Master Limited Partnerships: , L A View From Their 1986 Tax Returns 

Susan Nelson 

U. S. Treasury Department 

and 

Joann Martens 

Harvard University

OTA Paper 63 May 1989 

OTA Papers and Briefs are circulated so that the preliminary findings of tax research conducted 

by staff members and others associated with the Office of Tax Analysis may reach a wider 

audience. The views expressed are those of the author(s), and do not reflect Treasury policy. 

Comments are invited. but OTA Papers and Briefs should not be quoted without permission from 

the author(s). Additional copies of this publication may be purchased from the National 

Technical information Service, 5285 Port Royal Road, Springfield, Virginia 22 16 1. Phone: 

(707) 487-4660. 

Office of Tax Analysis 

U.S. Treasury Department, Room 4040 

Washington, D.C. 20220 

The authors are indebted to Gail Moglin of IRS' Statistics of Income and her contacts in 

IRS field offices for collecting tax returns of master limited partnerships; to Gordon Wilson 

for his usual invaluable programming assistance; to Laura Donnelly and Ronald Rhodes for 

research assistance: and to Donna Harrell for her cheerful help in preparing the manuscript. 

The authors are also grateful to Bryan Collins. Geraldine Gerardi, Thomas Neubig. and 

participants in OTA's Work in Progress Seminar for comments on earlier drafts. The views 

expressed in this paper are those of the authors and do not necessarily reflect those of the 

Treasury Department. 
MASTER LIMITED PARTNERSHIPS: A VIEW FROM THEIR 1986 TAX RETURNS 

Contents 

Page 

C 

1. Introduction: Purpose and Overview of the Paper 

A. Purpose 1 

B. Overview of the Paper 2 

11. A Tax Return Perspective on MLPs 

A. Consolidated Basis 4 

B. Duplicated Basis 6 

111. Resemblance: MLPs Compared to Partnerships and Corporations 

A. All Partnerships 9 

B. Corporations 12 

C. Averages 14 

I\ Economic Efficiency Considerations of Tax Treatmen. of MLPs 15 

V. MLP Income for Tax Purposes 20 

VI. Suininaiy and Conclusion 23 

ENDNOTES 25 
-- 

-- 

TABLES 

Table I Income and Balance Sheet Items of MLPs on a Consolidated 

Basis by Industry 1986 

Table 2 Income and Balance Sheet Items of MLPs on a Duplicated Basis 

by Industry 1986 

Table 3A Income and Balance Sheet Items of All Partnerships in 1986, 

by Industry 

Table 3B Income and Balance Sheet Items of Limited Partnerships 

in 1986. by Industry 

Table 4 Selected Income and Balance Sheet Items of Nonfinancial 

Corporations in 1986, By Industry 

Table 5 Percentage Distributions of Assets and MLPs, Partnerships, 

and Nonfinancial Corporations ( 1985) by Asset Size 

Table 6A Debt/Equity Ratios of MLPs, Partnerships (1986) and 

Nonfinancial Corporations (1 985) by Industry 

Table 6B Distributions and Withdrawals by MLPs, All Partnerships (1986). 

and Nonfinancial Corporations ( 1985). by Industry 

Table 7 Derivation of Income for Tax Purposes of MLPs and All 

Partnerships by Industry. 1986 

Page 

5 

8 

10 

II 

13 

14 

17 

18 

21 
MASTER LIMITED PARTNERSHIPS: 

A VIEW FROM THEIR 1986 TAX RETURNS 

I. Introduction: Purpose and Overview of the Paper 

. A. Purpose 

A new form of business organization emerged in 198 1, the master limited partnership, or MLP. 

