As of June 2013, Master Limited Partnerships (“MLPs”) have reached a market capital of $400 billion, with over 100 MLPs traded on major exchanges.[1] Generally established as LLCs with advantageous partnership flow through tax treatment, MLPs present attractive return vehicles to attract long term capital to the energy extraction, energy transportation (“midstream”), and most recent, energy distribution (“downstream”), markets. However, MLPs may result in unfavorable tax treatment for investors as well.
The Mertens Federal Income Taxation August 2013 Highlight by William Byrnes, Robert Bloink and Theron West examines the tax issues for MLP investors pre- and post- the 1986 Code, imposed MLP investment restrictions, and gradual relaxation thereof. The Highlight concludes with an analysis of the April 2013 legislative bi-partisan proposal, the Master Limited Partnership Parity Act, to extend MLP tax treatment to renewable (“green”) energy, and why this proposal is contentious.
Given the continuing Congressional gridlock over deficit reduction and heightened sensitivity of energy industry tax breaks in light of this, even with bipartisan support, renewable energy lobbyists will probably not realize passage this year. According to J.P. Morgan, “MLP distribution yields have generated 6-7%, and over the past twenty years, capital growth has totaled approximately 8% annually.[2] Regardless of whether MLPs eventually are expanded to encourage renewable energy investments, for the time being they present an alternative asset class that has the potential to produce high-yield returns, and therefore high investor interest.[3]
See Mertens Highlights at > WestLaw <
William Byrnes' Tax, Wealth, and Risk Intelligence 