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Topic: MLP's
Good morning everyone,

I've just been reading another article in
Smart Money magazine (March 2010 issue) which is
touting the benefits of investing in MLP's. MLP's are
Master Limited Partnerships. The article makes interesting
points about the returns you might achieve
but I feel that their discussion of tax consequences is lacking.
I'd like to expand on it a bit in case you might be thinking
of investing in one of these in your club.

I think we all understand that if we're going to invest we're going to owe
taxes. We grumble and strategize and try and minimize them, but we pay them.

What is annoying is when there is more than the taxes themselves which eat into
investment returns. There can also be expenses incurred because we have to take our own time
or pay for extra time put in by a tax preparer to comply with complicated tax issues.

You need to be aware of such issues in advance because it will
require a certain level of returns to justify those added costs.
You probably won't achieve that from an investment your club makes.

bivio does not handle the accounting required for MLP's. We can't do that
and provide you with a product you can use for your club accounting at a price you can afford.
Correct accounting and tax preparation for MLP's is a complex topic. There
is variation in the type of tax reporting that might be required depending on the
business the MLP engages in. There may also be complicated state tax issues.

If you invest in an MLP, not only will your club have to deal with these,
each member will have to deal with them on
their personal tax returns. You (and your members) will probably need to hire an outside
professional to prepare your tax returns for you.
 
As an example, consider pipeline MLP's, which are popular today. If you own them you may need to
file
state taxes in each of the states the pipeline crosses. This means your investment club
will have to file partnership taxes in all those states and each member of your club will have
to file personal taxes in each one of them. Not a simple task.

Many of us do our personal investing in tax deferred accounts such as IRA's and therefore
avoid many yearly tax consequences. Even this is not a refuge if you invest in MLP's. The
way they pay out their income may result in you having to pay taxes each year even if they are held
in a tax deferred account.

It is easy for someone recommending an investment to you to dismiss the tax issues by
saying "Consult your tax advisor". We just want to let you know up front that there may be costs
of owning these
investments which will eat into any returns your club will have from
them. Even if you are considering them for your personal portfolio, make sure you
get good advice in advance about what you might be up against at tax time so you can get
a true feeling for what your real returns might be.

    Laurie Frederiksen
    www.bivio.com
Bravo, Laurie!!!
 
Ira Smilovitz
Join me at InvestEd 2010
Investor Education at Its BestTM
Baltimore, MD August 6 - 8, 2010
http://www.investor-education2010.org/

Thank you sir!

And thank you for the different take on reimbursing someone with units earlier.

It’s not necessarily obvious how it works and having a different way to think about it

will,  I’m sure,  be helpful to many.

  Laurie

Unfortunately, we did buy a MLP - and now I am trying to
figure out how to prepare the tax returns. I have the K-1
and am wondering where to report everything on our K-1.
Does anyone have any advice? I thought I would tackle our
partnership return first, then see what I need to do for the
state returns. I have also asked that this be sold ASAP!
Thanks for ANY help...



Laurie Frederiksen wrote:
> Good morning everyone,
>
> I've just been reading another article in
> Smart Money magazine (March 2010 issue) which is
> touting the benefits of investing in MLP's. MLP's are
> Master Limited Partnerships. The article makes interesting
> points about the returns you might achieve
> but I feel that their discussion of tax consequences is lacking.
> I'd like to expand on it a bit in case you might be thinking
> of investing in one of these in your club.
>
> I think we all understand that if we're going to invest we're going to owe
> taxes. We grumble and strategize and try and minimize them, but we pay them.
>
> What is annoying is when there is more than the taxes themselves which eat into
> investment returns. There can also be expenses incurred because we have to take our own time
> or pay for extra time put in by a tax preparer to comply with complicated tax issues.
>
> You need to be aware of such issues in advance because it will
> require a certain level of returns to justify those added costs.
> You probably won't achieve that from an investment your club makes.
>
> bivio does not handle the accounting required for MLP's. We can't do that
> and provide you with a product you can use for your club accounting at a price you can afford.
> Correct accounting and tax preparation for MLP's is a complex topic. There
> is variation in the type of tax reporting that might be required depending on the
> business the MLP engages in. There may also be complicated state tax issues.
>
> If you invest in an MLP, not only will your club have to deal with these,
> each member will have to deal with them on
> their personal tax returns. You (and your members) will probably need to hire an outside
> professional to prepare your tax returns for you.
>
> As an example, consider pipeline MLP's, which are popular today. If you own them you may need to
> file
> state taxes in each of the states the pipeline crosses. This means your investment club
> will have to file partnership taxes in all those states and each member of your club will have
> to file personal taxes in each one of them. Not a simple task.
>
> Many of us do our personal investing in tax deferred accounts such as IRA's and therefore
> avoid many yearly tax consequences. Even this is not a refuge if you invest in MLP's. The
> way they pay out their income may result in you having to pay taxes each year even if they are held
> in a tax deferred account.
>
> It is easy for someone recommending an investment to you to dismiss the tax issues by
> saying "Consult your tax advisor". We just want to let you know up front that there may be costs
> of owning these
> investments which will eat into any returns your club will have from
> them. Even if you are considering them for your personal portfolio, make sure you
> get good advice in advance about what you might be up against at tax time so you can get
> a true feeling for what your real returns might be.
>
> Laurie Frederiksen
> www.bivio.com