Master limited partnership is the term applied to limited partnerships traded on organized 

securities exchanges. MLPs appear to have many of the characteristics of corporations. but they 

generally have been determined to be partnerships for tax purposes. Until December, 1987, 

Federal tax law treated all MLPs as partnerships, and. as such, the corporate income tax did not 

apply to them. With the passage of the Omnibus Budget Reconciliation Act of 1987 (OBRA). 

certain publicly traded partnerships (PTPs), including some master limited partnerships, became 

1 subject to the corporate tax. While that legislation resolved for the moment the uncertainty 

over the tax treatment of MLPs and other PTPs, it raised new questions about how the line should 

be drawn between "publicly traded" and "not publicly traded" for tax purposes. It also kept 

alive the debate on the appropriate tax status of MLPs and other publicly traded partnerships. 

A number of factors should be considered in determining "appropriate" tax treatment of PTPs. 

including the similarities between the entities and corporations, economic efficiency. and, in 

the era of Gramm-Rudman, Federal tax revenue. A major purpose of this paper is to contribute to 

that continuing debate by presenting new evidence on those factors from an examination of tax 

returns for 72 MLPs in 1986.2 

Most discussions of the proper tax treatment of master limited partnerships have relied on 

publicly available financial reports, such as those published by Standard and Poors. for data on 

income and financial structure. For this paper. however.' we examined confidential Internal 

Revenue Service (IRS) tax returns. These returns provide similar types of information. but on a 

tax reporting basis. Thus, the figures from the two sources often differ for a number of 

3 

reasons, including differences between financial and tax accounting rules. For some purposes. 
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such as judging the income potential or cash flow of an MLP as an investment vehicle, the 

financial accounting data available in the firm’s annual report might be appropriate. 

Conversely, if a corporation were interested in creating an MLP, the tax data would be relevant 

for determining the income for tax purposes of the partnership and of the partners. Similarly, 

data from tax returns provide more direct evidence for considerations of tax policy towards 

MLPs. 

B. Overview of the Paper 

Section I1 presents the data from MLP tax returns on which analyses in the following 

sections are based. Tables show the aggregate income and balance sheet information from the MLP 

returns by major industry in a format similar to the tables published by IRS Statistics of 

Income (SOI)on partnership and corporate returns. 

Sections I11 through V employ the tax return data to answer questions related to the 

appropriate tax treatment of MLPs. Section I11 first quantifies the resemblance between MLPs 

and other partnerships, and then between MLPs and Corporations. It provides a sense of whether 

MLPS are financially more like one type of entity than the other, and a perspective on the size 

of the MLP sector relative to the partnership and corporate sectors. 

Section IV turns to the implications for economic efficiency of taxing MLPs as corporations. 

Although partnership taxation of MLPs is often supported as an offset to some of the distortions 

caused by the corporate income tax, other distortions might be reduced by treating a 

corporate-like entity as a taxable corporation. Section IV discusses these claims and presents 

data related to them. 

Section V presents data directly related to the tax consequences of MLPs to answer the 

following questions: What was the bottom line income and loss for tax purposes for MLPs and 

their partners in 1986, including items of income and expense not usually tabulated by SOI? How 

much in tax preferences did MLPs generate? Is this share of income higher or lower than for 

other non-traded limited partnerships? (1.e.. do MLPs disproportionately generate tax 

preferences?) 
-- -- 

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Section VI presents a summary and conclusions. 

11. A Tax Return Perspective on MLPs 

The tax return data that we examined came from two sources: copies of the actual paper 

returns plus attachments filed by MLPs with the Internal Revenue Service, and computer records 

of MLPs appearing on the Partnership SO1 file for 1986. Some MLPs appeared in one source but 

not the other, and many appeared in both. The paper returns frequently provided information not 

included in the SO1 file, such as deductible amounts for intangible drilling costs and potential 

depletion allowances, which enabled us to improve our analysis of the MLPs tax position. 

A number of MLPs, particularly in the oil and gas industry, technically derive their income 

as a limited partner in an operating partnership (OP) that runs the business. A corporation is 

virtually always the general partner of both the MLP and the operating partnership. Because the 

two entities are legally separate, both the MLP and the operating partnership file tax returns. 

