“What we have here is a failure to communicate”. For that, I take full responsibility, so let me try, yet, once again.
The article was clear in stating that post-zero distributions are either taxed at ordinary rates, which most people seek to avoid, or it is ROC-LTCG, which most people consider favorable. The article asserted that the ROC-LTCG is not as favorable as it appears as a result of "double taxation"..
Let’s put it under a microscope. Start with zero basis and $75k in MLP earnings which are fully distributed.
Example 1: $75k in 1245 depreciation shields earnings from ordinary income tax, enabling the $75k to be taxed when received as ROC-LTCG. There is also a deferred tax attributable to the recapture that causes $75k of the eventual sales proceeds to be taxed as ordinary income. I’m sure we agree on this.
Example 2: $75k distribution is taxed at ordinary rates. This increases basis (the ROC-LTCG does not). As a result, at sale $75k of the sales proceeds incurs no tax, whatsoever.
Let’s compare the two outcomes. The ROC-LTCG accounting carries with it a recapture where ordinary income creates basis.
The accounting that gives rise to ROC-LTCG creates two tax situations, one now and one later, whereas the ordinary gain tax does not. The ROC-LTCG accounting therefore (except for a possible timing issue) carries with it more taxes than a fully taxable ordinary income distribution. WOW, and that's the expressed point in my article.
I choose to describe the ROC-LTCG phenomenon as “double taxation”. I could have, instead, described the ordinary gain distribution as a non-taxed distribution (pay now, get back later).
That would have certainly caused as least as much confusion.
The fact is that MLPs have unusual tax structures that cause unusual outcomes. These outcomes carry with it many avenues to explore. In this article I flew the concept that ROC-LTCG is worse than ordinary income. In that pursuit, I choose to describe the effect as “double taxation”. Though this phraseology was confusing, the result is accurate.
I ask you, if the ROC-LTCG accounting ultimately causes more taxes than an ordinary income distribution, is it fair to make the assertion as I did? If not, how would you describe an outcome where a ROC-LTCG carries a greater overall tax impact than an ordinary gain distribution? You have to attribute it to something?
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Hi lpjblb,
I have small positions in some "outliers".
80% I just use hedged SPX or SPY. They are plenty diversified for me and since I use options (mostly put calendar spreads) I'm looking for low-beta. I don't bother with bonds, etc, my long dated puts act as insurance.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Hi Russell,
I could post a picture of a man in a $12,000 suit, rep tie, Flag Lapel Pin, impeccably dressed, monogrammed cuffs, expensive watch, perfectly groomed so you could be more comfortable. Oh, sorry, that was a picture of Bernie Madoff.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Hi leehoffman,
If you are saying that passive losses on one MLP (such as LINE) can be used to offset gains on another MLP (say KMP) or passive losses on other investments such as real estate, you are misinformed.
The Code is clear and specific that suspended losses for Publicly Traded Partnerships can only be used to offset gains on the MLP that gave rise to the losses. Furthermore, passive losses cannot be applied towards gain on a sale of the MLP giving rise to the losses unless it is a substantially complete sale. IRC Section 469(k)
If you're saying something else, I'm not sure what it is. Could you explain?
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Hi knightmine,
You have to consider how much tax you would pay to make the exchange. For me, I "bought the bullet" and changed. Long term, I see no other alternative.
In my previous article (http://bit.ly/ZflSdG) I PREDICTED LnCo outperforming LINE and explains my reasons.
So far, so good on that one, but I'm only in the lead around the first turn of a very long race.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Hi Alex,
Actually, it applies to any corporate stock that makes distributions that are not from current or accumulated earnings.
It would most likely take place in a corporation that has lots of Free Cash Flow, but not taxable net earnings. This usually happens if there are large depreciation or depletion allowances.
Since most of these types of businesses are energy related and also MLPs, you don't see it too often, but I suspect more and more will move in that direction.
Right now I don't know if LnCo will end up being a "one-of-a-kind" or a trend setter. We have somethig to look forward to.
