KMI Holding Period

[Burke]

KMI stock issued in exchange of KinderMorgan LP interests in Nov 2014: Will the new shares have a long-term holding period from date of original purchase of the LP? Info not in K-1
package.

[Burke]

Well, it looks like the answer is No. I finally found a document on the Internet which indicates the KMI stock must be held more than one year after receipt in the taxable distribution transaction to be considered long-term.

[Roland Slugg]

No. The buy-out of the KMP units was a fully taxable transaction, and the purchase of KMI shares starts a new holding period for those shares.

The disposition of the KMP units also triggers the release of all suspended PALs (if any) in that activity. KMP is a PTP, so its losses can only be offset against gains from the same PTP, or upon a complete disposition in a taxable transaction ... such as the one last November.

You can easily find many references online about that buyout/exchange. Here is just one that you may find helpful ...

http://www.kindermorgan.com/content/docs/KMP_and_EPB_Tax_Information_Package.pdf

[Burke]

Yes. I had worked out all the other issues on the sale. It was the holding period of KMI I needed to resolve. BTW, howcome you are on this forum at 2:20 am? That's commitment! Ya gotta love this business.....

[Roland Slugg]

BTW, how come you are on this forum at 2:20 am?

I wasn't. The posting times you see are auto-converted to the local time of the person reading them. It was, however, 11:20p ... still kinda late.

If you still want to read that WSJ article I tried to link you with a few days ago, just do a "KinderMorgan merger" search on Google and look for a hit that says "WSJ." You should be able to find it quite easily, and you should be able to read the article. It was a nice, comprehensive one.

[Lion]

This one started on Forbes and redirected to

http://www.gurufocus.com/news/323192/kinder-morgan-filing-your-taxes-after-the-kmpkmi-merger

[Burke]

Sorry, but that one defaults to a login and password requirement.....

[Lion]

I followed it just fine. Did have to click to make the log-in go away one time. You do get a lot of ads by reading it without joining. So, here's my copy & paste:

Kinder Morgan: Filing Your Taxes After The KMP-KMI Merger
March 09, 2015 | About: KMI +0%

Charles Sizemore

Investors in Kinder Morgan Energy Partners (KMP), Kinder Morgan Management (KMR) and El Paso Pipeline Partners (EPB) are now the proud owners of Kinder Morgan Inc. (KMI) after the reorganization of the Kinder Morgan empire last year. While I consider this to be a great development for shareholders, it does raise a few questions come tax time.

I love MLPs. I love the high cash distributions, and I love the fact that in most years, the distributions are considered mostly tax-free returns of capital. Congress was really on to a good idea when they created the MLP investment vehicle in 1986.

But as much as I love MLPs, the taxes can be messy, even in the absence of a merger or reorganization. You have to input K1 data into your tax return, and energy MLP K1s can be several pages long and filled with obscure accounting for depreciation and depletion.

Let’s dig into the details and see what Kinder Morgan shareholders should expect when filing their 2014 taxes.

Holders of Kinder Morgan Inc.
I’ll start with an easy one: Shareholders who owned KMI going into the reorganization. If you owned KMI, then absolutely nothing changes for you. Dividends are reported on your broker’s 1099-div, and any sales in 2014 will show up on your broker’s 1099-b. There is nothing new under the sun here.

Holders of Kinder Morgan Management
Here too, the tax accounting is simple. If you owned KMR, you received 2.48 shares of KMI for every share of KMR you owned before the reorg. This is not a taxable transaction, and your cost basis in KMR becomes your cost basis in KMI. The only taxes due would be for cash received in lieu of fractional shares.

Kinder Morgan Management was always a quirky security. It paid its distribution in shares rather than cash and thus avoiding current-year taxes. It was also safe to hold Kinder Morgan Management in an IRA as it did not produce any unrelated business taxable income. Shareholders who previously held KMR in a taxable account will have to get accustomed to paying taxes on their new KMI dividends. But shareholders who previously held KMR in an IRA account will no new tax obligations at all.

One adjustment you might want to make, however, is instructing your broker to reinvest your KMI dividends if dividend compounding was a reason for your original ownership in KMR.

Holders of Kinder Morgan Energy Partners and El Paso Pipeline Partners
Here is where it gets complicated. In the case of both KMR and EPB, the conversion to KMI shares is deemed a “sale” in the eyes of the IRS regardless of whether you accepted KMI shares, cash or a combination of the two. Per Kinder Morgan investor relations, “The sum of the cash received and stock value received ($41.535 times KMI shares received) equals the deemed “sale price” of your partnership units.”

So, long-time investors in KMP and EPB may be looking at significant capital gains taxes due, particularly if accumulated depreciation lowered their cost basis. Additionally, some portion of your taxable gain will be considered ordinary income.

