One of the hottest investment products being pitched by Wall Street, in the low interest environment that has persisted over the past few years, has been Energy Master Limited Partnerships (“MLPs”) – an investment product with above average yields and, all too often, above average commissions for the financial advisors who have touted them.
Unfortunately, for many investors, one of the material facts associated with MLPs, that never seems to have been included in the sales presentations of their financial advisors, is the fact that investors in these products often have to file income tax returns in every state where the MLP conducts its business.
The latest U.S. Securities & Exchange Commission filings by a number of energy-related MLPs provide a clear example of the undisclosed income tax ramifications that could potentially impact investors in these products.
A case in point is clearly illustrated, for example, by the specific risk factor disclosure that was contained within the annual report (“Form 10-K”) that was filed by Energy Transfer Partners, L.P. (NYSE:ETP) on February 29, 2016 for its fiscal year that ended on December 31, 2015:
Unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of investing in our Common Units.
“In addition to federal income taxes, the Unit holders may be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if they do not live in any of those jurisdictions. Unitholders may be required to file state and local income tax returns and pay state and local income taxes in some or all of the jurisdictions. We currently own property or conduct business in many states, most of which impose an income tax on individuals, corporations and other entities. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal or corporate income tax. Further, Unitholders may be subject to penalties for failure to comply with those requirements. It is the responsibility of each Unitholder to file all federal, state and local tax returns.”
Another clear illustration is the specific risk factor disclosure that was contained within the annual report (“Form 10-K”) that was filed by Buckeye Partners, L.P. (NYSE :BPL) on February 25, 2016 for its fiscal year that ended on December 31, 2015:
You will likely be subject to state and local taxes and income tax return filing requirements in jurisdictions where you do not live as a result of investing in our LP Units.
“In addition to U.S. federal income taxes, you may be subject to other taxes, including non-U.S., state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we conduct business or own property now or in the future, even if you do not live in any of those jurisdictions. You will likely be required to file non-U.S., state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. We own property and conduct business in a number of states in the United States. Most of these states impose an income tax on individuals, corporations and other entities . . . As we make acquisitions or expand our business, we may own assets or conduct business in additional states or non-U.S. jurisdictions that impose a personal income tax. It is a unit holder’s responsibility to file all non-U.S., federal, state and local tax returns.”
Finally there is the specific risk factor disclosure that was contained within the annual report (“Form 10-K”) that was filed by Enterprise Product Partners L.P. (NYSE:EPD) on February 26, 2016 for its fiscal year that ended on December 31, 2015:
Our common unitholders will likely be subject to state and local taxes and return filing requirements in states where they do not live as a result of an investment in our common units.
“In addition to federal income taxes, our common unit holders will likely be subject to other taxes, such as state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes imposed by the various jurisdictions in which we do business or own property even if the unit holder does not live in any of those jurisdictions. Our common unit holders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, our unit holders may be subject to penalties for failure to comply with those requirements. We currently own property or conduct business in many states, most of which impose an income tax on individuals, corporations and other entities. As we make acquisitions or expand our business, we may control assets or conduct business in additional states that impose a personal or corporate income tax. It is the responsibility of each unit holder to file its own federal, state and local tax returns, as applicable.”
The common sense interpretation of this complicated legalese – investors in MLPs may owe state and local taxes, in some instances substantial taxes, in every state where their MLP conducts its business and may incur substantial penalties if they fail to file the required tax returns in all of the applicable states.
If you are an individual or institutional investor who has any concerns about your investment in any Master Limited Partnership investment, please contact us for a no-cost and no-obligation evaluation of your specific facts and circumstances. You may have a viable claim for recovery of your investment losses by filing an individual securities arbitration claim with the Financial Industry Regulatory Authority (FINRA).