Tax Changes Coming - Master Limited Partnerships And REITs Advantages At Risk

Includes: KMI
by: Jeff Boyd


Congressman Paul Ryan has indicated that specialized tax structures need to be changed in order to make the tax system more fair.

The target is clearly Master Limited Partnerships and Real Estate Investment Trusts (REITs).

The president and Congress are in agreement on certain changes in tax laws, and this brings risk to MLPs.

Kinder Morgan Inc. (NYSE:KMI) recently shocked the MLP world by acquiring the various MLPs it had structured over the years to fund tax-advantaged growth. Certain pundits indicated that the acquisition was not a knock on MLPs, and was merely a one-off event. Comments from Congressman Paul Ryan in an article quoted in yesterday's Wall Street Journal should indeed worry MLP and REIT investors, as Congress is looking to change the laws, and what was viewed as a one-off event could turn into a crush.

Mr. Ryan indirectly said that MLPs and REITS are on his list when he said:

"Many U.S. companies are structured in a way so that they pay their taxes through the individual code, not the corporate code, and they would have to be changed to ensure fairness."

Normally, I would say that Paul Ryan has come up with lots of interesting and creative ideas, but none of them ever seem to be signed into law. Now that Republicans are in power in both houses of Congress, and both they and President Obama support lowering the corporate tax rates, it might very well be time to seriously worry with regard to all of the MLPs and REITs out there and in the process of being created, as cuts in corporate income tax rates have to be paid for in order to avoid increasing the deficit.

In addition to the regulatory risk, the fact is that tax-driven strategies almost always layer on additional administrative costs and restrictions to the way business is conducted. It isn't obvious to investors, but senior managers and administrative staff wind up spending significant time with non-value added administrative issues resulting from significant restrictions on the types of activities that can be engaged in by these specialized entities. These restrictions finally led Richard Kinder to say enough is enough, and he brought back the MLPs into the corporate fold.

Kinder MLP investors were fortunate to have a financially strong and growing company that could justify unwinding its MLP structures. Companies that do not have such a relationship could find that not only have their tax advantages been taken away, but they have unwieldy business structures where no one will want to buy the entire company, and instead, it will have to be executed in a piecemeal fashion that will only be done where the assets are integral to future growth plans.

MLPs, and sometimes REITs, carry more risks than investors often acknowledge. Now is the time to re-examine your MLP holdings and whether the company's business prospects justify the regulatory risks that now appear to be coming into view.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.