Kinder Morgan Outgrows Tax Structure it Popularized – Los Angeles Income Tax Planning & Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on September 4, 2014

Richard Kinder, a man who twenty years ago helped start a boom in reorganizing large US companies so they would be exempt from corporate income tax, announced recently that he is now done with the idea.

Kinder plans to consolidate his oil and natural gas pipeline empire under a single, taxable corporation known as Kinder Morgan Inc. This will involve buying up two companies he controls, known as master limited partnerships (MLPs), and would result in lowering investor payouts while leaving more to beat rivals on new projects or buy them up.

Despite Kinder’s change of structure, everyone from phone companies to container-board makers are moving the in other direction and exploring ways to organize parts of their business outside the corporate income tax system by using MLPs or another tax-advantaged format called a real estate investment trust.

Kinder maintains that this change is “in no way a swipe at MLPs in general,” but that a unique confluence of factors affecting his own business changed his mind.

MLPs became popular as one way of avoiding the dreaded “double taxation,” where corporations first pay taxes on profits and then shareholders pay taxes on any dividends or capital gains from their investment. Partnerships help avoid this situation by skipping the corporate level of taxation and making the investors responsible for their share of the company’s earnings. MLPs distribute most of their earnings to their investors each year, making them attractive to individuals looking for steady income.

As Kinder’s MLPs have raised distributions over the years, Kinder Morgan has ended up with a bigger slice of their cash flows in the form of management fees. However, because Kinder Morgan is a corporation, around half of the cash generated by the partnerships ended up flowing to the parent, where it was taxed anyway. This is one of the reasons that led Kinder to reconsider his tax structure.

Many of Kinder Morgan’s peers have lower management fees, don't face taxation at the corporate level, or both, making them less likely to reorganize in the way Kinder proposes. For example, Houston-based Enterprise Products Partners LP stopped paying management fees altogether in 2010 when it acquired its management company.

According to Gabe Moreen, an analyst at Bank of America Merrill Lynch, Kinder’s reversal “provides a template for a somewhat graceful exit from a structure that can prove long-term unwieldy as an MLP grows.” Moreen added, “We expect significant interest in potential MLP consolidation candidates.”

Thanks to a 1987 law, companies that are large enough to be publicly traded are usually prohibited from being taxed as partnerships. However, Congress made exceptions for a few industries, such as energy, natural resources, investing, and real estate. A different break offers similar benefits for real estate investment trusts.

According to the Joint Committee on Taxation, the MLP tax break for energy and mining companies will cost $6.3 billion in lost revenue to the US Treasury during the 2014-2018 federal fiscal years.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

Leave a Comment

Previous post:

Next post: