10-86 plan – Little-known Loophole Could Triple Investing Income
So what are they talking about, 10-86 plans, little known tax loophole, 10-86 payback plans, 10-86 loophole, gas pump revenge, 10-86 gas pump payback plans and what does it have to do with Ronald Regan? What is a 10-86 plan?
In short Energy MLP ‘s (Master Limited Partnerships). When people talk about Reagan’s secret taxpayer loophole they are going back to the Tax Reform Act of 1986 and the tax benefits set up for real estate related items of which oil and gas actually falls into. (watch the video below)
MLPs are investments that offer high yield and mix the tax “loophole” benefits of an LP (limited partnership) with the liquidity of an exchange listed common stock. MLPs have the structure of LPs but offer investment units that trade on an exchange. You could actually buy the units through your regular brokerage account. Because of the Tax Reform Act of 1986 put forth by the Reagan administration MLPs were formed around the energy sector, pipeline ownership in particular. But in order to qualify the MLP must derive 90% of its income from activities related to commodities, natural resources or real estate. Most MLPs trade on the large exchanges such as NYSE and NASDAQ and relate to US oil and gas infrastructure.
In an MLP, instead of paying a corporate income tax, the tax liability of the entity is passed on to its unitholders.
Energy MLP are highly attractive for a couple reason:
The cash distributions made are not treated like dividends, you don’t get taxed when you receive them, but are considered to reduce the cost basis of your investment, this liability is deferred until you sell your units of the MLP.
Because of the “loophole” in the Tax Reform Act of 1986 related to oil and gas production, transportation and storage, these MLPs are able to claim significant depreciation against any income. In essence, you as an MPL unit get taxed on a much lower percentage of your cash distribution.
As entities that distribute the majority of their cash flow to shareholders, MLPs don’t have to pay taxes at the company level, which greatly lowers their cost of capital.
Below are some examples of Energy MLPs:
|Alliance Resource Partners||Coal||ARLP|
|Amerigas Partners||Propane Marketing||APU|
|Atlas Pipeline Partners||Natural Gas Pipelines||APL|
|Boardwalk Pipeline Partners||Natural Gas Pipelines||BWP|
|Buckeye Partners||Refined Product Pipeline||BPL|
|Chesapeake Midstream Partners||Natural Gas Pipelines||CHKM|
|Cheniere Energy Partners||Natural Gas Midstream||CQP|
|Crestwood Midstream||Midstream Natural Gas||CMLP|
|Crosstex Energy||Natural Gas Pipelines||XTEX|
|DCP Midstream Partners||Nat Gas Pipeline/Prc||DPM|
|Dorchester Minerals||Oil and Gas Production||DMLP|
|Eagle Rock Energy Partners||Natural Gas Prod, Pipel||EROC|
|Enbridge Energy Partners||Oil/Gas Pipelines||EEP|
|Energy Transfer Partners||Natural Gas Pipelines||ETP|
|Ferrellgas Partners||Propane Marketing||FGP|
|Genesis Energy Partners||Oil/Gas Pipelines||GEL|
|Global Partners||Oil & Gas Marketing||GLP|
|Holly Energy Partners||Crude & Refined Pipel||HEP|
|K-Sea Transportation Partners||Tank & Tug Boats||KSP|
|Kinder Morgan Energy Partners||Pipelines/Storage||KMP|
|Magellan Midstream Partners||Crude & Refined Pipel||MMP|
|Markwest Energy Partners||Natural Gas Pipelines||MWE|
|Natural Resource Partners||Coal||NRP|
|Niska Gas Storage Partners LLC||Natural Gas Storage||NKA|
|Nustar Energy Partners||Oil Pipelines||NS|
|Oneok Partners||Natural Gas Pipelines||OKS|
|Plains All American Pipeline||Oil/Gas Pipelines||PAA|
|Star Gas Partners||Heating Oil||SGU|
|Suburban Propane Partners||Fuel Distribution||SPH|
|Sunoco Logistic Partners||Crude & Refined Pipel||SXL|
|TC Pipelines||Natural Gas Pipelines||TCLP|
|Transmontaigne Partners||Refined Product Storage||TLP|
|Williams Partners||Natural Gas Pipelines||WPZ|
The following process was laid out by Harry Domash’s Dividend Detective for finding MPL pipeline operators:
Screening is the best way to find worthwhile MLP candidates. If you’re not familiar with the term, stock screeners are programs available on financial sites that you can use to search the entire market for stocks meeting your particular requirements.
