Scary MLPs

[bingybear]

I've been reading up on MLPs and finding some info that is a little unsettling.
I'm not real concerned with "return of capital" or the recapture when selling, but other thing I've read online.

For example phantom income that can create taxes

Phantom Income and the Problem of Character Mismatch to Partners
MLP investors are familiar with the concept of a “tax shield,” which is often associated with an investment in MLP common units. As partners in an MLP, common unitholders receive allocations of income, gain, loss and deduction with respect to their units. Non-cash deductions, such as depreciation and depletion, often lower the net income allocated to these unitholders to an amount less — in many cases substantially less — than the cash distributed to them. These “excess” cash distributions instead reduce a unitholder’s basis in his or her units, effectively resulting in tax deferral. But, just as non-cash deductions can defer a current tax liability, non-cash income can accelerate it, creating “phantom income.” Simply put, phantom income results in a cash tax liability without a sufficient distribution of cash with which to pay the tax bill. When a partnership has non-cash income, such as CODI, the partners are allocated phantom income. Although the partners receive additional basis in their partnership interests as a result of the income allocation, they often cannot offset the CODI, even if they were to sell their partnership interests at a loss, due to the character mismatch — the CODI is generally ordinary income whereas the loss is generally a capital loss, and capital losses can only offset capital gains.

Other liabilities

MLPs make distributions that are similar to dividends, and these are generally paid out on a quarterlybasis. It is important to note that cash distributions are not guaranteed, and every unitholder is responsible for the taxes on his or her proportionate share of income, even if the MLP does not pay a cash distribution.
Although unitholders are generally limited in their liability, similar to a corporation's shareholders, creditors typically have the right to seek the return of distributions made to unitholders if the liability in question arose before the distribution was paid. This liability stays attached to the unitholder even after he or she sells the units.

These are not the only sources. I seen similar info to some of these in articles from AAII and information from other sources.

What "scary" things exist that are not seen with typical purchase of common stock. Sure the value can go to zero, but what else is there that could make this a nightmare investment? I'm assuming what I quoted above is true, but if not I'd like to know. And if it is true, are there limits to how much it can pull from you?

 

[haha]

I've been reading up on MLPs and finding some info that is a little unsettling.
I'm not real concerned with "return of capital" or the recapture when selling, but other thing I've read online.

For example phantom income that can create taxes


Other liabilities


These are not the only sources. I seen similar info to some of these in articles from AAII and information from other sources.

What "scary" things exist that are not seen with typical purchase of common stock. Sure the value can go to zero, but what else is there that could make this a nightmare investment? I'm assuming what I quoted above is true, but if not I'd like to know. And if it is true, are there limits to how much it can pull from you?

It is certainly theoretically true, by the nature of pass through ownership. But I am into my 10th year of owning 3 MLPs , and I have not encountered this.

Ha