rlp2451's  Instablog

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:

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	0.0000	0.1500	1.0000	1.0000	11.0000
2	9.0000	0.1060	1.0600	7.9400	0.0000	0.1500	1.0600	2.0600	12.0600
3	7.9400	0.1124	1.1236	6.8164	0.0000	0.1500	1.1236	3.1836	13.1836
4	6.8164	0.1191	1.1910	5.6254	0.0000	0.1500	1.1910	4.3746	14.3746
5	5.6254	0.1262	1.2625	4.3629	0.0000	0.1500	1.2625	5.6371	15.6371
6	4.3629	0.1338	1.3382	3.0247	0.0000	0.2000	1.3382	6.9753	16.9753
7	3.0247	0.1419	1.4185	1.6062	0.0000	0.2000	1.4185	8.3938	18.3938
8	1.6062	0.1504	1.5036	0.1025	0.0000	0.2000	1.5036	9.8975	19.8975
9	0.1025	0.1594	1.5938	-1.4913	0.3985	0.2500	1.1954	11.0929	21.0929
10	-1.4913	0.1689	1.6895	-3.1808	0.4224	0.2500	1.2671	12.3600	22.3600
11	-3.1808	0.1791	1.7908	-4.9716	0.4477	0.2500	1.3431	13.7031	23.7031
12	-4.9716	0.1898	1.8983	-6.8699	0.4746	0.2500	1.4237	15.1268	25.1268
13	-6.8699	0.2012	2.0122	-8.8821	0.5030	0.2500	1.5091	16.6360	26.6360
14	-8.8821	0.2133	2.1329	-11.0151	0.5332	0.2500	1.5997	18.2357	28.2357
15	-11.0151	0.2261	2.2609	-13.2760	0.5652	0.2500	1.6957	19.9313	29.9313
					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