Question for Laurie..

As far as accounting knowledge I’m hardly in  your class or that of Ira’s, but could you answer this question?

A few years ago my club bought some KMP energy partners and we had  a really bad time trying to use Bivio. That  year we had to use another tax program because Bivio doesn’t handle K-1’s

We sold the stock  at  the end the same year as the purchase but we had one  dividend  the following year.

For the following year we decided to report the tax-as ordinary dividends, thus losing some of the tax advantage  We felt that is was easier to forgo the additional tax deduction (drilling exp etc) and pay taxes on the full dividend.

We used Bivio and it made life much easier.

What is your opinion on that approach ?

Arthur Klages, Treas.

Piedmont Investments Club LLC.

From: club_cafe@bivio.com [mailto:club_cafe@bivio.com] On Behalf Of Laurie Frederiksen
Sent: Thursday, February 25, 2010 5:40 PM
To: 'The Club Cafe'
Subject: RE: club_cafe: MLP's

Thank you sir!

And thank you for the different take on reimbursing someone with units earlier.

It’s not necessarily obvious how it works and having a different way to think about it

will,  I’m sure,  be helpful to many.

  Laurie

Hi Arthur - we purchased KMP in 2009, had we known then what
we know now...I will look forward to Laurie's response and I
am thankful for your message as well.

Arthur Klages wrote:
> Question for Laurie..
>
>  
>
> As far as accounting knowledge I’m hardly in  your
> class or that of Ira’s, but could you answer this question?
>
>  
>
> A few years ago my club bought some KMP energy partners and we
> had  a really bad time trying to use Bivio. That  year we had to use another
> tax program because Bivio doesn’t handle K-1’s
>
> We sold the stock  at  the end the same year as the
> purchase but we had one  dividend  the following year.
>
>  
>
> For the following year we decided to report the tax-as ordinary
> dividends, thus losing some of the tax advantage  We felt that is was
> easier to forgo the additional tax deduction (drilling exp etc) and pay taxes
> on the full dividend.
>
> We used Bivio and it made life much easier.
>
>  
>
> What is your opinion on that approach ?
>
>  
>
> Arthur Klages, Treas.
>
> Piedmont Investments Club LLC.
>
>  
>
>  
>
>
>
>
>
> From: club_cafe@bivio.com
> [mailto:club_cafe@bivio.com] On Behalf Of Laurie Frederiksen
> Sent: Thursday, February 25, 2010 5:40 PM
> To: 'The Club Cafe'
> Subject: RE: club_cafe: MLP's
>
>
>
>
>
>  
>
> Thank you sir!
>
>  
>
> And thank you for the different take on reimbursing someone with
> units earlier.
>
>  
>
> It’s not necessarily obvious how it works and having a
> different way to think about it
>
> will,  I’m sure,  be helpful to many.
>
>  
>
>   Laurie
>
>  
Hi Folks,

Unfortunately, the reason for my original post is that there is no simple answer we can give you.

It's difficult for us at tax time when people ask us to OK something they are doing which may not
comply with tax rules. Obviously, we would like very much to be able to help you out but it really
isn't appropriate for us to make a value judgment on whether something you want to do is "OK".

All we can really tell you is how to do the accounting for the types of investments which we
support.

Within this community, there may be those who will take on your project and answer your questions.
But ultimately, it will be up to you to figure out how to do accurate tax reporting for them.
Unfortunately, there may be an additional cost associated in ensuring that you are getting things
done correctly for MLP's.