Yahoo’s Basic Stock Screener is the only free screener I know of that can search specifically for pipeline operators.
Set Up Your Screen
Once there, click on “Oil & Gas Pipelines” in the Industry Selection box to confine your search to stocks in that category. Next, specify your minimum acceptable dividend yield. I set my minimum at 5% because that is well above current CD rates. Try lowering it to 4% if you want to see more stocks.
Your best prospects are MLPs that are growing earnings, and hence distributions. Stock analysts generally forecast the next five year’s average annual earnings growth rate for stocks that they cover. Yahoo lets you screen on consensus (average) five-year earnings growth forecasts. I selected 5% minimum, which is good for high dividend stocks.
Analysts usually publish buy, sell, or hold ratings on stocks that they cover. Those ratings are based mostly on earnings growth expectations, not dividend safety or expected dividend growth, which would be of more value to us. Thus, I reasoned that as long as analysts aren’t advising selling a stock, it’s a viable candidate. I required “Hold Rating or better” for average analyst recommendation.
According to the settings above (at this time), the screener popped up with 2 symbols (NYSE: EPB) El Paso Pipeline Partners LP Co showing a 5.4% dividend yield and a 31.6% analyst estimated 5 year growth, and (NYSE: NGLS) Targa Resources Partners LP Co which shows a 6.9% dividend yield and 16.6% analyst estimated 5 year growth.
As the case for all screens, consider the results as candidates for further research, not a buy list.
The video below is an example of how Felken Filmer uses the Yahoo Stock Screener to find mutual funds. This is very close to how you would identify MLPs and he goes over some additional techniques for identification later on in the video. It’s a good introduction into decision making techniques based on dude diligence methods.
You can’t analyze an MLP the same as you would a regular stock. MLPs own lots of assets that result in large depreciation charges that subtract from reported earnings, but don’t affect the cash flow that fuels distributions. Your best prospects are MLPs with a strong distribution growth history and plenty of pipeline construction projects underway.
You can learn about an MLP’s expansion plans by reading the management summary portions of their quarterly and annual reports. You can see the SEC reports on Yahoo by selecting SEC Filings and then looking for reports labeled 10-Q (quarterly) and 10-K (annual). Once you’ve found a report, select Summary to read the management’s discussion.
Ronald Reagan and the Modern MLP
So what does Ronald Reagan have to do with the MLP ( Master Limited Partnership)? Well it was during the Reagan era that the Tax Reform Act of 1986 occurred, which directly attributes to the structure of the modern MLP due to the tax benefits enveloped within its passing.
Whether these tax benefits are actually a loophole or they were intended doesn’t matter in the eyes of someone trying to profit from it. It seems to us, that the “little known tax loophole” was intentionally created to stimulate growth in this sector. Or as conspiracy theorists say, to help the rich get richer. But the fact remains that you too can participate in a MLP.
Now are these “loopholes” actually “little known”? If you have ever been pitched a partnership in the drilling of an oil and gas well, you will have heard all about these benefits. Tangible and intangible write offs etc…coming from direct ownership of the preparation and drilling of a well. The biggest problem occurs when the well itself doesn’t actually produce any oil.
Can this “little known loophole triple your investment”? Well sure, if you chose the right MLP. Do you need a “guru” to tell you which one? Maybe. Can you find some good energy MLP on your own? Absolutely. It takes time, thought and research and a thing called due diligence. Some people will put more research into what TV or DVD player they want to buy vs making an investment decision. If you happen to find a “guru” that can tell you how to make money, all the better for you, it makes your life easier. But in the meantime, keep reading, studying and learning how to make money in the stock market.
Lacing your portfolio with the top high yield dividend companies is one of the most crucial aspects of retirement building. Free tools can only take you so far, but they can give you a good start. However, if it were really that easy then everyone would be a fund manger eh? If you are unsure of your research, one of the better, more affordable services is the Dividend Stocks Online. If you want to keep up on the latest and greatest dividend stocks, or even monitor and compare the stocks in your long term portfolio then check out Dividend Stocks Online.
Alternatively if you are heavy into oil and gas investing, EVERYTHING you need to know is at Oil and Gas Investor, click the banner below to check them out:
If you have found this article useful, please share it by using one of the options below. Or google plus us above.
Originally posted 2011-10-01 12:19:52.