Kinder Morgan Didn’t Lose When It Exited MLP Status: Lawyers

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By Laura Davison

Oct. 19 — When Kinder Morgan Inc. decided to convert its master limited partnership into a C corporation, it was still able to mitigate some of the entity-level tax, tax attorneys said.

“When they did the roll up, they did it in large part in a taxable transaction,” Dean Shulman, a partner at Kirkland & Ellis LLP, said during an Oct. 19 Practising Law Institute event. “They created a tremendous amount of depreciable basis, so even though they were a C corp, they had a lot of depreciation that I think over a pretty long period of time was going to eliminate or largely limit corporate level tax.”

Kinder Morgan, one of the biggest energy infrastructure companies in North America, combined the MLP into the larger corporation in 2014. The move highlighted that the tax-favored status, which passes earnings and the tax liability through to investors, might not be worth complying with the Internal Revenue Service’s complex rules governing the entities.

“One of the reasons they became too large is that MLPs are priced on a yield and also growth. You have to be able to grow,” said R. David Wheat, a principal at KPMG LLP. “When you’re that big, to find acquisitions to continue to grow and move the needle is very, very difficult.”

MLPs must derive at least 90 percent of revenue from qualifying activities, such as oil and gas exploration or production, to maintain their status. If an entity falls below that threshold, it can be taxed as a corporation, an error that would enrage investors who were assured a single level of tax.

“It looks nice in little simple charts, but in real life they can get very complex,” said Clifford M. Warren, special counsel to the IRS associate chief counsel (Passthroughs and Special Industries). “The mistakes in this area are nuclear.”

To contact the reporter on this story: Laura Davison in Washington at

To contact the editor responsible for this story: Meg Shreve at

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