Earlier this week, the business world was chattering about the news that Kinder Morgan, pioneer of the Master Limited Partnership (MLP) business model, was surrendering the MLP structure in favor of a more traditional corporation. This happened last Sunday.
While many questioned what this meant for the MLP model in general, the more pressing questions began to emerge when, the following day, the Treasury Department came out with a statement regarding MLPs: “We at the Treasury are looking into the effects of these transactions on future tax revenues. Instances where the tax base may be eroded serve as a reminder of why we need Congress to enact business tax reform that broadens the tax base and lowers tax rates.”
Much like that false crusade on inversions, here we have another instance of anti-business sentiment coming out of the Executive Branch. Obama's abuse of the law is clearly now seeping down to his cabinet underlings who also think now they have the authority to rewrite the law as well -- especially under the cloak of getting more tax revenue.
Starting this past April, the government issued a temporary pause in the formation of new MLPs. The way the process works is that the IRS would issue what's known as "private letter rulings" that examine qualifying income, and then therefore allow an MLP to be formed. However, the Treasury Department decided to examine the standards being used, meaning that the creation of new MLPs have been on hold for a few months.
The internal committee has been tasked with evaluating the “aggressive” rulings regarding qualifying income of MLPs issued in recent years. The internal committee may determine that such rulings are too expansive and recommend stricter interpretations of what types of natural resources income constitute qualifying income.
Most folks in the business world fully expected the formation of MLPs to resume after rules were reviewed. Barrons noted that, "They went through a similar review process for REITs in 2013 and concluded that the approvals were in line with the law. The same results were expected for MLPs and that private letter rulings would resume. But Treasury seems to say they are looking at issues larger than the IRS which would seem like another attempt to jawbone companies in the future from seeking MLP approvals."
This sudden interest in MLPs sounds eerily similar to the recent interest the government has taken in business "inversions"; the government claims (erroneously) that inversions also deprive the government of supposed-entitled tax revenue, the same flimsy justification for looking more closely at, and ceasing the formation of, MLPs.
The worst part about this new anti-business targeting is that it is completely unfounded. The Treasury Department makes it sound like MLPs somehow are avoiding paying tax revenue by the way the company is structured and calls on the need for "Congress to enact business tax reform". Except that MLPs ARE a perfect example of a reformed business tax structure that Congress should be welcoming.
With MLPs, the business is only taxed once, (the way most business structures around the world already operate). In the United States, however, corporations face an abominable problem in our tax code known as "double taxation". Basically if a corporation pays its corporate taxes and then reinvests its profits, there is no extra tax. But if its profit earnings are given to the owner(shareholders), they are taxed again on that amount -- hence the double taxation.
Contrast that with MLPs, which "does not incur income taxes. Its income is allocated among all partners in proportion to their ownership interest." Hence, the taxation only occurs once. This singular taxation of businesses is what real broad-based tax reform should aim for.
The real inequality in the tax code is not the MLP structure, which only taxes businesses one time; it is the double taxation that major corporations face. If Obama is truly for tax reform -- like he says he is when he talks about inversions -- the MLP structure for businesses is one way to achieve that reform. (Another would be to lower the corporate tax rate.)
Going after MLPs now and reducing the number of them in existence is the opposite of tax reform. Allowing the Treasury Department to play with business rules willy-nilly is egregious. This MLP attack is just another example of how anti-business the Obama Administration really is.