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rlp2451
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Retired Investor.
  • Are MLPs Worth the Trouble? 2 comments
    May 17, 2011 10:13 AM
    After numerous recent discussions on Yahoo MLP boards, I came to the conclusion it might be better off if MLPs ARE taxed like other companies and the so-called 'pass through' exemption is eliminated.  I calculated holding one share (unit) of a $10 MLP, distributing 10%/year, with distributions growing at 10%/year. (Generous obviously, but it makes the calculations easier).

    If the current law stays as is, you will get to a zero cost basis at year 8 (give or take a month or so).  My assumption is that the tax rate will increase to 25% anyway at year 8 (again for the sake of argument).

    If you put the distibutiions back into the original share, at year 15 you would have 2.92 shares, or almost tripleing your money (again under the current tax laws).

    If you decide to sell in the fifteenth year, you will have to pay taxes on the whole 2.92 shares.

    However, if you pay a 15% tax now, and still compound shares, you wind up having 2.82 shares - a mere .10 share less - but you only have to pay taxes on 1.82 shares since your original cost basis can be subtracted from the amount.You sind up with more shares and less taxes!

    The spreadsheets are posted below. Please tell me where I am in error!

    First page - Current tax scheme:

    YearCostDistribution RateDistribution AmountAdjusted CostTax AmountTax RateNet ReturnCumulative ReturnCompound Return
    110.00000.10001.00009.00000.00000.15001.00001.000011.0000
    29.00000.10601.06007.94000.00000.15001.06002.060012.0600
    37.94000.11241.12366.81640.00000.15001.12363.183613.1836
    46.81640.11911.19105.62540.00000.15001.19104.374614.3746
    55.62540.12621.26254.36290.00000.15001.26255.637115.6371
    64.36290.13381.33823.02470.00000.20001.33826.975316.9753
    73.02470.14191.41851.60620.00000.20001.41858.393818.3938
    81.60620.15041.50360.10250.00000.20001.50369.897519.8975
    90.10250.15941.5938-1.49130.39850.25001.195411.092921.0929
    10-1.49130.16891.6895-3.18080.42240.25001.267112.360022.3600
    11-3.18080.17911.7908-4.97160.44770.25001.343113.703123.7031
    12-4.97160.18981.8983-6.86990.47460.25001.423715.126825.1268
    13-6.86990.20122.0122-8.88210.50300.25001.509116.636026.6360
    14-8.88210.21332.1329-11.01510.53320.25001.599718.235728.2357
    15-11.01510.22612.2609-13.27600.56520.25001.695719.931329.9313
         3.3446 19.9313  
    Sell share(s) year 15:         
    Adjusted cost basis 0.0000       
    Current Basis: 29.9313       
    Tax Rate 0.2500       
    Tax Amount 7.4828       
    Net Amount: 22.4485       
    Less original cost 10.0000       
    Gross Net: 12.4485       

    Second page: Pay-as-you-go:
    Year
    Cost
    Distribution Rate
    Distribution Amount
    Adjusted Cost
    Tax Amount
    Tax Rate
    Net Return
    Cumulative Return
    Compound Return
    1
    10.0000
    0.1000
    1.0000
    9.0000
    0.1500
    0.1500
    0.8500
    0.8500
    10.8500
    2
    9.0000
    0.1060
    1.0600
    7.9400
    0.1590
    0.1500
    0.9010
    1.7510
    11.7510
    3
    7.9400
    0.1124
    1.1236
    6.8164
    0.1685
    0.1500
    0.9551
    2.7061
    12.7061
    4
    6.8164
    0.1191
    1.1910
    5.6254
    0.1787
    0.1500
    1.0124
    3.7184
    13.7184
    5
    5.6254
    0.1262
    1.2625
    4.3629
    0.1894
    0.1500
    1.0731
    4.7915
    14.7915
    6
    4.3629
    0.1338
    1.3382
    3.0247
    0.2676
    0.2000
    1.0706
    5.8621
    15.8621
    7
    3.0247
    0.1419
    1.4185
    1.6062
    0.2837
    0.2000
    1.1348
    6.9969
    16.9969
    8
    1.6062
    0.1504
    1.5036
    0.1025
    0.3007
    0.2000
    1.2029
    8.1998
    18.1998
    9
    0.1025
    0.1594
    1.5938
    -1.4913
    0.3985
    0.2500
    1.1954
    9.3952
    19.3952
    10
    -1.4913
    0.1689
    1.6895
    -3.1808
    0.4224
    0.2500
    1.2671
    10.6623
    20.6623
    11
    -3.1808
    0.1791
    1.7908
    -4.9716
    0.4477
    0.2500
    1.3431
    12.0055
    22.0055
    12
    -4.9716
    0.1898
    1.8983
    -6.8699
    0.4746
    0.2500
    1.4237
    13.4292
    23.4292
    13
    -6.8699
    0.2012
    2.0122
    -8.8821
    0.5030
    0.2500
    1.5091
    14.9383
    24.9383
    14
    -8.8821
    0.2133
    2.1329
    -11.0151
    0.5332
    0.2500
    1.5997
    16.5380
    26.5380
    15
    -11.0151
    0.2261
    2.2609
    -13.2760
    0.5652
    0.2500
    1.6957
    18.2337
    28.2337
     
     
     
     
     
    5.0423
     
    18.2337
     
     
    Sell share(s) year 15:
     
     
     
     
     
     
     
     
     
    Original Cost basis
     
    10.0000
     
     
     
     
     
     
     
    Current Basis:
     
    28.2337
     
     
     
     
     
     
     
    Adjusted cost basis
     
    18.2337
     
     
     
     
     
     
     
    Tax Rate
     
    0.2500
     
     
     
     
     
     
     
    Tax Amount
     
    4.5584
     
     
     
     
     
     
     
    Net Amount:
     
    13.6753
     
     
     
     
     
     
     
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Comments (2)
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  • NYCTEXASBANKER
    , contributor
    Comments (2984) | Send Message
     
    rlp

     

    You forgot to factor in the drip rate as an additional cost
    14 Oct 2014, 12:25 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (2127) | Send Message
     
    I'm not sure but it appears you have the dividends being reinvested at ever cheaper prices. This would incorrectly penalizes the mlp option. The MLP benefits from having more net funds to drip (due to less taxes) in the early years. A better assumption might be that dividend and the share price increases by 3% annually (inflation).

     

    Also you are assuming the tax is eventually paid. That is not necessarily true. If you leave the mlp to your kids, they get a step up in basis. Even if that were not applicable in your case, you could also choose to sell the shares and realize the capital gain during a period where you have a low tax rate. Either due to capital losses, your income being lower in retirement, you moving to a low tax location, etc.
    12 Feb, 06:54 PM Reply Like
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