Kinder Morgan deal risks unpleasant tax surprise for some investors


The Kinder Morgan companies open lower, giving back a bit of yesterday's big gains following the plan to consolidate their collection of pipeline companies: KMI -1%, KMP -1.4%, KMR -1.1%, EPB -1%.

Some investors in Kinder’s MLPs could be left with big, unexpected tax bills; taxes on the substantial quarterly payouts from MLPs are deferred, and when the units are sold or exchanged - as they will be in the reorganization - the deferred taxes come due.

Some investors were planning on holding the units and not paying a tax until they sold it or died, "so it's probably going to be a bit of a surprise for those people,” says Twenty-First Securities' Robert Gordon.

Kinder Morgan confirms the deal will be a taxable transaction for owners of KMP and EPB, while KMR owners will have a tax-free transaction; according to estimates released by the company, the tax owed by an average investor in KMP units could range from $12.39 to $18.16 per unit, depending on the individual’s tax rate.

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Comments (116)
  • Mike Maher
    , contributor
    Comments (2863) | Send Message
     
    Dozens of comments on SA yesterday that the devil was in the tax details, but the WSJ article doesn't go into it that in depth. I'd expect some of the larger unit holders to be a bit upset.
    12 Aug 2014, 10:32 AM Reply Like
  • bigbenorr
    , contributor
    Comments (1174) | Send Message
     
    I am really hoping they push the transaction into next year. That would give me a lot more time for tax planning.
    12 Aug 2014, 10:34 AM Reply Like
  • Ralph208
    , contributor
    Comments (66) | Send Message
     
    Could these taxes be classified as long term gains if you held EPB over one year?
    Thanks in advance.
    12 Aug 2014, 10:36 AM Reply Like
  • Love_ Money
    , contributor
    Comments (320) | Send Message
     
    Well Taxes and deaths are the only thing that are certain. We should learn to live with it. I pay a very large tax portion, but i see it as something that I can't avoid if i have to live in a civilized society
    12 Aug 2014, 10:37 AM Reply Like
  • paulalmony
    , contributor
    Comments (6) | Send Message
     
    How can they estimate the tax bill for any individual investor? Wouldn't it depend on when the MLP units were bought? Seemingly, if you bought $KMP now, and received only one distribution of $1.39 per unit, the gain that would be taxable upon coversion attributable to distributions would only be that 1.39. Yes, a seller would be liable for taxes on the gain; but, that's true of any security that is bought and sold. What am I missing?
    12 Aug 2014, 10:41 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2863) | Send Message
     
    If you had bought KMP for income in retirement, and planned on living off the income, you would not pay taxes on the income til you died. Since the transaction is forcing tax payments, a lot of people are going to get tax bills they weren't planning for, and they've going to be rather large tax bills.
    12 Aug 2014, 10:47 AM Reply Like
  • paulalmony
    , contributor
    Comments (6) | Send Message
     
    I agree. I guess my point is that for those investors that bought $KMP recently (yes, I bought it in the first quarter of this year) and didn't plan a long-term hold, the tax ramifications don't seem any different than the purchase and sale of any other security (except, the distributions don't get taxed at the favorable dividend rate).
    12 Aug 2014, 12:24 PM Reply Like
  • whopf@twc.com
    , contributor
    Comments (3) | Send Message
     
    the $1.39 will be taxed as income and not as a dividend, big difference
    13 Aug 2014, 10:04 AM Reply Like
  • paulalmony
    , contributor
    Comments (6) | Send Message
     
    KMI has a 43 cent quarterly dividend. At a 15% tax rate, the net dividend is 37 cents. Annualized, that's 1.46, or a 3.78% after tax yield based on KMI's closing price today.

     

    KMP has a $1.39 quarterly dividend. At a 40% tax rate, the net dividend is 83 cents. Annualized, that's 3.34, or a 3.57% after tax yield bsed on KMP's closing price today.

     

    If that's the only difference, seems to me that KMP, based on the conversion plan, is a better buy than KMI.
    13 Aug 2014, 04:15 PM Reply Like
  • ckarabin
    , contributor
    Comments (1917) | Send Message
     
    So when you make a boatload of money, you still have to pay taxes. Got it. Sounds fair to me.
    12 Aug 2014, 10:44 AM Reply Like
  • bigbenorr
    , contributor
    Comments (1174) | Send Message
     
    It is different with an MLP, you don't pay taxes on distributions like you do with a dividend paying stock, but over time you count up how many tax deferred distributions you received and then if you sell the units (or they get acquired) you have to reduce your cost basis by the same amount you received in distributions, so even if you paid $80 for your units and they get bought for $90 you are looking at paying tax on more than $10 per unit. It will hurt worse than a normal tax situation, especially if you have been blowing your distributions in Vegas....
    12 Aug 2014, 11:00 AM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    Worse yet, depreciation and other expenses reduce you basis and increase your taxes without a total offset to income. You don't know until it is to late
    12 Aug 2014, 11:30 AM Reply Like
  • bigbenorr
    , contributor
    Comments (1174) | Send Message
     
    Cost depletion is the term I think.
    12 Aug 2014, 11:35 AM Reply Like
  • chopchop0
    , contributor
    Comments (5215) | Send Message
     
    Glad I picked EPD over Kinder personally
    12 Aug 2014, 10:50 AM Reply Like
  • fredj
    , contributor
    Comments (155) | Send Message
     
    Glad I picked KMR. No tax problems.
    12 Aug 2014, 11:29 AM Reply Like
  • hallereugene@gmail.com
    , contributor
    Comments (588) | Send Message
     
    Im with you Bro.
    12 Aug 2014, 11:58 AM Reply Like
  • chopchop0
    , contributor
    Comments (5215) | Send Message
     
    "Glad I picked KMR. No tax problems."

     

    I was referring to EPD, not EPB. I personally would rather have an MLP than not, regardless of what Kinder is saying
    12 Aug 2014, 01:18 PM Reply Like
  • EZDAN
    , contributor
    Comments (45) | Send Message
     
    The problem is that the exchange of shares in KMI for KMP and EPB unit holders only leaves them with a minimal amount of cash with which to pay taxes. If they want to remain fully invested they will be required to dip into their pocket to pay the taxes unless they sell shares of KMI after the exchange.
    12 Aug 2014, 10:54 AM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    Ouch. I also hope this gets delayed till 2015. Maybe I should just sell this junk.

     

    So, for about $6000 of ordinary income not planned on, my family will have an additional $18,000 expense excluding the tax on the ordinary income.

     

    My situation is unique. however, I had a plan. I hate kinder.
    12 Aug 2014, 11:00 AM Reply Like
  • hallereugene@gmail.com
    , contributor
    Comments (588) | Send Message
     
    Why dont you blame all the talking heads who for almost a year kept the stock low and caused the apple cart to be overturned? Drop downs! Buy EPD! Dont buy Kinder! There is no growth!

     

    I started to buy KMR and KMI and consistently added for the past year. I made out much better than if I had bought the same amount of EPD.

     

    Now if anybody can tell me what a good entry point to EPD would be Id be very appreciative.
    12 Aug 2014, 12:06 PM Reply Like
  • Bobco23
    , contributor
    Comments (240) | Send Message
     
    Looks like investing in an MLP in an IRA was a pretty good idea after all.