Thus, to the extent that the income and assets reported by the MLP are, in fact. the income and 

assets of the operating partnership. aggregate partnership tax statistics represent a double 

counting of the economic activity and resources residing in partnerships. The tax retum of the 

operating partnership reflects the structure of the economic activity from which the MLP derives 

its income the debt structure. the types of deductions, and the sources of income whereas 

the tax return of the MLP generally reflects only its share of net income and assets. For 

example. the revenues and expenses associated with oil drilling operations would be reported on 

the operating partnership's tax return, while the MLP would show only income received from the 

OP on its tax retum. 

To provide an accurate picture of the MLP's and the OP's operations. we created a new 

"consolidated" retum for the entity when information supplied on the paper retum enabled us to 

identify both the operating partnership and the MLP. This consolidated return essentially sees 

through the extra partnership layer, eliminating double counting of the two partnerships while 

recognizing that the MLP may have assets. revenue. and expenses of its own that are separate 

from the operating partnership. As a result, the consolidated retum reflects the tax posture 
-- 

-- 

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of the economic activity more accurately than the MLPs return does. However, the duplicated 

basis more closely reflects the data reported by SO1 and used publicly. Our analysis, 

therefore. discusses the MLP sector on both a consolidated and a duplicated basis. 

A. Consolidated Basis 

Table 1 draws the tax return picture of income and balance sheet items that emerges when 

MLPs are consolidated with their operating partnerships. Tax returns for 1986 were available 

for 72 MLPs and/or their operating partnerships, out of a total of 81 MLPs we identified as 

4

having been listed on a stock exchange by the end of that year. Of the 30 MLPs which operated 

through an operating partnership, we were able to consolidate the returns of 16 MLPs with their 

OPs. In the remaining 14 cases. data for both returns were not available. The data in Table 1 

are similar to that reported by Statistics of Income for all partnerships and corporations. 

Data are displayed separately for five industry groupings in which MLPs appear: oil and gas; 

real estate operators and lessors: other holding and investment companies; agriculture, 

forestry. and timberhumber; and ”all other” which includes MLPs in motion pictures, cable 

television. water transport, health, and construction. 

Several points may be noted from Table 1. 

’ MLPs average nearly 10,000 partners. Oil and gas MLPs have a substantially higher 

average number of partners 18,000. Excluding the oil and gas MLPs, the average 

number of partners is closer to 4,000. Both of these figures are well over the average 

number of partners 9 -- in partnerships as a whole. The large number of partners is 

one of the distinguishing characteristics of MLPs. 

O MLPs in oil and gas dwarfed MLPs in other industries in financial respects as well as in 

number of partners: in gross income, net income. and assets. 

O Gross profits from business operations is the largest source of income to the economic 

entity behind MLPs. Interest and dividends are the next most important source of income 

on average. Rental income is important in real estate while income from other 

partnerships is important in oil and gas. 
-3-

Table 1. IRCOHE ARD BALARCE SHEET ITEMS OF HLPS ON A CONSOLIDATED BASIS BY IRDUSTRY - 1986 

Income from other P/S 1 

50.3 46.1 7.7 (0.0) (0.1) (3.4) 

Gross Rental Income 51.6 1.4 36.7 0.0 10.7 2.7 

Net Rental (+/-I 18.4 1.4 7.2 0.0 10.5 (0.8) 