Now, specifically regarding KMR, KMR's plan seems to be one tax step better, in that after LnCo's basis gets to zero and is taxed at LTCG, KMR continues to defer that taxation.
All else being equal, I'd give the edge to KMR for IRAs and those with no current income need, and LnCo the edge for those desiring current income.
There are so many MLPs and "clones" out there, each one has to be looked at for its own conclusion.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Hi 5bandit5,
Yep, can't wait. Keeps me young (or should I say grey).
Be Here Now got the big one right out of the box, so that angle is now mute.
I'm waiting for the people who completely miss the point and say I forgot to compare corporate tax rates by LnCo to individual tax rates on LINE, or some other such nonsense.
Hopefully readers will recognize that this was all about an unusual and favorable treaqtment of LnCo's distributions. Experience says no.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Hi richjoy.
Yes, this particular point does not add anything to the tax advantage of LnCo over LINE in an IRA.
You raise a very interesting point. That is, does it make sense to own dividend paying stocks in an IRA, period?.
I'm planning an article that will explore exactly this issue. More so, how should one structure a portfolio for maximum after tax return. It's sure to get plenty of feedback.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Hi Be Here,
Direct from IRS Publication 17
"
Nondividend Distributions
A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. You should receive a Form 1099-DIV or other statement showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you do not receive such a statement, you report the distribution as an ordinary dividend.
Basis adjustment. A nondividend distribution reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered. This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first. When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. "
MLPs - A Reality Check ? [View article]
“What we have here is a failure to communicate”. For that, I take full responsibility, so let me try, yet, once again.
The article was clear in stating that post-zero distributions are either taxed at ordinary rates, which most people seek to avoid, or it is ROC-LTCG, which most people consider favorable. The article asserted that the ROC-LTCG is not as favorable as it appears as a result of "double taxation"..
Let’s put it under a microscope. Start with zero basis and $75k in MLP earnings which are fully distributed.
Example 1: $75k in 1245 depreciation shields earnings from ordinary income tax, enabling the $75k to be taxed when received as ROC-LTCG. There is also a deferred tax attributable to the recapture that causes $75k of the eventual sales proceeds to be taxed as ordinary income. I’m sure we agree on this.
Example 2: $75k distribution is taxed at ordinary rates. This increases basis (the ROC-LTCG does not). As a result, at sale $75k of the sales proceeds incurs no tax, whatsoever.
Let’s compare the two outcomes. The ROC-LTCG accounting carries with it a recapture where ordinary income creates basis.
The accounting that gives rise to ROC-LTCG creates two tax situations, one now and one later, whereas the ordinary gain tax does not. The ROC-LTCG accounting therefore (except for a possible timing issue) carries with it more taxes than a fully taxable ordinary income distribution. WOW, and that's the expressed point in my article.
I choose to describe the ROC-LTCG phenomenon as “double taxation”. I could have, instead, described the ordinary gain distribution as a non-taxed distribution (pay now, get back later).
That would have certainly caused as least as much confusion.
The fact is that MLPs have unusual tax structures that cause unusual outcomes. These outcomes carry with it many avenues to explore. In this article I flew the concept that ROC-LTCG is worse than ordinary income. In that pursuit, I choose to describe the effect as “double taxation”. Though this phraseology was confusing, the result is accurate.
I ask you, if the ROC-LTCG accounting ultimately causes more taxes than an ordinary income distribution, is it fair to make the assertion as I did? If not, how would you describe an outcome where a ROC-LTCG carries a greater overall tax impact than an ordinary gain distribution? You have to attribute it to something?
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
I have small positions in some "outliers".
80% I just use hedged SPX or SPY. They are plenty diversified for me and since I use options (mostly put calendar spreads) I'm looking for low-beta. I don't bother with bonds, etc, my long dated puts act as insurance.
This is not for everyone, but it works for me.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Excellent advice.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
I could post a picture of a man in a $12,000 suit, rep tie, Flag Lapel Pin, impeccably dressed, monogrammed cuffs, expensive watch, perfectly groomed so you could be more comfortable. Oh, sorry, that was a picture of Bernie Madoff.