     

    The UBTI was a small risk, small dollar exposure compared to the now certain capital gain hit on zero basis in the max tax bracket for some KMP holders in taxable accounts.
    12 Aug 2014, 11:01 AM Reply Like
  • fredj
    , contributor
    Comments (155) | Send Message
     
    The problem with an IRA is NONE of your withdrawls will ever be LT cap gain. At least in a taxable account most of them will be LT cap gains.
    12 Aug 2014, 11:31 AM Reply Like
  • YorgoSiam
    , contributor
    Comments (44) | Send Message
     
    Bobco:

     

    I guess now we'll see how small a risk UBTI really is for anyone with KMP/EPB in an IRA.

     

    A commenter a few months ago mentioned a UBTI issue upon sale of an MLP in an IRA that was related to recapture of depreciation.
    12 Aug 2014, 05:45 PM Reply Like
  • Bobco23
    , contributor
    Comments (240) | Send Message
     
    Yorgo,

     

    I recall that comment. I searched the IRS website several hours for clarification. UBTI information is tough to come by and I did not satisfy my concern.

     

    I concur that the recapture question is relevant and we could all use a regulation or ruling reference on this issue. A related question is what happens to all the UBTI losses in suspense accumulated over the years? Do they off set the recapture (if that is indeed true)? I have about $200k in MLPs and $35k in accumulated UBTI losses.

     

    If the author of the comment Yorgo referred to reads this, please give us any additional or clarifying information you may have. Thanks in advance.
    13 Aug 2014, 12:33 PM Reply Like
  • YorgoSiam
    , contributor
    Comments (44) | Send Message
     
    Hey Bob,

     

    Wish I could clarify for you but I have the same problem finding info.

     

    The comment we're referring to was part of an extensive UBTI side discussion in the comments to Albert Alfonso's article "Rich Kinder Backs up the Truck" this past May (see http://bit.ly/1rs2R0p )

     

    For ease of referrence I copy part of that comment below:

     

    >Yorgo....It had to do with UBTI, the significant capital gain that I had when I sold the MLP's, the calculation of the basis for my capital gain (the IRS reduced the basis, in hindsight correctly I believe)....of course I had assumed that all of this was a non-taxable event in a tax-deferred account....wrongo!<
    13 Aug 2014, 03:10 PM Reply Like
  • Bobco23
    , contributor
    Comments (240) | Send Message
     
    Thanks for the response and the reference, Yorgo.

     

    Reading that comment again and thinking about UBTI, I am beginning to suspect a bit of confusion on the part of the commentator. Here's my thinking:

     

    UBTI is generated by the MLP. It is passed through to the partner on the K-1. UBTI is either a gain or a loss on line 20 box v. If the gain is over $1,000 in the aggregate, the custodian of the account (in my case Schwab) takes out the appropriate tax. I have had roughly $200k in pipeline MLPs over the last decade and the aggregate UBTI has never been positive. I (Schwab would have made the withdrawal and filed the 990-T return identifying UBTI tax not due) have losses in suspense in excess of $35k. I believe my case is common as several of my friends have a similar situation. So the commentator is suggesting that losses in suspense generate a reduction in basis? That does not make sense. Further, I have sold MLPs in that Schwab account over the years and Schwab has not shown any effect of the sales on the Form 990-T.

     

    Perhaps the commentator did not file the 990-T, had positive UBTI for some or all years and was assessed on that "gain". I am beginning to think you and I are chasing a ghost. I don't know, but given the lack of further info here, I am going to assume this is a non-issue.
    14 Aug 2014, 12:06 PM Reply Like
  • YorgoSiam
    , contributor
    Comments (44) | Send Message
     
    Bob,
    Thanks for sharing your thoughts. You are right, the commentator wasn't really clear on why UBTI was a problem, he just stated that it was and that he had a capital gains issue b/c the IRS lowered his basis. I also would think that suspended losses would be a benefit not a liability in that situation.

     

    I am thinking (and hoping) you are right about UBTI being a non-issue in practice ... we'll all find out for sure next spring when everything shakes out.

     

    Personally, I went with KMR to just avoid the issue entirely (in the event of a sale), although my parents have held KMP in their IRA for some time. They too also hold a bunch of mlps without ever having any ubti issues but I think this is the first "sale or exchange" they are going through.

     

    cheers
    14 Aug 2014, 06:31 PM Reply Like
  • Alfredo Martinez
    , contributor
    Comments (176) | Send Message
     
    Also glad I ignored the UBTI scare mongering and bought MLPs in tax deferred accounts.

     

    Honestly, I don't even think the IRS know it's own UBTI laws, have you ever actually talked with someone from the IRS? I guarantee you 99.9% of their employees have no clue.

     

    Even if you ever get hit with the UBTI (which is VERY difficult) it's an incredibly small penalty and I doubt the IRS would even have the ability to know if it's "owed".

     

    I'll take my chances with MLPs in tax deferred accounts.
    22 Nov 2014, 07:15 PM Reply Like
  • mydogmoe
    , contributor
    Comments (1403) | Send Message
     
    If your EPB or KMP are in tax deferred accounts (IRA etc.) those taxes should be deferred until withdrawal and regular income tax should be owed. Converting KMR into the common is slightly less return than presently but there is nothing wrong with the 5% dividend which is supposed to increase 10% a year until 2020. I wouldn't be surprised if the value of the KMI increases by a rate of greater than 10%...
    12 Aug 2014, 11:01 AM Reply Like
  • puffperney
    , contributor
    Comments (9) | Send Message
     
    Well, the unit holders will just have to suck it up and take one for the team.
    12 Aug 2014, 11:02 AM Reply Like
  • bigbenorr
    , contributor
    Comments (1174) | Send Message
     
    As a unit holder I was a little peeved at first, but I think you are right. Big picture this will be positive so I might as well get on board and vote for the deal.
    12 Aug 2014, 11:13 AM Reply Like
  • 101investor
    , contributor
    Comments (82) | Send Message
     
    I would assume that KM has or will get a tax determination letter from the IRS that would settle the issue of whether this is a tax free exchange
    12 Aug 2014, 11:03 AM Reply Like
  • fredj
    , contributor
    Comments (155) | Send Message
     
    No. it's already been stated that it's tax free for the KMR people only.
    12 Aug 2014, 11:32 AM Reply Like
  • Hopper1%
    , contributor
    Comment (1) | Send Message
     
    It also needs to be continuously qualified with a reminder that the tax situation is different for a taxable account versus a IRA or Roth. What happens in an IRA stays in the IRA, until actually distributed outside the IRA.
    31 Aug 2014, 10:48 PM Reply Like
  • ipaduser
    , contributor
    Comments (751) | Send Message
     
    Everybody has a plan until they get punched in the mouth.
    -Mike Tyson
    12 Aug 2014, 11:04 AM Reply Like
  • riley2010
    , contributor
    Comments (5) | Send Message
     
    Keep in mind that most of the "distributions" from KMP are considered a return of capital. So if you have held your units for years, the cost basis in your units has been going down since you started receiving distributions.

     

    That means that your taxable capital gains have been going up in direct proportion to the distributions.

     

    My units have already gone into a negative basis since I have held them since 2009. I am anticipating getting hit with capital gains on the entire sale value of the units when the consolidation occurs.

