary so people can pay whatever they think is correct each year. Ignorance of the complexities of the tax code is not a good defense when getting audited by the IRS, a person may get a friendly auditor who feels some sympathy towards them but it won't matter when they do the math to calculate the penalties (just ask Wesley Snipes http://usat.ly/1oWVlaQ ).

    Best Regards,
    Phil
    Aug 19 10:54 AM | 1 Like Like |Link to Comment
  • Weekly Intelligence For MLP Investors [View article]
    I'll defer to the professional accounting and tax firms, so if it's a self reporting obligation for MLPs held in tax advantaged accounts that will likely be an issue for all the investors without MLP focused professional tax help.
    Aug 19 12:14 AM | Likes Like |Link to Comment
  • MLPs - Yes, They're Okay In Your IRA And Other Tax Questions Answered [View article]
    David,

    Timing to zero tax basis always depends on the Original Cost Basis, so hypothetically a brave investor bought LINE in their IRA in December of 2008 (picking a low point on purpose) and has an original cost basis of $12 per unit (vs the all time low of $10.81). LINE has generally been pretty close to having 100% of its distribution be treated as return of capital and thus lowering the investor's cost basis, so to keep it simple I'll assume 100% return of capital treatment from Dec 08 onward.

    Here's how their Adjusted Tax Basis would look per unit (with the ever present caveat that this is a gross oversimplification because of all of the other info that flows through to investors via their K-1s):

    Date - Distribution - Adjusted Tax Basis
    Dec 08 - $0.00 - $12.00 (<<Original Cost Basis)
    Feb 09 - $0.63 - $11.37
    May 09 - $0.63 - $10.74
    Aug 09 - $0.63 - $10.11
    Nov 09 - $0.63 - $9.48
    Feb 10 - $0.63 - $8.85
    May 10 - $0.63 - $8.22
    Aug 10 - $0.63 - $7.59
    Nov 10 - $0.66 - $6.93
    Feb 11 - $0.66 - $6.27
    May 11 - $0.66 - $5.61
    Aug 11 - $0.69 - $4.92
    Nov 11 - $0.69 - $4.23
    Feb 12 - $0.69 - $3.54
    May 12 - $0.725 - $2.815
    Aug 12 - $0.725 - $2.09
    Nov 12 - $0.725 - $1.365
    Feb 13 - $0.725 - $0.64
    May 13 - $0.725 - $0.00 (TAX BASIS IS NOW ZERO, could possibly have a UBTI issue for each distribution received in an IRA hereafter as well)
    3Q13 - $0.7248 (3 monthly at $0.2416) - $0.00
    4Q13 - $0.7248 - $0.00
    1Q14 - $0.7248 - $0.00
    2Q14 - $0.7248 - $0.00
    3Q14 - $0.7248 - $0.00

    So they hit zero tax basis in ~4.5 years. Even if it takes 10 years, I think some investors may hold IRA investments for the "long haul" which could be 20, 30, or 40+ years (so yes hopefully they could experience huge growth in the value of the MLP investment such that the recapture UBTI taxes at sale are comparatively small-ish).

    Assuming the example position was 1,300 LINE units for an original total cost of $15,600 and they sell today at $31 a unit, the estimated UBTI taxes per unit would be:

    Low Case:
    $14,600 taxable: Over $11,200 = $2,895.50 + 35%
    $2,895.50 + 35% * ($14,600 - $11,200)
    $2,895.50 + $1,190.00
    $4,085.50 of taxes taken out of the IRA / $3.14 per unit (which is 10.1% of the final sales price per unit)

    Worst Case:
    $14,600 taxable: Over $11,200 = $2,895.50 + 35%
    $2,895.50 + 35% * ($14,600)
    $2,895.50 + $5,110
    $8,005.50 of taxes taken out of the IRA / $6.16 per unit (which is 19.9% of the final sales price per unit)

    Using that very rough example the IRA LINE investor gets a 10% to 20% haircut in their final sales proceeds, so their anger level and desire to sue will be driven by how they feel about that outcome (just something I want people to not have to deal with).

    You bought LINE like an absolute genius near the lows in Dec 08 and held on like a champ controlling your fear and greed through thick and thin, then you get dinged for 10% to 20% of your final sales price today because you held it in your IRA. How would you feel?
    Would you go back and add up all the distributions you received to provide some additonial mental comfort?
    I'd acutally recommend that eveyone long KMP and EPB may want to add up those total lifetime distribution recieved numbers to help them feel better about the taxes due at the close of the KMI deal.