That's why I wrote the message. I want to try and help do what I can to make sure people have good
information up front on what they are getting into when they invest in these things.
 
Laurie Frederiksen
 
I'm not Laurie, but my take on it is that it was wrong. As the IRS gets better at K-1 document matching (and that's the intent behind the revised K-1 we been using for several years), a club that chose to report the distribution as a dividend could expect to get a letter from the IRS asking about the discrepancy. It's especially a problem with MLP distributions as the cash distributed bears no relationship to the income that should be reported.
 
Ira Smilovitz
Join me at InvestEd 2010
Investor Education at Its BestTM
Baltimore, MD August 6 - 8, 2010
http://www.investor-education2010.org/
 
In a message dated 02/25/10 20:39:25 Eastern Standard Time, aklages@triad.rr.com writes:

Question for Laurie..

As far as accounting knowledge I’m hardly in  your class or that of Ira’s, but could you answer this question?

A few years ago my club bought some KMP energy partners and we had  a really bad time trying to use Bivio. That  year we had to use another tax program because Bivio doesn’t handle K-1’s

We sold the stock  at  the end the same year as the purchase but we had one  dividend  the following year.

For the following year we decided to report the tax-as ordinary dividends, thus losing some of the tax advantage  We felt that is was easier to forgo the additional tax deduction (drilling exp etc) and pay taxes on the full dividend.

We used Bivio and it made life much easier.

What is your opinion on that approach ?

Arthur Klages, Treas.

Piedmont Investments Club LLC.

 
As I stated in my other reply, the cash distributions from KMP bear little to no relationship to the income you are required to report. You really do need to report the income correctly as shown on the K-1 you receive from KMP. For what it's worth, you could have avoided all the problems by purchasing KMR instead of KMP. KMR is a corporate entity which holds partnership units in KMP and is designed specifically for entities that don't/shouldn't invest directly in the partnership.
 
Ira Smilovitz
Join me at InvestEd 2010
Investor Education at Its BestTM
Baltimore, MD August 6 - 8, 2010
http://www.investor-education2010.org/
 
In a message dated 02/25/10 20:52:08 Eastern Standard Time, makovect@bivio.com writes:
Hi Arthur - we purchased KMP in 2009, had we known then what
we know now...I will look forward to Laurie's response and I
am thankful for your message as well.
 
 
One other tax problem is not just different state taxes ,
you may also have to file foriegn taxes. We had Plains All
American for just a short time and not a very big
investment, thank the Lord. We bought it in November of 08
and received in Feburary of 09 the K-1's for the U.S. and
Canada, ( the gas came from Canada ). We dumped the stock
very quickly, investment clubs need to keep it as simple as
posible.
Scott Mace
Snake River Investment Club