     

    Check with your accountants but long term holders could end up with substantial tax bills.
    12 Aug 2014, 11:05 AM Reply Like
  • mcbrayerja
    , contributor
    Comments (7) | Send Message
     
    Riley:
    Not capital gains... recapture of distributions. Taxed at full rate, not capital gains. Ouch!
    12 Aug 2014, 11:11 AM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    Both right and wrong. Ordinary income and capital gains are due.
    12 Aug 2014, 11:23 AM Reply Like
  • fredj
    , contributor
    Comments (155) | Send Message
     
    Not Long Term capital gains and thus not the lower tax rate, but rather "ordinary income" from recapture of distributions in prior years. Amounts exceeding that are probably LT cap gains though.
    12 Aug 2014, 11:34 AM Reply Like
  • TellTruth
    , contributor
    Comments (33) | Send Message
     
    All wrong and partially right ... recapture is taxed at 25% at Federal level. This is analogous to selling depreciated real property for a cash gain which is far less than the taxable gain to a long term holder (speaking as one who has owned KMP for over 12 years). The portion of gain attributable to depreciation recapture is 25%. The portions attributable to depletion allowance MAY (not sure) be taxable at ordinary income rates.
    12 Aug 2014, 12:48 PM Reply Like
  • riley2010
    , contributor
    Comments (5) | Send Message
     
    Checked with my accountant. The comments below are substantially correct. Recapture of distribution is an issue. But so too are passive losses. After discussions with her today, I decided to simplify: I sold the lot. Yes, I will pay taxes but I also did ok on the net deal over the years. Each case will be different so please work with your accountant before you make a decision. As always, I appreciate all the input from the Seeking Alpha community. It is pretty amazing in total.
    12 Aug 2014, 09:13 PM Reply Like
  • Clay King
    , contributor
    Comments (750) | Send Message
     
    About half and half in my case........
    15 Aug 2014, 10:57 AM Reply Like
  • Curtlevy
    , contributor
    Comments (46) | Send Message
     
    Just sell KMP here. The increased value will pay the tax. Take the proceeds and start an new position in KMI.
    12 Aug 2014, 11:20 AM Reply Like
  • fredj
    , contributor
    Comments (155) | Send Message
     
    Beats worrying if the stock will fall in price by the transaction date.
    12 Aug 2014, 11:36 AM Reply Like
  • bigbenorr
    , contributor
    Comments (1174) | Send Message
     
    Yeah, except that KMP is currently trading at an apparent discount to where the deal values it. Current KMI price * 2.1931 +10.77 = 95.42

     

    Current KMP price = 91.72
    Plus I am assuming there will be another distribution from KMP (possibly 2 if the transaction takes longer than expected.)

     

    Honestly I am doing the opposite, sell KMI, buy KMP (or KMR).
    12 Aug 2014, 11:53 AM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    Actually, as I compare my capital accounts for epd and KMP. EPD is much better situation. Maybe due to on IDR for KMP. KMP is less profits and more taxes maybe due to KMI taking IDR. I owe taxes in KMP for reductions in capital with no offsets. The experts have been wrong about KMP for years.
    12 Aug 2014, 11:27 AM Reply Like
  • Rudester
    , contributor
    Comments (3413) | Send Message
     
    After its all said and done, what will be the cost basis of the KMI shares received?
    12 Aug 2014, 11:30 AM Reply Like
  • fredj
    , contributor
    Comments (155) | Send Message
     
    I bet the cost basis will end up pretty close to the value of KMI at issuance.
    12 Aug 2014, 11:37 AM Reply Like
  • dgswanson
    , contributor
    Comments (16) | Send Message
     
    There will be a "Seller's Packet" provided that will explain the facts. There appears to be much misinformation in much that I have read today.
    12 Aug 2014, 03:17 PM Reply Like
  • Lookingforincome
    , contributor
    Comments (70) | Send Message
     
    You are correct based on what Kinder presented, the KMI basis for KMP and EPB exchange will be the value of KMI stock at time of exchange. KMR share holder will use their original cost basis without adjustment.
    12 Aug 2014, 03:45 PM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    Dgswanson,

     

    Where and when can we have this sellers package? Who told you about this sellers package.

     

    I hope you are right that this is a merger and hence no tax due. I doubt it though.
    12 Aug 2014, 04:17 PM Reply Like
  • Rudester
    , contributor
    Comments (3413) | Send Message
     
    The exchange is tax free only for KMR holders.
    15 Aug 2014, 12:32 PM Reply Like
  • jerrywengler
    , contributor
    Comments (657) | Send Message
     
    Wish candidates who favored the 10 percent flat tax for everyone with no increases above that or deductions possible had been elected. Of course a 5 percent flat tax would have been even better. But with less taxes to pay, fewer non-productive talking heads would have jobs unless they were real ones.
    12 Aug 2014, 11:33 AM Reply Like
  • bale002
    , contributor
    Comments (460) | Send Message
     
    One of the reasons why I prefer MLPs packaged in the incorporated general partner or ETNs or ETFs which issue 1099s. Perhaps not the most profitable under normal circumstances, but certainly simpler.
    12 Aug 2014, 11:35 AM Reply Like
  • fredj
    , contributor
    Comments (155) | Send Message
     
    You could always sell one third of your KMP right now while the price is high and save the cash for income taxes. Let the other two thirds ride.
    12 Aug 2014, 11:39 AM Reply Like
  • Chancer
    , contributor
    Comments (4373) | Send Message
     
    I have avoided MLPs for many reasons. This deal just gave me another reason: company pulls the rug out and you get an unexpected tax bill.

     

    I had planned to hold my KMR shares for life, and I am disappointed it did not go according to my plan. But I always foresaw the biggest risk in KMR was that management would eliminate it and kill the golden goose. But I expected it would be KMP shares exchanged for KMR. Not wanting to hold an MLP, that would have prompted me to sell. After analyzing the deal yesterday (as much as I can now), I concluded that as structured (assuming no major surprise changes), it works for me.

     

    My worst consequence: Instead of receiving tax deferred KMR shares that can be sold when I choose to pay cap gains tax, I will pay annual taxes on the KMI dividends received. But as a KMI shareholder I will probably get greater increases in both dividends and share price (than with KMR)- that is, if all goes according to plan. The KMR advantages were certain (but not certain to last), and the KMI advantages are likely, but not certain.

     

    I believe the purpose of KM giving $10.77 cash to KMP investors was to compensate for taxes due for the "average" KMP investor, although some investors will pay higher taxes.
    12 Aug 2014, 11:43 AM Reply Like
  • dgswanson
    , contributor
    Comments (16) | Send Message
     
    There is a share for unit, not tax trade. The cash portion can be in cash (and thus a taxable event) or one can elect stock instead. Otherwise, the merger provides the non-taxable event (at the time of the merger).
    12 Aug 2014, 03:17 PM Reply Like
  • YorgoSiam
    , contributor
    Comments (44) | Send Message
     
    dgswanson:

     

    I am afraid that for the MLP unitholders of KMP & EPB this 'merger' is taxable.

     

    see the Sunday presentation, footnotes 3 on slide 11 for KMP and slide 13 for EPB showing that "taxes for an average unitholder are estimated to be ..." $16.41/unit and $4.61/unit respectively.

     

    There are also plenty of news articles about this as well, including today's Wall Street Journal.
    12 Aug 2014, 06:00 PM Reply Like
  • whopf@twc.com
    , contributor
    Comments (3) | Send Message
     
    If you use a dividend reinvestment option you should duplicate your KMR tax deferral plan with KM stock?
    13 Aug 2014, 10:04 AM Reply Like
  • eternitus141
    , contributor
    Comments (525) | Send Message
     
    As an advisor once told me, tax deferral is not tax elimination. You should only count on your shares being worth the current price less your tax liability. As you receive distributions, your tax liability goes up if you do not pay the piper today. And the piper always gets paid, sooner or later. I think it's only a matter of time before congress targets these things - they are going to be scraping for every penny for the next 50 years, at least. After all, it's unfair that investors like us use the laws they (congress) set up in exactly the way they intended to avoid getting taxed twice on the same income stream (smirk).

     

    On the other hand, I realize that these units are not necessarily sold the right way. I'm sure financial advisors are happy to tell you that you get 7% without paying taxes. They leave out the part about having to pay all those taxes back when you sell out or the partnership is acquired. The end result is that people end up thinking they are wealthier than they are and spend the entire distribution. As if you don't have to pay taxes like the rest of us. We believe what we want to believe.

     

    By the way, if the transaction was the other way around, guess who would owe $2.5 billion in taxes? Just something to chew on.
    12 Aug 2014, 11:56 AM Reply Like
  • DANNOV60613
    , contributor
    Comments (10) | Send Message
     
    Don't overlook the fact that KMP generates significant "passive losses" that will partially offset the ordinary income arising from the tax deferral on distributions. Just looking at my K1 for 2013, my distribution was $20.5 (line 19), but the "Ordinary business income (loss)", a passive loss (Line 1), was a minus $20.3. The passive losses accumulate and are not used on an annual basis to offset tax liability, instead they come into play as an offset to tax liability on ordinary income when the security is sold or in this case exchanged.
    I have to check prior years but my sense is that there are big passive losses in each year. If you add up those losses, you will get a significant offset to to any ordinary income arising from the undoing of the tax deferral on distributions. Yes, we will have to pay a tax on ordinary income arising from the deferral but it may not be a big as many people think.
    12 Aug 2014, 12:04 PM Reply Like
  • TellTruth
    , contributor
    Comments (33) | Send Message
     
    Unless one used those losses to offset passive income in prior years, of course. The vast majority of KMP shares are held by high net worth accounts which may well have done so, and planned to hold "forever" with a step up in basis for heirs. This was essentially the same as a private real estate play, but now about to "go amok."
    12 Aug 2014, 12:50 PM Reply Like
  • bernief7744
    , contributor
    Comments (68) | Send Message
     
    mlp passive losses were NOT usable against other passive gains
    12 Aug 2014, 02:11 PM Reply Like
  • psapinski
    , contributor
    Comments (2) | Send Message
     
    I purchased 300 shares of KMP in January and this is the first MLP I have owned. When you say the tax can be per unit what is the definition of a unit? The cash I would get would not cover the tax if a unit is equivalent to 1 share. What would be the purpose of holding on to the stock. If I sell it now would the tax still effect me?
    12 Aug 2014, 12:04 PM Reply Like
  • 21thomas99
    , contributor
    Comments (411) | Send Message
     
    "Units" are used in lieu of "shares" when discussing MLPs. "units" versus "shares" is just a matter of terminology. They both mean the same.
    13 Aug 2014, 10:22 AM Reply Like
  • bigbenorr
    , contributor
    Comments (1174) | Send Message
     
    being a short term holder, the cost depletion should not really affect your taxes much since you haven't received many distributions yet. You will probably have to pay short term cap gains taxes though.
    13 Aug 2014, 11:13 AM Reply Like
  • jerry4
    , contributor
    Comments (2) | Send Message
     
    What about passive loss recapture ?
    12 Aug 2014, 12:05 PM Reply Like
  • jdub4287
    , contributor
    Comment (1) | Send Message
     
    Can someone tell me why we would not sell now? KMP down today - better to get the best price and move on since KMP holders will pay tax one way or another.
    12 Aug 2014, 12:06 PM Reply Like
  • LoisK
    , contributor
    Comments (27) | Send Message
     
    Yes, but we were going to hold these shares . People on Medicare will be thrown into a higher tax bracket and their Medicare part b costs will also dramatically increase. This is a disaster for some people.
    12 Aug 2014, 12:09 PM Reply Like
  • dgswanson
    , contributor
    Comments (16) | Send Message
     
    PLEASE! Check with a CPA before making such a move. There is much misinformation circulating today!
    12 Aug 2014, 03:24 PM Reply Like
  • dgswanson
    , contributor
    Comments (16) | Send Message
     
    Marvin.....please do check with your accountant, before making any decisions. Trading _units_ in KMP for _shares_ in KMI will NOT be a taxable event....UNTIL YOU SELL THE STOCK in KMI. However, your future dividends from the KMI _corporation_ will have a tax that you have not had to this point in the KMP ownership. A knowledgeable accountant will be able to clear this up for you!
    12 Aug 2014, 03:32 PM Reply Like
  • Workinhard
    , contributor
    Comments (353) | Send Message
     
    the exchange of KMP to KMI will be a taxable transaction , and is not dependent on when you sell KMI.
    12 Aug 2014, 11:11 PM Reply Like
  • pole65
    , contributor
    Comments (136) | Send Message
     
    Sorry DG....agree....100% taxable, unless you have an accountant that will change what your year-end 1099's will state. I would avoid such an accountant though
    13 Aug 2014, 09:24 AM Reply Like
  • TellTruth
    , contributor
    Comments (33) | Send Message
     
    Disaster for KMP holders for following reasons -

     

    (i) all of the transaction will be taxable, and material recapture will occur. CS and Baird research - and WSJ article - this a.m. pegs hit @ $12-18/share in taxes depending on one's personal situation. In that regard, the anomalous $10/share in cash (also fully taxable) presumably was an attempt to appease KMP shareholders once they realize the tax hit to come. As current prices, KMP is close to same level after-tax as it was 2 weeks ago!;

     

    (ii) dividend income will fall materially, as $2/KMI share falls well short of the dividend paid/KMP unit, even after taking into account the terms of the deal;

     

    (iii) 100% of KMI dividends will be taxable, as opposed to 80%+/- of KMP dividend being tax deferred until a sale (which is precisely what is about to occur!). Hence, after-tax dividend yield to KMP holder/$ invested will fall "a lot" - some estimates peg this as a 50%+ after-tax drop.

     

    Bottom line - ZERO "value creation" will occur outside of providing Kinder with increased ability to buy vs. build in a world where build is becoming more difficult thanks to regulatory hurdles. The $20 billion in tax savings likely reflects KMI retaining the energy-related tax benefits which had passed through to KMP holders. Value has been transferred, and KMP holders were just @#!% by KMI and Richard Kinder (who I thought was a "rock star" until now).

