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James Martino
Curious, does this mean I have to pay taxes on my distributions over the past 15 years or so I owned KMP units, PLUS pay capital gains on the equity based on the capital gains? Could be a very big tax hit in 2014. Will the converted KMP shares into KMI shares be a taxable event?
Jim Fink
Negative tax implications for a long-time KMP unitholder are significant. See slide no. 11, footnote no. 3:
“Based on KMI’s 8/8/2014 closing price of $36.12, taxes for an average unitholder are estimated to be $12.39/unit. Based on an assumed KMI price of $44.44 ($2.00 dividend and a conservative 4.5% KMI yield), taxes for an average unitholder are estimated to be $16.41/unit. These represent approximate calculations for an average unit holder. Actual gain could be more or less.”
As I am understanding the tax implications, I have owner 600 shares since 2002. My cost bases by now is probably zero, so Will have to pay capital gains taxes on ALL my distributions over this period, which is over 30k. If I do nothing and my KMP shares are transferred to KMI shares, I would think this transfer is not a taxable event sine I am not selling my shares. Any thoughts out there??
Jim Fink
I am not a tax expert, but it is my understanding that the acquisition of KMP by KMI is a taxable event. It doesn’t matter whether you sell KMP directly or whether you sell to KMI through the takeover. In both cases, you are selling KMP. In fact, for a long-term KMP unitholder, the KMI takeover is a very-negative taxable event:
“Several tax advisers said individual investors in Kinder’s MLPs could face unwelcome tax bills. Because Kinder Morgan Energy Partners is organized as a partnership that benefits from substantial deductions, the taxes on its substantial quarterly payouts were deferred. When the units are sold or exchanged—as they will be in the reorganization—the deferred taxes come due. “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.
Most of that income will probably be taxed at ordinary rates, which are higher than long-term capital-gain rates, said Robert Gordon, a tax strategist who heads Twenty-First Securities Corp. in New York. The tax could be especially unwelcome for investors who planned to hold the units until death, when they could skip paying the deferred taxes. In effect, Mr. Gordon said, these people will owe tax they wouldn’t otherwise have had to pay. The individual impact would vary widely, depending on when the units were bought and other factors, he said. Kinder Morgan Inc. predicted it would distribute $10.77 of cash per partnership unit. Yet, according to estimates by the company, the tax owed by an average investor in Kinder Morgan Energy Partners could range from $12.39 to $18.16 a unit, depending on the individual’s tax rate. The estimate assumes that passive losses haven’t already been used to reduce tax liability and that Kinder Morgan Inc.’s stock is between $36.12 and $44.44 a share.”
See slide no. 11, footnote no. 3 of the company presentation:
“Based on KMI’s 8/8/2014 closing price of $36.12, taxes for an average unitholder are estimated to be $12.39/unit. Based on an assumed KMI price of $44.44 ($2.00 dividend and a conservative 4.5% KMI yield), taxes for an average unitholder are estimated to be $16.41/unit. These represent approximate calculations for an average unit holder. Actual gain could be more or less.”
I do now see that there will be taxes due on all the distributions over the years PLUS the sale/conversion of my KMP units to KMI shares. I noted that along with the transfer, KMP unit holders will also get about $11 per share in cash. While this will help offset some of the taxes, I suspect the cash payment is also taxable. I will surely contact my tax advisor to get a good estimate for what I will owe and adjust my quarterly IRS payments accordingly.
i am lost on this deal, i own 250 shares of KMP i bought at 81.02 a wile ago. what are you suggesting buy KMI an KMP sorry this could be a dumb question to me it almost seems KMI is taking over KMP. HELP
Igor Greenwald
If “awhile ago” is the last couple of years, I don’t think you have much to worry about and can sit tight. Longer-term unitholders can look forward to a day of reckoning with deferred taxes, unfortunately.
I’ve owned KMP since March, 2011 in a Traditional IRA. Am I correct in assuming that when my KMP shares convert to KMI that I will not owe any deferred taxes and that all taxes will be deferred until I withdraw money from my IRA just like any other IRA withdrawals? Thank you.