    Best Regards,
    Phil
    Aug 18 03:45 PM | Likes Like |Link to Comment
  • Weekly Intelligence For MLP Investors [View article]
    durango58,

    The difference between your Original Cost Basis in KMP and your Adjusted Tax Basis at the close of the KMI consolidation will be viewed as "Recapture" (as possibly adjusted by some items from prior year K-1s). Recapture that occurs in any tax advantaged account is supposed to be treated as UBTI. Any UBTI within any tax advantaged account above $1,000 is then taxable with taxes taken directly out of the tax advantaged account (at the rates shown here: http://bit.ly/1rKwI4p 2011 rates so it could be higher now).

    You may be able to lower that Recapture calculation in your IRA by selling deep in the money call options on your KMP position and being called away (assuming that the call strike price is lower than your Original Cost Basis per unit). You may want to get together with your tax preparer or work with your IRA Fiduciary to come up with a mitigation plan.

    Best Regards,
    Phil
    Aug 18 02:39 PM | 1 Like Like |Link to Comment
  • MLPs - Yes, They're Okay In Your IRA And Other Tax Questions Answered [View article]
    David,

    Thanks for the response and good luck with your IRA Fiduciary, it might not be that bad since the LINE position is so small and only held for 3 years (and I hope they don't charge you a fee for having to do the possible 990-T work!).

    I do see your point that people can try and manage the UBTI tax risk of investing in MLPs in their IRAs and potentially still come out with a good profit / return even after paying UBTI taxes down the road. I just know from a Financial Advisory / Fiduciary perspective it is not professionally acceptable to recommend that small investors take that risk since they are extremely unlikely to be able to model it correctly in advance (and if they get hit with large tax penalties within their IRAs then they will want to sue their Fiduciary). Back when I was working on the energy investment banking sell side and we would do public equity offerings for MLPs we would absolutely make sure that our retail brokerage network was NOT ALLOWED to buy any of the offerings in their clients' IRA (or any tax advantaged accounts) to be sure to protect investors from themselves and also prevent that lawsuit risk to the firm.

    I met with an Accounting and Tax Firm here in Houston this past Friday for 3+ hours to have them start handling my taxes. I asked them specifically about handling Recapture for MLPs held in an IRA and they said it will indeed generate UBTI.

    So hypothetically if someone buys $15,000 worth of LINE in an IRA and then holds it until after their Adjusted Tax Basis is zero and then they sell it, that will generate $15,000 of UBTI in the year sold (again oversimplified because there may be losses etc. from prior years that can help reduce that number). After the $1,000 "deduction" then the IRA would owe UBTI taxes on $14,000, which based on the UBTI tax link rlp2451 provided seems like it would be one of the following:

    Low Case:
    $14,000 taxable: Over $11,200 = $2,895.50 + 35%
    $2,895.50 + 35% * ($14,000 - $11,200)
    $2,895.50 + $980
    $3,875.50 of taxes taken out of the IRA (seems like a bad outcome to me)

    Worst Case:
    $14,000 taxable: Over $11,200 = $2,895.50 + 35%
    $2,895.50 + 35% * ($14,000)
    $2,895.50 + $4,900
    $7,795.50 of taxes taken out of the IRA (seems like an insanely bad outcome to me)

    So even assuming there is never a UBTI problem on the annual K-1, the UBTI tax problem can show up and really, really hurt investors when they sell and the longer they hold the MLP in the IRA the more likely there will be a UBTI problem upon sale, unless perhaps their total money invested into MLPs in their IRA(s) is never larger than $1,000.

    Personally any time people ask me I recommend very, very strongly that they never invest in any K-1 generating investment in any of their tax advantaged accounts, not because it is some conspiracy "against the little guy making money in MLPs" but because I want them to have 0% risk of having to pay any taxes out of their tax advantaged accounts down the road. Recommending that people take that risk in their IRAs is not something I could do with a clear conscience (and that's coming from a former evil investment banker).

    Best Regards,
    Phil
    Aug 18 02:25 PM | 4 Likes Like |Link to Comment
  • Weekly Intelligence For MLP Investors [View article]
    tigerstl,

    While you could avoid the taxes by donating away your KMP and EPB units prior to the deal, donating K-1 investments to charity is a very, very bad idea.

    "Don’t donate depleted MLPs to charity. Since they are pregnant with ordinary income, your deduction would be limited to the stock market appreciation in the shares. (Buy at $50, let the basis run down to $0, donate when the share is worth $52: Your charitable deduction is $2)."

    Source: http://onforb.es/HTVCbn

    Investors with low tax basis KMP and EPB units would still be better off after paying the taxes at the close of the KIM deal.

    Best Regards,
    Phil
    Aug 18 10:41 AM | Likes Like |Link to Comment
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