     

    More important - don't think for a second that the other MLP GPs will overlook the wealth transfer possible by "de-MLPing" and keeping the tax benefits for the C Corp, and avoiding the complexity and limits posed by running a MLP, especially when so many have dividend yields well above SPX or other dividend income funds, let lone well wide of the 10 year UST yield. This transaction may well mark the beginning of the end of the MLP asset class.
    12 Aug 2014, 12:50 PM Reply Like
  • Disturber
    , contributor
    Comments (201) | Send Message
     
    I think your analysis is largely correct although each person's situation will be different. I want to point out however, that each KM investor had three choices, each with different tax consequences and different risk profiles. Those who picked KMP over KMR were probably motivated by the receipt of sheltered cash distributions. There were many, many discussions on the KM boards here as to which of the three made the most sense. I chose KMR for several reasons: (1) the dividend was inherently sheltered because I received shares rather than cash and the return was essentially the same as with KMP; (2) I could time the tax impact by selling shares if I needed the cash or holding them if I did not; (3) the holding period for the dividend shares (or distributions shares) tacked to the holding period for the underlying investment so I always would have capital gains treatment on any sales proceeds; (4) I didn't have to deal with the K-1 issues when preparing my tax returns.

     

    Although I tried to understand why small, or individual investors would buy KMP, I could never see the case. Once again, simplicity prevails over complexity.

     

    Disturber
    12 Aug 2014, 03:17 PM Reply Like
  • comeinvestwithme
    , contributor
    Comments (247) | Send Message
     
    One of the first realistic posts I've seen, after hundreds of cheerleading comments by those who are, effectively, unwittingly being slaughtered by RK and blinded by the eye-candy in his presentation with arbitrary and hypothetical future distribution growth numbers. In the long run, this transaction is a wealth transfer from LP retail investors who intended to hold their units for life, to RK and his KMI empire. As commenter eternitus141 above in this thread put it: if the transaction was the other way around, guess who would owe $2.5 billion in taxes?
    12 Aug 2014, 05:40 PM Reply Like
  • eternitus141
    , contributor
    Comments (525) | Send Message
     
    Unfortunately, after seeing so many people %$%$ others over in the world of finance and energy investing, and getting royally $%$%$ed myself in a partnership by someone I trusted when I started a business as a naive, idealistic 20-something, I realized the only way to protect yourself is to make sure your interests are aligned with the person who controls the business. I also learned that partnerships are great vehicles to use to fleece others because most people lack the sophistication to understand them and don't even realize that the GP is not required to act in their best interests.

     

    This is why I owned KMI even though I could have used the extra yield. Interests weren't aligned. Kinder owned very little of KMP and had the majority of his wealth invested in KMI. KMP holders were dependent upon Kinder being honorable and "doing the right thing," rather than serving his own interests. In these situations, LP investors usually end up with a series of half-measures and token gestures to placate them while the GP gorges on profits. LP investors end up feeling lucky to get what they already deserve.

     

    I think it's a testament to Rich Kinder that all of the constituents have done remarkably well investing with him, and not just himself. Still, in the end, when wall street could no longer supply him with enough money to grow profitably and he needed to self-finance, he did just enough to placate LP holders while serving his own interests, stuffing them with a nice, big, fat tax bill.

     

    I'll never bet on someone's honor over his self-interest, but I do think it's funny that I would have done better owning KMR. Just goes to show you that nothing's certain. Sometimes choices that aren't the best lead to good outcomes, and wise choices don't work out.
    13 Aug 2014, 09:52 AM Reply Like
  • ba37840
    , contributor
    Comments (164) | Send Message
     
    Based on some of the questions asked in many of the comments here and in other articles about MLPs, there are many people that should have never bought and MLP.

     

    When someone does not know the difference between a distribution and a dividend, or how passive losses offset ordinary income, etc., etc., then they obviously did not research and learn what they bought.

     

    You can get an idea of your tax liability by logging into the KMP tax package support site here.

     

    http://bit.ly/1r7a1Md

     

    Then log into your own tax package which has your K-1. You can then use the Projected Gain/Loss Calculator. You can put in various stock prices if you sold the stock and it calculates the ordinary income taking into account the passive losses you have accumulated and the LT Capital gain portion.

     

    Example: I bought KMP in 2010 @64.40 per share. If I sold it now @94, the K-1 Projected Gain/Loss Calculator breaks it down after taking into account adjustments to tax basis, I would have a LTCG of $42.66, Ordinary Income of $39.80 and Return of Principal of $11.56.

     

    So assuming the entire exchange of stock and cash for KMP is taxable, I can get a fairly good idea of what my tax burden will be.

     

    Best regards
    12 Aug 2014, 12:56 PM Reply Like
  • ba37840
    , contributor
    Comments (164) | Send Message
     
    Based on my example, assuming a 15% rate fro LTCG and 25% rate for ordinary income, my tax would be a LTCG of $6.40 per share and ordinary income of $9.95 per share.
    12 Aug 2014, 01:26 PM Reply Like
  • bb13
    , contributor
    Comments (8) | Send Message
     
    I confess to being one of those who didn't really do the homework and bought KMR simply because I read it was a good play for a Roth account. That seems to have turned out to be true.
    What I'm trying to decide now is whether I should a) go ahead and sell and buy KMI or b) hold on to KMR until the exchange or c) buy some KMI AND hold on to the KMR or d) sell KMR and pocket a nice gain (I bought it at around $70). What should I be looking at to make this decision? Can I assume the exchange rate (about 2.5 for 1) is going to stay the same? Though KMI will initially have a lower yield than KMR, it would seem there is more growth possible, so I am leaning toward choice C.
    12 Aug 2014, 02:04 PM Reply Like
  • DANNOV60613
    , contributor
    Comments (10) | Send Message
     
    That is an interesting site and very useful, thanks for the link. But, I do not think it takes into account the accumulated amount of passive losses. Depending upon prior use of passive losses, everyone's situation could be different, so I think they left it open rather than provide a number. I read over the online explanations and it appears to be silent regarding passive losses.
    Notice that in the estimates of average tax liability just provided by Kinder yesterday, they specifically state that the calculation is before usage of passive losses. I think they are doing the same with their online calculator, recognizing that the amount of passive losses available depends upon each persons' individual situation and how much has already been used elsewhere.
    I just totaled my passive losses from individual K1's and they total over $130K of losses at the end of 2013. In looking at the calculation I made online it seems clear that they are not considering passive losses.
    The site just calculates capital gains and recapture of deferred dividends, without deducting passive losses. Interesting info, but not the whole story. If I am wrong about that please correct me and direct me to the place that contradicts my conclusion.
    12 Aug 2014, 02:17 PM Reply Like
  • DANNOV60613
    , contributor
    Comments (10) | Send Message
     
    Let me make a correction to my earlier post. The release yesterday regarding average investor tax liability assumes that: "passive losses haven't already been used". I mistakenly said that the average tax liability was calculated before usage of passive losses.
    But, I still am convinced that the online calculator gives a tax number before usage of passive losses. The passive loss number is big and important, and it should be broken out in the online calculation, I don't think it is there!
    12 Aug 2014, 03:19 PM Reply Like
  • Disturber
    , contributor
    Comments (201) | Send Message
     
    If you continue to believe in the KM story and the positive prospects for the company, hold on to the KMR and accept the conversion rate and possibly receive the November dividend/distribution. If you want to go in deeper, I would buy KMI, but keep an eye on the price as you might be able to pick it up for a few dollars less than the current price.