Igor Greenwald
It depends on the size of your holding, but over this relatively short holding period it would have to be quite large to run the risk of subjecting your IRA to a tax on unrelated business taxable income above $1,000.
Igor – I don’t want KMI as I want to keep my MLP portfolio pure and I am already at the right balance of energy stocks in my regular stock portfolio. Knowing that I want to sell my KMP shares, does it makes sense to hold them in expectation of a further run-up before the consolidation or do you think we have seen as much as we are going to get? Thanks.
Igor Greenwald
I think there is room for more gains by KMI and therefore by the partnerships it’s buying. Please see the MLP Investing Insider coming out later today for more analysis behind this thesis.
Stock Talk
James Martino
Curious, does this mean I have to pay taxes on my distributions over the past 15 years or so I owned KMP units, PLUS pay capital gains on the equity based on the capital gains? Could be a very big tax hit in 2014. Will the converted KMP shares into KMI shares be a taxable event?
Jim Fink
Negative tax implications for a long-time KMP unitholder are significant. See slide no. 11, footnote no. 3:
http://www.kindermorgan.com/investor/presentations/KMI_Purch_MLPs_Investor_Presentation_vR.pdf
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James Martino
As I am understanding the tax implications, I have owner 600 shares since 2002. My cost bases by now is probably zero, so Will have to pay capital gains taxes on ALL my distributions over this period, which is over 30k. If I do nothing and my KMP shares are transferred to KMI shares, I would think this transfer is not a taxable event sine I am not selling my shares. Any thoughts out there??
Jim Fink
I am not a tax expert, but it is my understanding that the acquisition of KMP by KMI is a taxable event. It doesn’t matter whether you sell KMP directly or whether you sell to KMI through the takeover. In both cases, you are selling KMP. In fact, for a long-term KMP unitholder, the KMI takeover is a very-negative taxable event:
http://online.wsj.com/articles/kinder-morgan-deal-risks-big-tax-bills-for-investors-1407784361?
See slide no. 11, footnote no. 3 of the company presentation:
http://www.kindermorgan.com/investor/presentations/KMI_Purch_MLPs_Investor_Presentation_vR.pdf
James Martino
Thanks Jim,
I do now see that there will be taxes due on all the distributions over the years PLUS the sale/conversion of my KMP units to KMI shares. I noted that along with the transfer, KMP unit holders will also get about $11 per share in cash. While this will help offset some of the taxes, I suspect the cash payment is also taxable. I will surely contact my tax advisor to get a good estimate for what I will owe and adjust my quarterly IRS payments accordingly.
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Robert Vujovich
i am lost on this deal, i own 250 shares of KMP i bought at 81.02 a wile ago. what are you suggesting buy KMI an KMP sorry this could be a dumb question to me it almost seems KMI is taking over KMP. HELP
Igor Greenwald
If “awhile ago” is the last couple of years, I don’t think you have much to worry about and can sit tight. Longer-term unitholders can look forward to a day of reckoning with deferred taxes, unfortunately.
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Bob Cecchini
I’ve owned KMP since March, 2011 in a Traditional IRA. Am I correct in assuming that when my KMP shares convert to KMI that I will not owe any deferred taxes and that all taxes will be deferred until I withdraw money from my IRA just like any other IRA withdrawals? Thank you.
Igor Greenwald
It depends on the size of your holding, but over this relatively short holding period it would have to be quite large to run the risk of subjecting your IRA to a tax on unrelated business taxable income above $1,000.
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Thomas Horwich
is there a new best buy list?
Igor Greenwald
We don’t publish a new Best Buys list monthly. The July version: http://www.investingdaily.com/mlp-profits/articles/20743/a-changing-of-the-guard/ still applies.
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MurphyB
Igor – I don’t want KMI as I want to keep my MLP portfolio pure and I am already at the right balance of energy stocks in my regular stock portfolio. Knowing that I want to sell my KMP shares, does it makes sense to hold them in expectation of a further run-up before the consolidation or do you think we have seen as much as we are going to get? Thanks.
Igor Greenwald
I think there is room for more gains by KMI and therefore by the partnerships it’s buying. Please see the MLP Investing Insider coming out later today for more analysis behind this thesis.
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