|ENTERPRISE PRODUCTS PARTNERS L P filed this Form 8-K on 03/06/2018|
If we were taxable as a corporation in any taxable year, either as a result of a failure to meet the Qualifying Income Exception or otherwise, our items of income, gain, loss and deduction would be reflected only on our tax return rather than being passed through to the unitholders, and our net income would be taxed to us at corporate rates. In addition, any distribution made to a unitholder would be treated as taxable dividend income, to the extent of our current and accumulated earnings and profits, or, in the absence of earnings and profits, a nontaxable return of capital, to the extent of the unitholders tax basis in his common units, or taxable capital gain, after the unitholders tax basis in his common units is reduced to zero. Accordingly, taxation as a corporation would result in a material reduction in our cash available for distribution to unitholders and thus would likely result in a substantial reduction of the value of the common units.
The discussion below is based on Sidley Austin LLPs opinion that we will be classified as a partnership for U.S. federal income tax purposes.
Tax Consequences of Common Unit Ownership
Limited Partner Status. Unitholders of the Partnership who are admitted as limited partners will be treated as partners of the Partnership for U.S. federal income tax purposes. Unitholders whose common units are held in street name or by a nominee and who have the right to direct the nominee in the exercise of all substantive rights attendant to the ownership of their common units, will be treated as partners of Enterprise Products Partners L.P. for U.S. federal income tax purposes.
As there is no direct or indirect controlling authority addressing assignees of common units who are entitled to execute and deliver transfer applications and thereby become entitled to direct the exercise of attendant rights, but who fail to execute and deliver transfer applications, Sidley Austin LLPs opinion does not extend to these persons. Furthermore, a purchaser or other transferee of common units who does not execute and deliver a transfer application may not receive some federal income tax information or reports furnished to record holders of common units unless the common units are held in a nominee or street name account and the nominee or broker has executed and delivered a transfer application for those common units. In addition, a beneficial owner of common units whose units are the subject of a securities loan would appear to lose his status as a partner with respect to those common units for U.S. federal income tax purposes. Please read Tax Consequences of Common Unit OwnershipTreatment of Securities Loans.
Items of our income, gain, loss or deduction would not appear to be reportable by a unitholder who is not a partner for U.S. federal income tax purposes, and any cash distributions received by a unitholder who is not a partner for U.S. federal income tax purposes would therefore appear to be fully taxable as ordinary income. These unitholders are urged to consult their tax advisors with respect to the tax consequences to them of holding common units in Enterprise Products Partners L.P.
The references to unitholders in the discussion that follows are to persons who are treated as partners in Enterprise Products Partners L.P. for U.S. federal income tax purposes.
Flow-through of Taxable Income. Subject to the discussion below under Entity-Level Collections and Administrative MattersInformation Returns and Audit Procedures, we will not pay any U.S. federal income tax. Instead, each unitholder is required to report on his income tax return his share of our income, gains, losses and deductions for our taxable year or years ending with or within his taxable year, without regard to whether we make cash distributions to him. Consequently, we may allocate income to a unitholder even if he has not received a cash distribution. Our taxable year ends on December 31.
Treatment of Distributions. Distributions by us to a unitholder generally will not be taxable to the unitholder for U.S. federal income tax purposes, except to the extent the amount of any such cash distribution exceeds his tax basis in his common units immediately before the distribution. Cash distributions in excess of a unitholders tax basis in his common units generally will be treated as amounts realized from the sale or exchange of the common units, taxable in accordance with the rules described under Disposition of Common Units below. Any reduction in a unitholders share of our liabilities for which no partner bears the economic risk of loss, known as nonrecourse liabilities, will be treated as a distribution of cash to that unitholder. To the extent our distributions cause a unitholders at risk amount to be less than zero at the end of any taxable year, the unitholder must recapture any losses deducted in previous years. Please read Limitations on Deductibility of Losses.