     

    I am holding KMR in a taxable account. As the exchange is not a taxable event, I will continue to hold it and see what happens. I believe in the company and I think KM's prospects are as good or better than any alternatives that I am presently following.
    12 Aug 2014, 03:22 PM Reply Like
  • DANNOV60613
    , contributor
    Comments (10) | Send Message
     
    I went back to the Kinder site to look at that calculation again to see if I am missing something. If you do the calculation online, notice that one column is titled "Adjustments to Tax Basis".
    Be aware that use of passive losses does not change or adjust tax basis, such losses would instead be a net against "Ordinary Gain". There is no column adjusting "Ordinary Gain". The online calculation merely gives you your current cost basis and goes no further in calculating your tax liability.
    In my case my Ordinary Gain is $193.0 (Wow! Ouch!), but if I net passive losses of $130.0, my net Ordinary Gain would be $63.3. Don't like that, but it is far easier to digest than $193.0 of Ordinary Income.
    I think we should all be careful here and be aware that passive losses will play a huge role in the calculation of our tax liability, don't just think that the Feds are entitled to tax all those deferred tax distributions without adjusting for passive losses. If you do your own taxes this is one place where you can easily overpay bigtime! Even if you have someone else do your taxes this is something to check and double check.
    12 Aug 2014, 03:25 PM Reply Like
  • Lookingforincome
    , contributor
    Comments (70) | Send Message
     
    I have looked at the Kinder Tax calculation in the past. I am pretty sure that you are correct in that it uses the K-1 Tax Basis not adjusted for passive losses that are suspended until sale or a year with ordinary K-1 income.
    12 Aug 2014, 04:04 PM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    Hi,

     

    I did the same analysis and also concluded that the online calculator excludes passive losses offsetting ordinary income. Nothing else is possible as the tax burden without passive losses is much too high.

     

    I am confident that part 3 line I ordinary business loss is an offset, but I also believe that part 3 line 10 net section 1231 loss is another offset to ordinary gains.

     

    Are there any other passive losses ? The current year decreases on the k1 are always more than the passive losses. Something is missing, or KMP owners are paying a tax on something never earned or deducted!! ,
    12 Aug 2014, 04:06 PM Reply Like
  • DANNOV60613
    , contributor
    Comments (10) | Send Message
     
    dataman
    You are correct about decreases on K1 being always a bit higher than the current year passive loss. I don't understand that and it bothers me that there is something here that I can't explain. The difference is not much but I will look at my returns for a few years and see if I can figure it out.
    I think you will agree that passive losses are s huge factor in calculating taxable income. This is something that few commentators are focusing on. When I do a rough calculation of my tax liability I become much more agreeable to this deal. I have owned KMP since 2009 so my basis is really low, some lots are at zero. I'm pleasantly surprised that my projected tax bill is not nearly as high as I feared.
    12 Aug 2014, 04:21 PM Reply Like
  • ba37840
    , contributor
    Comments (164) | Send Message
     
    Danno, your right that the calculator does not keep track of your passive losses but only keeps track of your adjusted basis. It is a good starting point for those who want to know what their ordinary income and LTCG would be at various prices.

     

    In my example: I bought KMP in 2010 @64.40 per share. If I sold it now @94, the K-1 Projected Gain/Loss Calculator breaks it down after taking into account adjustments to tax basis, I would have a LTCG of $42.66 per share and an Ordinary Income of $39.80 per share and Return of Principal of $11.56 per share.

     

    The $11.56 is my actual adjusted basis in KMP.

     

    Based on my last example, and not taking into consideration of my accumulated passive losses, assuming a 15% rate for LTCG and 25% rate for ordinary income, my tax would be a LTCG of $6.40 per share and ordinary income of $9.95 per share.

     

    However because I have kept track of my passive losses which come out to $38.06 a share my taxable ordinary income would be $1.74 a share.

     

    (Ordinary Income of $39.80 per share - $38.06 per share of passive losses = $1.74 per share taxed at ordinary rates. )

     

    For those who have held KMP for years and did not save their K-1s or did not keep track of their passive losses they will be paying a lot more taxes then they should. MLP's do not keep K-1 information forever.

     

    Also note you cannot use any of your accumulated passive losses unless you sell your entire holding.
    12 Aug 2014, 04:34 PM Reply Like
  • marvinjayton
    , contributor
    Comments (4) | Send Message
     
    I think that I have a problem. I started buying kmp in1997 and accumulated 6200 shares by 2003 .1000 of them in my ira. I am 90 yrs old and have been using the dividend as an important part of my income. I will check with my accountant but I am afraid that i will have a huge tax bill.
    12 Aug 2014, 01:32 PM Reply Like
  • earl ledden
    , contributor
    Comments (29) | Send Message
     
    Are the unit prices fixed at a given point in time, or are they calculated as of the time of consolidation/reorgani... for purposes of determining who gets what if they do nothing and let the chips fall where they may?
    Also, I'm astounded that all this appreciation can be accomplished in morning after the announcement the night before. Sort of like the amazing electric trash compactor that transforms forty pounds of trash in to 40 lbs of trash at the press of a button.
    12 Aug 2014, 04:07 PM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    The ratio is fixed now the share price is the day of merger.
    12 Aug 2014, 04:18 PM Reply Like
  • msgreenberg
    , contributor
    Comment (1) | Send Message
     
    Hey, I am surprised no one has complained about the deal price/conversion premium. I for one, think it is very low once you factor in the tax hit every KMP shareholder will take. We need to have this deal sweetened for it to make sense for me. There are a lot of merits to combining the companies but the tax implications are pretty harsh for the shareholders.
    12 Aug 2014, 04:18 PM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    I agree . Why else did KMI go up in price so much!!!!!, They bought assets below fair value.

     

    I don't know if we get to vote on this matter. if not, I hope attorneys starts a lawsuit .
    12 Aug 2014, 05:42 PM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    The newly combined corporate entity is likely to enjoy substantial tax benefits at the expense of some current unit holders, according to Robert Willens, a New York-based tax adviser.

     

    “It could've been fairly easily made into a tax-free transaction — all they would've had to do was create a new corporation to serve as the acquiring company,” Mr. Willens said.

     

    But doing so would have deprived the company of a tax convention, called a step-up in basis, which allows it to use a higher valuation of the acquired firms when calculating its liabilities. Doing so will allow the new Kinder Morgan to “eliminate all or most of its taxable income” associated with those companies' increased value, according to Mr. Willens.

     

    my comment:
    let's remember that Mr Kinder owns mostly KMI. He has helped himself , not unit holders. he has robbed the pockets of unit holders who are smaller investors .

     

    let hope for attorneys to start lawsuits.
    12 Aug 2014, 06:02 PM Reply Like
  • Rudester
    , contributor
    Comments (3413) | Send Message
     
    The law firm of Vincent Wong is starting an investigation of the boards of KMP and KMR, checking into possible violations of fiduciary duties over the proposed buy out deal.