Taxable Interest & 

Dividends 125.2 34.0 19.2 49.1 19.0 3.9 

Other 1065 Income 85.9 39.4 8.5 16.8 9.4 11.8 

Total Deductions2 1,716.2 1,407.4 81.7 21.9 119.3 85.9 

Salaries & Wages 51.3 22.6 13.2- 7.8 6.7 1.1 

Total Int. Deduction 123.8 99.7 10.8 0.0 6.9 6.2 

Depreciation 329.3 284.9 11.1 0.8 6.5 26.0 

Other Deductions 1,161.6 971.7 29.6 12.5 98.9 49.1 

Other Rental Expenses 18.3 0.0 14.7 0.0 0.2 3.5 

Guaranteed Payments 31.9 28.5 2.3 0.8 0.2 0.0 

Net Income (less Deficit) 407.2 355.1 25.6 65.5 (47.5) 8.4 

Net Income 720.2 584.6 32.5 66.9 19.4 16.8 

Deficit (313.O) (229.4) (6.9) (1.4) (66.8) (8.4) 

DISTRIBUTIVE SHARE ITEMS 

TOTAL 138.0 (46.4) 21.4 11.9 154.3 (3.4) 

Net Short-Term Gain/Loss 13.9 9.2 0.0 4.6 0.0 0.0 

Net Long-Term Gain/Loss 15.1 5.1 2.2 7.1 0.8 0.0 

Net Sec.1231 Gain/loss 125.3 (53.0) 24.2 0.2 153.8 0.2 

other Income 27.6 27.9 0.0 0.0 (0.3) 0.0 

Investment Interest Exp. 19.6 12.6 3.8 0.0 0.0 3.2 

Other Deductions 24.5 23.0 1.2 0.0 0.0 0.4 

BALANCE SHEET ITEMS 

Total Assets 17,268.3 10,038.5 2,016.7 1,095.6 1,682.7 2,434.7 

Total Liabilities 7,383.7 5,090.7 1,126.7 86.7 186.2 893,4 

Partners' Capital Account 9,884.6 4,947.8 890.0 1,009.0 1,496.5 1,541.3 

Debt/Equity Ratio 0.75 1.03 1.27 0.09 0.12 0. 58 

: All MLPs : OIL &GAS : REAL : HOLDING : AGRICULTURE : OTHER 

: ESTATE : L OTHER : FORESTRY, : 

: INVESTMENT: & LUMBER : 

(Dollar Amounts in Millions) 

Number of Partnerships 72 29 14 10 6 13 

Number of Partners 704971 533727 41352 76447 21679 31766 

Average Partners 9791 18404 2954 7645 3613 2444 

INCOME FROM FORM 1065 

Total Receipts 2,123.2 1,762.5 107.2 87.2 71.7 94.2 

Gross Profits1 

1,810.2 1,641.6 35.1 21.3 32.7 79.3 

1/ Income from other partnerships excludes income of MLPs for which an OP - is clearly missing, and allocates the income to gross profits. 

-2/ Components include rental expenses in relevant categories 

SOURCE: Unpublished tax return data. 
-6-

O Depreciation deductions are nearly three times as large as interest deductions for MLPs 

in general because of the oil and gas MLPs. In real estate, however, depreciation and 

interest deductions are about equally important. For all types of MLPs. the largest 

expense category is the uninformative "other". 

Ordinary income exceeds deficits in all industries except agriculture. et al. MLPs 

indeed generally appear profitable. 

Table I goes beyond the partnerships' ordinary income shared among all partners and examines 

the "Distributive Share Items" of income and expense which are reported to individual partners 

on their K-l tax forms and subject to Federal tax treatment at the partner level (to the extent 

that the partner is not another partnership). Generally these items are not reflected in either 

Sol's standard reports on partnerships or in published measures of partnership income. even 

though they are clearly components of the economic activity and of the income for tax purposes 

5 generated by partnerships. The distributive share items indicate that capital gains, including 

Section 1231 gains on assets used in the course of business, are a significant source of income 

for many MLPs. The agriculture, forestry, and lumber industry provides a striking example of 

this discrepancy. This group shows a net loss in terms of ordinary income of $47 million but 

reports a net gain of $153 million in Section 1231 assets. On the other hand, for the oil and 

gas industry. ordinary income ignores net losses registered on Section I23 1 assets. Therefore. 

focusing on ordinary income can present a distorted view of the income generated. Section V 

discusses this issue of the income measure at greater length. 