This sounds complicated, but your K1 package will have the information you need to sort it out. Look for the page titled “2014 Sales Worksheet” about halfway through the package. At the bottom of the page, you’ll have 11 boxes. The first three boxes should be prefilled with the number of units owned, the date you bought and the date you sold or converted your shares to KMI. Box 6 should also be prefilled with the adjustment to your cost basis from accumulated depreciation.

Now for the fun part. You can find the correct sales proceed amount for box 4 by looking at line L on the K1 statement. It will be the second-to-last line, “Withdrawals and distributions.”

You might need to dig through old statements to find your cost basis for box 5, or it might be included on the 1099 you received from your broker. It really depends on when you bought and who your broker is. But box 5 should be the original amount you paid for your KMP or EPD shares.

Bear with me…we’re almost done. To calculate box 8—“Total Gain/Loss”—you add boxes 5 and 6 together and subtract the total from box 4. (If box 6 has a negative value—and it should—it will have the effect of lowering your cost basis.)

We’re almost to the finish line. Subtract the value in box 9 from box 8, and put the result in box 10. This is your capital gain that should be reported on Schedule D of your 1040. The ordinary income reported in box 9 should be inputted into Line 10 of Form 4797, Part II.

If your head is spinning, don’t worry. I understand. But take the process step by step, and you’ll find it’s not quite as tedious as it first appears. And the good news is that you’ll never have to do this again. These will be the last K1s you ever receive from the Kinder Morgan companies!

One final note: If you owned KMP or EPB in an IRA or Roth IRA, none of this is necessary, as gains are not taxable. The only exception would be if you had $1000 or more of “unrelated business taxable income” in line 20. In this case, you would need to file a separate tax return for your IRA. If you find yourself in that situation, I would recommend hiring an accountant to take care of the paperwork for you. That gets into a level of complexity better left to the professionals.

Disclosures: Charles Sizemore is long KMI.

Note: This article was intended to explain in plain English the expected tax issues that you might face as an investor in the Kinder Morgan companies, but it is not specific tax advice. I am an investment adviser representative, not a CPA. If you have questions about your specific tax situation, you should consult your tax professional.

About the author:
Charles Sizemore
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, has been quoted in Barron’s Magazine and the Wall Street Journal, and has been published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures, and Options Magazine and The Daily Reckoning.


jfreemanJfreeman - 2 weeks ago
For KMP, you say the entry for Sales Worksheet box 4 comes from K-1 line L Withdrawals and Distributions. I believe this is incorrect, and the line L info is only a final accounting of your capital account after the sale, to bring your capital balance to 0. I believe box 4 entries must be calculated based on the FMV of KMI shares received in exchange + cash per share received. Do you agree?

jmoll7Jmoll7 - 2 weeks ago
I think Jfreeman is correct although I would prefer to be wrong. The instructions on the worksheet say "enter your Sales Proceeds (net of brokerage commissions) in column 4." Since my broker recorded this transaction as a sale of KMP, wouldn't column 4 just be the proceeds received?
I am confused by something else: according to the worksheet, my adjustments to tax basis grossly exceed my original purchase price. Is it possible to have a negative tax basis? I realize this is the US tax code but my common sense is troubled.

marlonmMarlonm - 1 week ago
I also agree that the statement in Mr. Sizemore's article, "You can find the correct sales proceed amount for box 4 by looking at line L on the K1 statement. It will be the second-to-last line, “Withdrawals and distributions.” is incorrect. This statement is in direct contradiction to the Sales Worksheet instructions in the KMP K1 which state "First enter your Sales Proceeds (net of brokerage commissions) in column 4". Column 4 is titled "Sales Proceeds".
And I share the question asked by Jmoll7 about having a negative basis. As a long time owner of KMP with a negative basis, I question the calculation methodology on Sales Worksheet 1 which would allow the additional Basis adjustments which exceed the original purchase price to be to added to the proceeds incurring additional taxable gains.

[Burke]

Thank you so much. I already did two of these, and I think they are correct. One note, though. I had one client who reinvested his distributions each quarter since he purchased it in 2009, and so there were all of those "adjustments" to basis notated on the schedule for each reinvestment. Just for kicks I added up all their figures,....which did NOT equal the total they had at the bottom! Oh, well, I was not about to get into that. I had spent enough time on it already. I have 2 more KM clients, one of which had two accounts, merged into one in 2014, then terminated in the liquidation. Hopefully all the basis adjs etc are for the combined units. Not to mention the other 17 LP's they sold. I frankly cannot see the advantage of these with all the recapture, reduction in basis, etc, except for the clientele who are in a high tax bracket. Not the elderly, who have no concept as to what they are in the first place, who all seem to have them in droves if they have an investment brokerage account. Think of the Social Security drag-in, etc....