     

    Richard Kinder doesn't have many units of KMP, so I plan to vote no on the proposed consolidation and hold out for a better deal that covers my tax liability and the drop in quarterly income for a couple of years.
    12 Aug 2014, 10:32 PM Reply Like
  • Clay King
    , contributor
    Comments (750) | Send Message
     
    Ditto..........bought mine in jan of '09 so almost a double just by itself, not to mention the reduced price, so a big tax bill to come.....thankfully, mine isnot a big position, but still a big tax bite that I was not expecting..
    13 Aug 2014, 10:34 AM Reply Like
  • eternitus141
    , contributor
    Comments (525) | Send Message
     
    Good luck with the merger opposition. Institutions and insiders own 32% of the KMP units (and probably more as a result of the recent drop down), and, due to arbitrage plays that pay off if the merger goes through, I'm willing to bet that that percentage is going higher and higher right now as we speak. The institutional investors care more about posting a short term gain to get a nice quarterly bonus than anything else, and will not want the prices to crater because the deal doesn't go through - which can get you fired as a portfolio manager. I'm not even sure enough retail investors will vote on the deal to block the merger even if they all voted no.

     

    I don't think anything that individual investors can do will be able to prevent the merger - and I actually think we would end up regretting it if any blocking movement were to succeed. This move is basically an admission that the model as it stands doesn't work any longer. If you can't grow the LP distribution, the units fall, you can't raise capital for accretive projects because equity is too expensive, and a vicious cycle occurs where, because new depreciable investments aren't made, the tax benefits eventually go away and maintenance costs per unit increase, causing a further decline in the LP units.

     

    If you want Kevin Kaiser to be right, vote no. At least if our units get crushed, we won't have to pay any taxes ;)
    13 Aug 2014, 11:45 AM Reply Like
  • bigbenorr
    , contributor
    Comments (1174) | Send Message
     
    let's remember that Mr Kinder owns mostly KMI. He has helped himself , not unit holders. he has robbed the pockets of unit holders who are smaller investors .

     

    So, lets see if I follow this logic, his actions are beneficial to KMI holders, but he is turning all KMP holders into KMI holders sooooo.....
    13 Aug 2014, 12:22 PM Reply Like
  • eternitus141
    , contributor
    Comments (525) | Send Message
     
    Not my logic and I don't disagree with your contention that Kinder is helping himself. My contention is that KMP is broken and can't be fixed (I think the fact that they are doing this deal proves it), and that KMP holders are better off taking this deal. If not, I think the structure eventually collapses under its own weight and LP holders will end up with much less.
    13 Aug 2014, 12:39 PM Reply Like
  • Rudester
    , contributor
    Comments (3413) | Send Message
     
    @eternitus,

     

    "Institutions and insiders own 32% of the KMP units..." Where did you get that information? Most institutions do not want to deal with K-1s, which is the main reason Kinder created KMR.
    13 Aug 2014, 06:33 PM Reply Like
  • eternitus141
    , contributor
    Comments (525) | Send Message
     
    Thomson Reuters. You can get it on yahoo finance key statistics page. There are a lot of yield-oriented funds that are willing to put up with the hassle. The bigger hurdles for them are (i) the structure and (ii), that their decisions aren't usually motivated by tax considerations at all. Even if they were tax-motivated, most of them see the MLP/GP structure for what it is - a bunch of smart guys making money off of investors who are willing to trade a tremendous amount of return, bearing 100% of the risk, just to put off paying taxes. People who think they will never pay taxes and hold MLP units until they die either don't plan to live very long or don't understand how these things work (setting aside the fact that nothing is certain in the tax code). Once capital raising slows and new projects become a smaller and smaller part of the deal, it all falls apart.

     

    As an example to show you that institutional investors don't really mind the K-1's, BX has almost 80% institutional ownership. The institutions just aren't as big of a fan of the whole 100% of risk / 50% of profits thing.

     

    As I said, the volumes of 20x adv are merger arbitrage hedge funds buying the heck out of KMP, KMR and EPB and shorting KMI, as the three acquisition targets have been trading below the merger value. I think on the first day of trading, $6 billion of KMI traded, $4 billion of KMP traded, $1 billion of KMR traded and $1 billion of EPB traded. It's not a coincidence that the values roughly balance between acquirer and target.

     

    I'm sure institutional ownership ticked up quite a bit over the past three days, all of whom I'm sure want the merger to go through.
    14 Aug 2014, 09:41 AM Reply Like
  • Donbagel
    , contributor
    Comments (3) | Send Message
     
    After looking at this total proposed deal, as a KMP unit holder, I think we would do well to vote NO on this deal closing? While I understand the merits and prospects for the new KMI holdings, this transaction will destroy my long term tax plans for retirement!
    12 Aug 2014, 06:19 PM Reply Like
  • Workinhard
    , contributor
    Comments (353) | Send Message
     
    If one holding can destroy your retirement plans , you have too much in one holding. At least the company hasn't gone bankrupt, but a security that has gone up in value.

     

    This is one of the risks of MLP's, along with creidit risk, interest rate risk and tax law change risk. I think investors with large MLP holdings should re-evaluate this type of concentration.
    12 Aug 2014, 11:19 PM Reply Like
  • bigbenorr
    , contributor
    Comments (1174) | Send Message
     
    Or you could vote yes, secure your buyout premium and then sell your shares and go find something else that fits your investment criteria. I think fighting this will be counterproductive, might as well play the deal as best you can. I am buying more KMP units right now since they are still trading below their implied value (based on 2.1931 shares KMI plus cash)
    13 Aug 2014, 12:25 PM Reply Like
  • bernief7744
    , contributor
    Comments (68) | Send Message
     
    thats the smartest comment in the whole thread bigbenorr
    14 Aug 2014, 04:26 PM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    Here is an excerpt from the press release. Unit holders will get to vote.

     

    KMP, KMR and EPB were represented in the negotiations by committees comprised exclusively of the independent members of the boards of the respective entities. The boards of all the Kinder Morgan companies have voted to recommend the transaction to their respective unitholders and shareholders. Each transaction is conditioned on the closing of the other transactions. Following unitholders and shareholder votes and standard regulatory notifications and approvals, the transaction is expected to close by the end of 2014. More information on the transaction, including the investor presentation, may be found in the Investor section of the Kinder Morgan website at http://bit.ly/sf6GjT.
    12 Aug 2014, 07:36 PM Reply Like
  • Lakerc
    , contributor
    Comment (1) | Send Message
     
    I inherited 150 shares of KMP from my mother upon her death in late May of 2014. The old tax basis would be the value at date of death (i.e., $75.805 per share). How does this acquisition by KMI affect me? Would I be better off to sell now?
    12 Aug 2014, 10:50 PM Reply Like
  • Dividends#1
    , contributor
    Comments (4315) | Send Message
     
    Hi Lakerc,

     

    There are some very knowledgeable people here at SA, however there are many who spread misinformation also.

     

    Do you have a CPA? You might not be aware of the complexities of KMP. I recommend you consult with a tax expert, they will know how to handle the K-1 ,etc.
    13 Aug 2014, 07:55 AM Reply Like
  • Keyquake6071
    , contributor
    Comment (1) | Send Message
     
    At the risk of sounding like a dummy, I am trying to determine how to calculate passive losses on my KMP shares and am having trouble figuring out how to determine this. Can someone give me some pointers in how to start?.
    13 Aug 2014, 11:02 AM Reply Like
  • ba37840
    , contributor
    Comments (164) | Send Message
     
    Keyquake

     

    You can get an idea of your tax liability by logging into the KMP tax package support site here.

     

    http://bit.ly/1r7a1Md

     

    Then log into your own tax package which has your K-1. You can then use the Projected Gain/Loss Calculator.

