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Master Limited Partnerships?

| | Posted in: Miscellaneous

A reader asked: “Could you shed some light on Master Limited Partnerships and their risk?”


There is not much formal research on Master Limited Partnerships (MLP). A Social Science Research Network search locates two papers that may interest you:

“Energy-Related Master Limited Partnerships Present Investment Opportunities with Some Tax Complexity”:

“Publicly-traded energy master limited partnerships (MLPs) are a specialized investment class that possess favorable investment characteristics. They currently provide high yields coupled with the potential for growing these yields in the future. MLPs are less volatile than stocks and are therefore arguably less risky. They also possess favorable tax advantages. They are not taxed at the entity level and a significant portion of the income generated by the MLP may be tax-deferred. MLPs are normally best suited for a taxable account since tax-exempt entities such IRAs are taxed on MLP income above a modest amount. Because, however, MLPs are subject to the laws governing partnership taxation, the tax issues surrounding MLPs are considerably more involved than the tax issues surrounding stocks. This article provides an overview of this unique asset class, including their tax history. Also, the tax issues surrounding MLPs such as determining adjusted basis, compliance with the passive activity rules, determining how much of sales proceeds to allocate between Section 741 and 751, and reporting tax shelter registration numbers are addressed. Fortunately, the MLP itself will aid the investor by computing the adjusted basis as well as the Section 741 gain or loss and Section 751 gain for the investor.” [Bolding added.]

“Corporate Restructuring and the Master Limited Partnership”:

“This note defines and discusses the concept of the Master Limited Partnership (MLP). Special attention is given to the economic analysis of MLPs: tax-related inducements, nontax benefits, attributes of firms likely best to exploit these benefits, cost benefit analysis, and a brief review of evidence about spin-offs.” [This paper is available for download.]

Many investing web sites have articles on MLPs (e., g., “A Closer Look at Master Limited Partnerships and Taxation”).

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