Table 1 also shows that the 72 MLPs examined for 1986 had total assets (reported at book 

value) of $17 billion and total liabilities of $7 billion on an entity basis. Overall the 

debt/equity ratio averaged about .75. ranging from a high of 1.27 among real estate MLPs to a 

low of .09 among holding and investment company MLPs. 

B. Duplicated Basis 

If we treat the MLPs and the operating partnerships as separate entities, the MLP sector 

appears somewhat larger in terms of total assets and income, although liabilities remain 
-7-

unchanged. To the extent that tax returns were available for both the MLP and the operating 

partnership. Table 2 presents the income and balance sheet data on MLPs on a duplicated basis as 

6 they would be reported in SOI's partnership tables. This approach allows a more consistent 

comparison with the partnership sector as a whole. With its double counting, Table 2 shows 

higher net income before deficit ($774.5 million compared to $720.2 million). greater loss 

($501.8 million compared to $3 13 million in deficit). and more in assets ($22.4 billion vs $17.3 

billion) than did Table 1 with its consolidated approach. (The differences would be even 

greater if the operating partnerships for which returns were unavailable were counted.) The 

excess of the duplicated amounts (Table 2) over the consolidated amounts (Table I) is 

concentrated in the oil and gas industry, where the operating partnership-MLP structure is most 

common. and in agriculture. forestry, and lumber where Section I23 1 gains are most prevalent. 

The financial structure of MLPs. as well as their size. differs in two ways on a duplicated 

basis. The debt/equity ratio notably falls from 0.75 on a consolidated basis to 0.49 on a 

duplicated basis. For oil and gas. it drops nearly by half, falling from 1.03 to 0.58. On a 

duplicated basis MLPs appear to be less leveraged than on a consolidated basis because the 

operating partnerships. not the associated MLPs, undertake the debt involved in the economic 

activity. Secondly, MLPs appear to depend more heavily on income from other partnerships on a 

duplicated than a consolidated basis, because the former approach counts the payments. both 

gains and losses. from an operating partnership to its MLP as "income from other 

partnerships. " 

111. Resemblance: MLPs Compared to Partnerships and Corporations 

A central issue in the debate on the appropriate taxation of MLPs is the extent to which 

they are more like partnerships than like corporations. The comparison has generally been macle 

in terms of the six legal characteristics of a corporation: associates. business and 

profit-oriented. continuity of life. centralization of management. limited liability. and free 

transferability of interests. If a legal determination concludes that an entity has three or 

more corporate characteristics. it will be taxed as a corporation. A financial comparison adds 

another dimension to the calculation of similarities. especially because debt is tax-favored 

relative to equity at the corporate level. 
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Table 2. INCOME AND BALANCE SHEET ITEM OF HLPS ON A DUPLICATED BASIS1 

BY INDUSTRY 1986 

:ALL MLPs:OIL &GAS: REAL :HOLDING :AGRICULTURE: OTHER 

:ESTATE :& OTHER :FORESTRY, : 

:INVESTMT:& LUMBER : 

(Dollar Amounts in Millions) 

Number of Partnerships 88 41 14 11 8 14 

Number of Partners 704971 533730 41352 76447 21679 31766 

Average Partners 8011 13018 2954 6950 2710 2269 

INCOME FROM FORM 1065 

Total Receipts 1988.8 1679.5 107.2 88.7 20.1 93.0 

Gross Profits 1,536.6 1,377.1 35.1 17.8 32.7 73.8 

Income from other P/S 189.5 227.6 7.7 5.0 (51.7) 0.9 

Gross rental income 51.6 1.4 36.7 0.0 10.8 2.7 

Net Rental (+/-) 18.4 1.4 7.2 0.0 10.5 (0.8) 