     

    You can put in various stock sale prices and it calculates the ordinary income and the LT Capital gain taxable amount. You will also see your original cost and also the amount that adjusts your basis to get your current basis.

     

    The amounts are estimates only. The only time you will know the true amount is when you receive the final K-1 for the year.

     

    You then subtract your accumulated passive losses, (that you have kept track of from all your K-1s), from the ordinary income portion and you will have the taxable amount for the ordinary income portion.

     

    Remember you have to sell your entire holding to use the passive losses.

     

    13 Aug 2014, 01:28 PM Reply Like
  • dataman2
    , contributor
    Comments (129) | Send Message
     
    Part 3 line 1 of ki. Plus 1031 loss on line 10
    13 Aug 2014, 11:27 AM Reply Like
  • Gentle Ben
    , contributor
    Comments (13) | Send Message
     
    Has anybody heard from their stockbroker or financial planner what the best course of action is for those of us who can't afford to take a tax hit? (For instance, is it possible to sell KMP before the merger and avoid or reduce taxes by using the proceeds to buy another MLP? I'm still waiting to hear back from my stockbroker, who says he is running all the scenarios for me and consulting with their tax department before he advises me.)

     

    I'm happy for all those still working to get to where I've struggled to be at. Kinda makes me wish I was still young and struggling so I could truly celebrate this merger, instead of sighing and groaning over it.

     

    I will miss the tax advantaged income that KMP provided quarterly. I will miss not being able to save the KMP for my descendants to inherit with no tax consequences to them after I'm gone. This merger puts the nail on the coffin for the plans I had made for my kids to inherit my KMP, sigh.

     

    But, if I wasn't worried about generating more taxable income, I'd be celebrating. Whether or not this merger is a good thing or a bad thing for us depends upon our current situation in life. For some, it's great news. For others like me, I hate having my estate plans ruined and hate having taxable income when the only reason I bought KMP in the first place was to generate tax advantaged income.
    13 Aug 2014, 01:02 PM Reply Like
  • Gentle Ben
    , contributor
    Comments (13) | Send Message
     
    Whether or not it's great news (because you WELCOME the taxable income) or bad news (because you are needing only tax exempt income), one thing that I haven't seen mentioned yet is whether or not it should even be LEGAL to completely restructure the TYPE of investment into something completely different. I have no problem with a buyout merging one stock into another stock, or one mutual fund into another mutual fund; but when you think you have bought a tax efficient MLP and then find out it's turning into something completely different that's taxable, this seems like it shouldn't be legal to be able to change the TYPE of the investment.
    13 Aug 2014, 01:07 PM Reply Like
  • Earth777
    , contributor
    Comment (1) | Send Message
     
    i am trying to figure out the impact for those like me that own KMP in their IRA. not sure if it was a good or bad decision.

     

    based on the below Q&A reference @ the WSJ, it seems that holders in an IRA will pay taxes which is odd ... any input is appreciated.

     

    http://on.wsj.com/1oyi7LX

     

    Q: What if an investor holds Kinder Morgan MLP units in an Individual Retirement Account or Roth IRA?

     

    A: Experts say it usually isn’t a good idea to hold MLP units in a tax-deferred retirement account, because if a taxpayer has more than $1,000 of certain MLP income, it’s subject to current tax even though the account itself is tax-deferred.

     

    This income is known as UBTI, for Unrelated Business Taxable Income, and typically the MLP’s K-1 statement lists the amount of UBTI per unit.

     

    According to Mr. Willens, the sale or exchange of MLP units held within an IRA or Roth IRA is likely to generate taxable income as well.
    14 Aug 2014, 05:44 PM Reply Like
  • papercut
    , contributor
    Comments (130) | Send Message
     
    Earth777:

     

    I've been going round and round about UBTI headaches when selling long-held KMP in any kind of IRA.

     

    See: http://bit.ly/YGPXE1

     

    The best answer I've seen that one can incur big UBTI when selling a (long-held) MLP in an IRA (Roth of Traditional) is from rlp2451 at:
    http://seekingalpha.co...

     

    He says:
    "When an MLP is sold in an IRA account, all prior depreciation (and some other items) are recaptured and is considered unrelated taxable business income or UBTI. This is unique to tax-deferred accounts; taxable accounts are not susceptible. Both Roth and Traditional IRAs are liable for it. In some cases, the total amount of UBTI can be more than the original investment; and the tax rates are at trust rates.

     

    "People think that by owning an MLP in an IRA that it makes them permanently tax-free but that isn't the case - the tax deferral ends when they are sold, and if the UBTI is over $1000, you wind up paying double tax - the UBTI tax and the tax upon withdrawal.
    21 Aug, 07:34

     


    nicholas davout

     

    rlp2451: I'm pretty certain that depreciation is not UBTI though its certainly an adjustment to your tax exposure; I've never added depreciation to UBTI in filing tax returns.
    21 Aug, 12:20

     


    rlp2451

     

    "<sigh>
    IRC Section 751(a) provides that gain on the sale of a partnership interest is ordinary to the extent it relates to the value of the partnership’s inventory and Section 1245 property.

     

    Section 1245 property is depreciable property, including Section 197 goodwill, used in a trade or business. The ordinary gain on Section 1245 property is limited to the amount of accumulated depreciation that has been claimed as a deduction by the partnership, and this gain is also called “depreciation recapture”. In order to do the computation of ordinary income, the partnership is treated as though it had itself sold all of its assets on the date you sold your units, then determines the amount of inventory gain and depreciation recapture that would result from a total sale, and then allocates to you your proportionate share of the ordinary income. For a citation, see reg. sec. 1.751-1(a)(2) for the way the gain gets calculated and the law itself for the rule. So the partnership is telling you that a portion of your gain represents the increased value of the partnership’s inventory and potential depreciation recapture under Section 1245.

     

    IRC Section 512(b) tells you how to compute UBTI. Section 512(b)(5) says that in general you exclude gain from the sale of property from UBTI. But there is a specific exception to this rule in the law. Gain on the sale of inventory is not excluded from UBTI. So the inventory portion of the ordinary income is taxable for UBTI, straight from the law. Depending on the MLP, the inventory gain might be significant or not.

     

    There is no similar exception for Section 1245 gain depreciation recapture in the law. But if you look at the instructions to Form 990-T (the UBTI tax return) at page 10, you will see that the IRS says that Section 1245 depreciation recapture is not excepted from UBTI (which is government speak for “It’s taxable”)."
    13 Sep 2014, 04:09 PM Reply Like
  • alpha retire
    , contributor
    Comments (14) | Send Message
     
    I was fortunate to choose KMI for my traditional IRA and KMR for my Roth IRA when I bought in March of this year. I also bought EPB, though, in my Roth,...thinking that I would sell before the UBTI liabilities would equal $1000. I had read that if it is below that amount, no tax is paid. However, with all of the information I have been reading lately, I am now hearing that my mistaken thought of the distributions being less than $1000,...is not the same thing as the UBTI liabilities. How do I find out how to calculate that? I have been on the websites for tax calculation and it seems that it is for the past 2013 tax year only....I would like to try and decide whether to sell now or let the shares convert. The amount invested was small, and it will be advantageous to have more KMI in my Roth with a projected 10% dividend growth rate. Thanks in advance if anyone can publish a link to help.
    14 Sep 2014, 03:22 PM Reply Like
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