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Investors Face Unexpected Tax Bills in Kinder Morgan Deal

August 21, 2014


Most of Wall Street was excited to hear Kinder Morgan Inc.’s $44 billion plan to consolidate its pipeline companies, however, some investors in the company’s master limited partnership may be left with huge, unexpected tax bills.

Houston-based Kinder Morgan announced Sunday it would acquire three affiliated companies. Two of the companies to be acquired are organized MLPs, which often attract investors due to their ability to qualify for deferred taxes.

MLPs, once a bland sector of energy-infrastructure investing, have rapidly expanded from just 38 a decade ago to 120 today, valued at $560 billion. The company’s founder and chief executive, Richard Kinder, said on Monday that energy MLPs are a “fertile field to do a little grazing in.”

Energy companies formed MLPs as a way to raise money and issue debt backed by pipelines and other assets, but Moody’s Investors Service issued a warning in a recent research report that investors are offered “less protection” from such partnerships “than that of a typical public company.” MLPs lack independent directors responsible for overseeing strategy, neither do they hold annual meetings to elect directors.

Tax experts suggest individual investors in Kinder’s MLPs could face unexpected tax bills.

“In this deal, one group of stakeholders will owe tax so that the company as a whole can benefit,” said Robert Willens, an independent tax expert in New York.

The individual impact would vary widely, depending on when the units were bought and other factors.

Source: Dieterich, Chris, “Hefty Tax Bills Loom in Kinder Morgan Deal,” The Wall Street Journal, August 12th, 2014

IRS Tax Collection