d_teller

The Nine Best Natural Gas, Oil Pipelines for Income and Capital Gains

It's not the total income, but the accumulation of UBTI...the author of the review above carefully notes that the sum of UBTI limit is what's important. Unfortunately, one can't know this before the K-1's come.


On Sep 16 11:53 AM GimliJan wrote:

> One of the best articles I have read on MLP's and how they work.
> I appreciated the information about holding them in a Roth IRA as
> that is what I am doing. I had read on the forums that due to the
> tax consequences on the UBTI if you made over a $1000 a year you
> could lose the Roth IRA status and have to pay taxes on your whole
> account! I don't a large account and the $1000 a year is way more
> than I will realize in profits from the MLP portion of my portfolio.
>
> I also would like some more information on the reasons you picked
> the companies you hold and also about the "arbitrage". I bought TPP
> at $17 and have thoroughly enjoyed the run up and the merger with
> EPD. I plan on adding Pembrian and maybe WPZ.
> Thanks for a great article!

The Nine Best Natural Gas, Oil Pipelines for Income and Capital Gains

PMBIF is the "pink sheet" listing for Pembina, which pays dividends at ca. 10%/yr on a monthly basis. The Canadian Income trust withholds 15% for Cdn Tax...and in a sheltered accout, this can't be claimed as a tax credit...but it can be in a US taxable account.

You can find the info at the NASDAQ site under the "pink sheets" listings, (OTCBB) and also at www.QuantumOnline.com

which has quite a number of the Cdn Income trusts listed with their TMX(TSX) and OTC equivalent listings.


On Sep 16 06:19 PM wg wrote:

> "PMBIF. This company transports about 1/2 the oil produced in the
> western Canadian sedimentary basin, offers a current distribution
> yield of approximately 10%, and pays monthly. "
>
> all of the financial stats sites I visit say PMBIF pays no dividend/yield.
> What's up?

The Nine Best Natural Gas, Oil Pipelines for Income and Capital Gains

I most strongly disagree with the premise that it is safe or desirable to hold MLP's or other securities that issue K-1's in tax-sheltered accounts:

The problem of UBTI (Unrelated Business...Taxable Income) that has accumulated to a single taxpayer's I.D. across all the taxpayer's shelters - is really very simple:

if it exceeds $1000.00/tax year, it has to have the Fiduciary of one of the shelters file a Tax Identification Number request and pay any UBIT (tax) from the shelter to the IRS. This isn't the income from the MLP's or pipelines...it's only the profits directly passed through to the limited partners...the taxpayer... that represents the income that is "unrelated to the limited partnership registration". An example, last year, a lot of MLP's had negative UBTI or losses, due to the swoon of commodity pricing.
The previous year, many had a lot of UBTI from selling a portion of their assets or raising debt. This varies from year to year.

Fiduciaries need the copies of the K-1's, and charge fees to get a TIN (920t) for the sheltered account. This is After the tax season closes, so interest and penalties accrue. The tax payer (beneficial owner) of the shelter may NOT pay the UBI tax directly, because it is:
a. After the year of the record
b.Considered an excess contribution.

With regard to Roth's, this can disqualify the Tax-Exempt status, and has other ramifications.

In any case, all of the return of capital, losses carried forward, and other allowed depreciation from the original price of purchase are totally wasted in a tax-sheltered account...those that aren't Roth's will pay tax at marginal rates...there's no Capital Gains advantage when e.g., Enterprise' ROC or Tax-loss carry-forwards ( which reduce the capital basis of the securities in a taxable account) can't be used to offset withdrawals.

The beneficial owner has to notify the fiduciary of the sheltered account that will be used to pay the tax, because the fiduciary (Brokerage) probably doesn't "know" what's on the K-1...they don't get copies. Only the Registration agent of the MLP (the accountants) and the IRS and the tax-payer get these forms.

In addition, it hasn't yet come to pass, but it probably will, that ETF's and Holdrs and other issuers of K-1's that take delivery and hold in storage >90 days...are considered COMMODITY HOLDERS: the IRC has an explicit prohibition vs holding commodities in a tax shelter, unless one has a "self-directed" IRA, with a fiduciary (not just a brokerage or advisor) who will file the TIN and 990 Tax forms...and these charge a percentage of assets or fees from $200-2500/year.

In summary:

UBTI across all sheltered accounts with a single Taxpayers's I.D > $1000, requires a fiduciary to file and pay tax.

The various schema to reduce "basis' or defer income, are wasted in a tax sheltered account.

The costs for setting up a "self-directed" IRA can exceed $2500/year.

Is a 20% Yield Sustainable? Look at Atlas Pipeline Partners

If you want to try a "basket" of these MLPs, without the hassle of K-1s, one could try Tortoise's "TYG" CEF.

Is a 20% Yield Sustainable? Look at Atlas Pipeline Partners

MWE (Mark West Energy L.P), is in a similar precarious position with debt-capital-cash flow constraints...with some recent good news, but potential losses still exist.

Investing in High Yield U.S. Income Partnerships

MLP's in a tax-sheltered account have additional drawbacks besides the UBTI (which also can come from Commodity ETF's and Currency ETF's, because the companies that create the shares, pass through the holder's info to the indexing service): The "return of capital" and "capital loss" amounts which affect the taxable basis in a regular account (reported on the K-1) have no effect on the taxation rate when distributions are taken from any IRA.

The losses cannot be claimed, and the "return of capital", which would increase the basis of shares, and would decrease the tax liability upon their sale, have no effect on the dividends received by the shares in the IRA.