Markman: Tax Crusaders Aiming at Partnerships

by Jon Markman | May 10, 2011 12:31 pm

You may have noticed that a few of the nice, quiet, unassuming energy master limited partnerships — energy stocks with high dividend yields — blew up in the middle of last week. Here’s why.

It seems that certain people in government have decided that rather than cutting back on spending to balance the budget it might be a better idea to tax successful companies more. Hard to believe, I realize, that government officials could be so naive. But here’s what I found out.

According to Reuters, the Obama administration is considering a plan to force more businesses to pay corporate income tax as part of an overhaul package that could be unveiled as early as this month. Under the proposal, entities with more than $50 million in gross receipts would pay the corporate income tax, instead of the individual income tax they now pay. Partnerships like law firms, hedge funds and MLPs would likely be the most affected.

“Treasury Department staff are working on a tax reform proposal that reportedly would include corporate taxation of any pass-through entity with gross receipts of $50 million or more,” said a letter to members of the National Association of Publicly Traded Partnerships from its
executive director Mary Lyman sent on Friday, obtained by Reuters.

Pass-through entities are those in which the income and tax liability “passes through” to the individual rather than being taxed at the company level. Lyman’s group represents publicly traded partnerships investing mostly in energy companies, says Reuters. These MLPs pay no tax themselves. Instead, the tax is paid by individual owners.

“We believe that if this proposal is released in its current form, the fact that it sweeps so broadly will ensure widespread opposition from business groups and many in Congress,” Lyman said in her email to members, according to Reuters.

Treasury Secretary Timothy Geithner has suggested that changes to how types of business are taxed would be considered. “Congress has to revisit this basic question about whether it makes sense for us as a country to allow certain businesses to choose whether they’re treated as corporations for tax purposes or not,” Geithner said at a congressional hearing this year. 

White House spokeswoman Amy Brundage said the process is still unfolding, according to the wire service. “No decisions have been made about the content of any specific reform proposal or the timing or manner in which the administration will move this dialogue forward,” Brundage said.

Now here’s my recommendation: Most of the time when fears of some kind of tax code or legislative changes are crushing a sector, all of the concerns turn out to be unfounded. A great example was “Obamacare,” which was supposed to annihilate health insurers and drug makers. They tumbled for awhile, but last I looked, many of them are at are multiyear highs now.

It is really hard to make changes like this because business interests, through their lobbyists and donations, pretty much run Congress. It’s a sad commentary, but it’s the way it is.

A typical affected company is Pioneer Southwest Energy Partners (NYSE:PSE[1]).

You can see that selloffs have hit the company regularly in the past 16 months. All were contained at the 100-day average, which is the red line. It would be prudent to set a stop under that line, because falling beneath that level would signal a major change in investors’ approach to these stocks for now. More favorites on my recommended list for months: MarkWest (NYSE:MWE[2]) and EV Energy Partners (NASDAQ:EVEP[3]).

For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage,[4] or his long-term investment service, Strategic Advantage[5]

  1. PSE:
  2. MWE:
  3. EVEP:
  4. Trader’s Advantage,:
  5. Strategic Advantage:

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