The Facts Are In - MLPs Work Great In IRAs [View article]
I've written many articles on options, but they are more advanced.
Unfortunately SA no longer accepts articles on options, unless they are incidental to a specific trade.
However, there are many very excellent sources for the basics. The CBOE has an excellent Education Section on its Web-Site.
Here's a link to covered calls (http://bit.ly/Zh1SaA)
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Thanks, maybe I won't age so much from this one.
RK
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
If you are saying that passive losses on one MLP (such as LINE) can be used to offset gains on another MLP (say KMP) or passive losses on other investments such as real estate, you are misinformed.
The Code is clear and specific that suspended losses for Publicly Traded Partnerships can only be used to offset gains on the MLP that gave rise to the losses. Furthermore, passive losses cannot be applied towards gain on a sale of the MLP giving rise to the losses unless it is a substantially complete sale. IRC Section 469(k)
If you're saying something else, I'm not sure what it is. Could you explain?
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
You have to consider how much tax you would pay to make the exchange. For me, I "bought the bullet" and changed. Long term, I see no other alternative.
In my previous article (http://bit.ly/ZflSdG) I PREDICTED LnCo outperforming LINE and explains my reasons.
So far, so good on that one, but I'm only in the lead around the first turn of a very long race.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Actually, it applies to any corporate stock that makes distributions that are not from current or accumulated earnings.
It would most likely take place in a corporation that has lots of Free Cash Flow, but not taxable net earnings. This usually happens if there are large depreciation or depletion allowances.
Since most of these types of businesses are energy related and also MLPs, you don't see it too often, but I suspect more and more will move in that direction.
Right now I don't know if LnCo will end up being a "one-of-a-kind" or a trend setter. We have somethig to look forward to.
Now, specifically regarding KMR, KMR's plan seems to be one tax step better, in that after LnCo's basis gets to zero and is taxed at LTCG, KMR continues to defer that taxation.
All else being equal, I'd give the edge to KMR for IRAs and those with no current income need, and LnCo the edge for those desiring current income.
There are so many MLPs and "clones" out there, each one has to be looked at for its own conclusion.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Yep, can't wait. Keeps me young (or should I say grey).
Be Here Now got the big one right out of the box, so that angle is now mute.
I'm waiting for the people who completely miss the point and say I forgot to compare corporate tax rates by LnCo to individual tax rates on LINE, or some other such nonsense.
Hopefully readers will recognize that this was all about an unusual and favorable treaqtment of LnCo's distributions. Experience says no.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Yes, this particular point does not add anything to the tax advantage of LnCo over LINE in an IRA.
You raise a very interesting point. That is, does it make sense to own dividend paying stocks in an IRA, period?.
I'm planning an article that will explore exactly this issue. More so, how should one structure a portfolio for maximum after tax return. It's sure to get plenty of feedback.
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Your calculations are correct.
under the Basis Reporting Regulations that recently took effect, the broker/dealer is required to track basis.
Hope they get it right
Linn Energy Vs. LinnCo: And The Verdict Is... [View article]
Direct from IRS Publication 17
"
Nondividend Distributions
A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. You should receive a Form 1099-DIV or other statement showing the nondividend distribution. On Form 1099-DIV, a nondividend distribution will be shown in box 3. If you do not receive such a statement, you report the distribution as an ordinary dividend.
Basis adjustment. A nondividend distribution reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered. This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first.
When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. "
MLPs - A Reality Check ? [View article]
Good question. I certainly have a lot more helpful articles that I could be writing tan just beating this horse.
Many "experts" have given up and come around. Even the MLPs now concede the issue.
However, "marketers" and "spin meisters" have too much to lose and are slower in coming around.
As a matter of fact, there are two articles on SA that appeared just about a week ago, holding on to the past.
I try to stay away, but readers keep dragging me in for support.
As long as ignorance continues, I guess the battle goes on.
The Facts Are In - MLPs Work Great In IRAs [View article]
I concur with rip.
An interesting aspect of LNCO is the non-dividend distribution.
It has some very big pluses, and I'll probably write an article about the tax planning opportunities. Keep an eye open.