Laurie Frederiksen wrote:
> Good morning everyone,
>
> I've just been reading another article in
> Smart Money magazine (March 2010 issue) which is
> touting the benefits of investing in MLP's. MLP's are
> Master Limited Partnerships. The article makes interesting
> points about the returns you might achieve
> but I feel that their discussion of tax consequences is lacking.
> I'd like to expand on it a bit in case you might be thinking
> of investing in one of these in your club.
>
> I think we all understand that if we're going to invest we're going to owe
> taxes. We grumble and strategize and try and minimize them, but we pay them.
>
> What is annoying is when there is more than the taxes themselves which eat into
> investment returns. There can also be expenses incurred because we have to take our own time
> or pay for extra time put in by a tax preparer to comply with complicated tax issues.
>
> You need to be aware of such issues in advance because it will
> require a certain level of returns to justify those added costs.
> You probably won't achieve that from an investment your club makes.
>
> bivio does not handle the accounting required for MLP's. We can't do that
> and provide you with a product you can use for your club accounting at a price you can afford.
> Correct accounting and tax preparation for MLP's is a complex topic. There
> is variation in the type of tax reporting that might be required depending on the
> business the MLP engages in. There may also be complicated state tax issues.
>
> If you invest in an MLP, not only will your club have to deal with these,
> each member will have to deal with them on
> their personal tax returns. You (and your members) will probably need to hire an outside
> professional to prepare your tax returns for you.
>
> As an example, consider pipeline MLP's, which are popular today. If you own them you may need to
> file
> state taxes in each of the states the pipeline crosses. This means your investment club
> will have to file partnership taxes in all those states and each member of your club will have
> to file personal taxes in each one of them. Not a simple task.
>
> Many of us do our personal investing in tax deferred accounts such as IRA's and therefore
> avoid many yearly tax consequences. Even this is not a refuge if you invest in MLP's. The
> way they pay out their income may result in you having to pay taxes each year even if they are held
> in a tax deferred account.
>
> It is easy for someone recommending an investment to you to dismiss the tax issues by
> saying "Consult your tax advisor". We just want to let you know up front that there may be costs
> of owning these
> investments which will eat into any returns your club will have from
> them. Even if you are considering them for your personal portfolio, make sure you
> get good advice in advance about what you might be up against at tax time so you can get
> a true feeling for what your real returns might be.
>
> Laurie Frederiksen
> www.bivio.com
Tammy Makovec wrote:
> Unfortunately, we did buy a MLP - and now I am trying to
> figure out how to prepare the tax returns. I have the K-1
> and am wondering where to report everything on our K-1.
> Does anyone have any advice? I thought I would tackle our
> partnership return first, then see what I need to do for the
> state returns. I have also asked that this be sold ASAP!
> Thanks for ANY help...
>
>
>
> Laurie Frederiksen wrote:
> > Good morning everyone,
> >
> > I've just been reading another article in
> > Smart Money magazine (March 2010 issue) which is
> > touting the benefits of investing in MLP's. MLP's are
> > Master Limited Partnerships. The article makes interesting
> > points about the returns you might achieve
> > but I feel that their discussion of tax consequences is lacking.
> > I'd like to expand on it a bit in case you might be thinking
> > of investing in one of these in your club.
> >
> > I think we all understand that if we're going to invest we're going to owe
> > taxes. We grumble and strategize and try and minimize them, but we pay them.
> >
> > What is annoying is when there is more than the taxes themselves which eat into
> > investment returns. There can also be expenses incurred because we have to take our own time
> > or pay for extra time put in by a tax preparer to comply with complicated tax issues.
> >
> > You need to be aware of such issues in advance because it will
> > require a certain level of returns to justify those added costs.
> > You probably won't achieve that from an investment your club makes.
> >
> > bivio does not handle the accounting required for MLP's. We can't do that
> > and provide you with a product you can use for your club accounting at a price you can afford.
> > Correct accounting and tax preparation for MLP's is a complex topic. There
> > is variation in the type of tax reporting that might be required depending on the
> > business the MLP engages in. There may also be complicated state tax issues.
> >
> > If you invest in an MLP, not only will your club have to deal with these,
> > each member will have to deal with them on
> > their personal tax returns. You (and your members) will probably need to hire an outside
> > professional to prepare your tax returns for you.
> >
> > As an example, consider pipeline MLP's, which are popular today. If you own them you may need to
> > file
> > state taxes in each of the states the pipeline crosses. This means your investment club
> > will have to file partnership taxes in all those states and each member of your club will have
> > to file personal taxes in each one of them. Not a simple task.
> >
> > Many of us do our personal investing in tax deferred accounts such as IRA's and therefore
> > avoid many yearly tax consequences. Even this is not a refuge if you invest in MLP's. The
> > way they pay out their income may result in you having to pay taxes each year even if they are held
> > in a tax deferred account.
> >
> > It is easy for someone recommending an investment to you to dismiss the tax issues by
> > saying "Consult your tax advisor". We just want to let you know up front that there may be costs
> > of owning these
> > investments which will eat into any returns your club will have from
> > them. Even if you are considering them for your personal portfolio, make sure you
> > get good advice in advance about what you might be up against at tax time so you can get
> > a true feeling for what your real returns might be.
> >
> > Laurie Frederiksen
> > www.bivio.com

So, if I understand this correctly, if we have a bivio
ActivePartnership subscription there is no way to make
manually entries in bivio for the information received on a
MLP K-1 form? If that is the case, then do you recommend
taking the 1065 and K-1s that are generated by bivio to an
tax accountant with the MLP K-1 for final processing?
Jan
Jan Liming wrote:

(sorry, last post was garbage)

So, if I understand this correctly, if we have a bivio
ActivePartnership subscription there is no way to make
manual entries in bivio to enter the information received on
a MLP K-1 form?

If that is the case, then do you recommend taking the 1065
and K-1s that are generated by bivio to an tax accountant
with the MLP K-1 for final processing?

Thanks, Jan