Nonqualif. Div & Int 125.2 34.0 19.2 49.1 19.0 3.9 

Other Income 85.9 39.4 8.5 16.8 9.4 11.8 

Total Deductions' 1,716.1 1,407.4 81.6 21.9 119.3 85.8 

Salaries & Wages 51.3 22.6 13.1 - 7.8 6.7 1.1 

Total Int. Deduction 123.8 99.7 11.0 0.0 6.9 6.2 

Depreciation 329.3 284.9 11.1 0.8 6.5 26.0 

Other Deductions 1,162.6 972.4 29.9 12.5 98.7 49.1 

Other Rental Expenses 18.2 0.0 14.5 0.0 0.2 3.5 

Guaranteed Payments 30.9 27.8 2.0 0.8 0.3 0.0 

Net Income (less Deficit) 272.7 272.1 25'. 6 66.9 (99.1) 7.2 

Net Income 774.5 637.5 32.5 68.3 19.4 16.8 

Deficit (501.8) (365.3) (6.9) (1.4) (118.5) (9.7) 

DISTRIBUTIVE SHARE ITEMS 

TOTAL 302.4 (62.3) 21.4 11.9 334.3 (2.8) 

Net Short-Term Gain/Loss 23.0 18.5 0.0 4.6 0.0 0.0 

Net Long-Term Gain/Loss 8.9 (1.0) 2.2 7.1 0.5 0.0 

Net Sec.1231 Gain/loss 308.7 (50.1) 24.2 0.2 334.4 (0.0) 

Other Income 36.7 36.6 0.0 0.0 (0.7) 0.8 

Investment Interest 32.0 25.0 3.8 0.0 0.0 3.2 

Other Deductions 42.8 41.2 1.2 0.0 0.0 0.4 

BALANCE SHEET ITEMS 

Total Assets 22,422.4 13,820.1 2,016.7 1,163.8 2,610.1 2,811.8 

Total Liabilities 7,383.7 5,090.7 1,126.7 86.1 186.2 893.4 

Partners' Capital 

Account 15,038.7 8,729.4 890.0 1,077.1 2,423.9 1,918.4 

Debt/Equity 0.49 0.58 1.27 0.08 0.08 0.47 

-

1/ Includes tax return data from the MLP and the operating partnership in 1 5

cases. 

-2/ Components include rental expenditures in appropriate categories. 

SOURCE: Unpublished tax return data. 
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A. All Partnerships 

Comparisons between either Table 1 or Table 2 and Tables 3A and 3B put MLPs into perspective 

within the partnership sector. Tables 3A and 3B present income and balance sheet data from the 

1986 partnership SO1 report for all partnerships and for limited partnerships. by the industry 

groupings used in Tables 1 and 2 above. The comparisons suggest that while MLPs represent a 

small piece of the overall partnership sector of the economy, they comprise a significant 

fq-wtion of limited partnerships in oil and gas. 

For example. in 1986 the MLPs examined for our study accounted for 4.6 percent of all 

partners. 1.6 percent of partnership assets. 1.0 percent of the net income. and 0.5 percent of 

the ordinary income deficit generated by partnerships (Table 3A). Among limited partnerships 

(Table 3B). MLPs were of course a more significant but still minor component. accounting for 7.2 

percent of the partners. 3.2 percent of the assets, 17.2 percent of partners' capital accounts. 

1.2 percent of liabilities. 4.6 percent of net income. and 1.0 percent of the net deficit. The 

aggregate statistics, however. obscure industry differentials. MLPs represent a major part of 

the economic activity and resources in the oil and gas industry. accounting for 25 percent of 

all assets held by partnerships and nearly half of the assets held in limited partnerships. 

Among limited partnerships in non-oil and gas industries. MLPs generally account for a tiny 

fraction of the resources, An exception is agriculture, forestry, and lumber, where the few 

MLPs have over half the partners' equity and a large fraction of total assets. 

