Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

IRS says temporarily halts issuing letters for MLPs

April 9, 2014

By Patrick Temple-West and Anna Driver

WASHINGTON/NEW YORK (Reuters) – The Internal Revenue Service has temporarily stopped issuing private letter rulings that energy companies sometimes request when setting up master limited partnerships (MLPs) for their tax benefits.

Lawyers specializing in the oil and gas sector have said the IRS wants to review the scope of assets that can qualify as tax-free for MLPs, which have lured billions from investors seeking higher yields.

“There has been a pause,” IRS Commissioner John Koskinen told reporters on Tuesday at Congressional hearing. He did not say how long the delay would last.

“(The pause) is to try to make sure the letter rulings are all consistent and to try to see if there is a way to give broader guidance to the industry.”

On Monday, in a sign that some transactions might be delayed, SandRidge Energy Inc said an MLP it had considered setting up for its water disposal business was affected by the IRS action. [ID:nL2N0MZ162]

Timothy Fenn, a partner with Latham & Watkins in Houston, said the market could slow for initial public offerings of MLPs, which are widely listed on U.S. stock exchanges.

“It’s causing uncertainty in the IPO market for new MLP IPOs who are waiting for a private letter ruling in order to go public,” he said.

But another lawyer at a top energy firm said most public listings of the partnerships do not need an IRS ruling to be viable.

The MLP world has grown dramatically over the past ten years, surging from investments of just $2 billion in 1994 to $445 billion now, according to Wells Fargo.

Cash-generating pipeline companies have traditionally used the structure, but now a range of companies are setting up MLPs and their complexity is growing, analysts say. [ID:nL1N0MU2BC]

Companies form the MLPs because they are not taxed at the federal level, lowering their cost of capital.

Investors, or unitholders, like them because they mostly provide higher payouts than dividend-paying companies, and the returns have been beating yields available on Treasuries and most corporate bonds.

Tagged with →