MLPs differ in their financial characteristics from other limited partnerships in the same 

industries. Most importantly, they are substantially larger than other limited partnerships in 

terms of average assets and income or loss. The 87 MLPs and operating companies reflected in 

Table 2 had average assets over $250 million. compared to just $2.5 million for the average 

limited partnership. In addition, MLPs tend to have lower debt/equity ratios over all and on an 

industry by industry basis. The most striking contrast appears in the real estate industry. 

Real estate limited partnerships as a whole are so leveraged that they have negative capital 

accounts (past losses exceed their capital contributions). whereas MLPs in this industry have 

almost as much equity as debt. MLPs are also more apt to be profitable (on a tax basis) than 
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Table 3A. IRCOHE AlVD BALAHCE SEEET ITEMS OF ALL PARTNERSHIPS IN 1986, BY INDUSTRY 

:ALL :OIL & GAS :REAL :OTHER :AGRICULTURE: OTHER 

:ESTATE :HOLDING & :FORESTRY, : 

:INVESTMENT :& LUMBER : 

(Dollar Amounts in Millions) 

Number of Partnerships 1,702,952 48,821 602,166 104,000 149,427 798,538 

Number of Partners 15,301,345 2,275,079 6,549,423 1,399,829 657,372 4,419,642 

Average Partners 9 47 11 13 4 6 

INCOME 

Total Income - Form 1065 298,301 10,670 98,998 9,856 3,475 175,302 

Gross Profits 163,261 8,480 5,624 1,860 3,206 144,092 

Income from other Part (10,360) 285 (7,448) (610) (250) (2,337) 

Gross Rental Income 107,508 60 90,806 1,504 542 14,596 

Net Rental income (15,766) 37 (16,391) (88) 173 503 

Taxable Interest & 

Dividends 21,716 334 7,125 5,915 349 7,994 

Other 1065 Income 16,177 1,511 2,891 1,188 (372) 10,958 

Total Deductions 1/ 315,672 13,327 131,807 8,796 4,505 157,237 

Salaries & Wages 39,424 359 4,085 647 468 33,865 

Total Interest Deductions 69,090 826 43,919 .3,722 528 20,094 

Depreciation 55,976 3,928 30,334 838 783 20,094 

Other Rental Expenses 49,946 17 44,074 586 195 5,074 

Other Deductions 93,998 8,147 8,737 2,672 2,199 72,243 

Guaranteed Payments 7,238 51 658 331 331 5,867 

Net Income (Less Deficit) (17,371) (2,657) (32,809) 1,060 (1,029) 18,065 

Net Income 80,215 4,661 17,761 ' 5,757 2,852 49,185 

Deficit (97,586) (7,318) (50,570) (4,697) (3,882) (31,120) 

DISTRIBUTIVE SHARE ITEMS 

TOTAL 46,010 (653) 25,854 8,546 1,873 389 

Net long-term Gain/loss 27,954 (53) 13,420 6,635 985 c, 967 

1231 Gain/loss 26,984 (211) 21,185 1,673 757 3,581 

"Other" Ordinary Income 9,732 941 2,162 2,400 329 3,900 

Investment Interest 13,530 74 9,740 1,715 44 1,957 

Other Deductions 5,131 1,257 1,173 446 153 2,102 

BALANCE SHEET 

Total Assets 1,403,750 55,981 687,749 151,684 28,161 479,569 

Debt 1,115,121 18,730 675,822 80,701 20,596 379,813 

Partners' Capital Account 228,023 37,258 11,927 70,971 8,166 99,696 

Debt/Equity 5.16 0.50 56.66 1.14 2.52 3.81 

-1/ Components include rental expenses in appropriate categories. 

SOURCE: 1986 Partnership SOI, Internal Revenue Service. 
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Table 38. INCOHS AND BALANCE SEEET ITEMS OF LIMITED PARTNERSHIPS IN 1986, BY INDUSTRY 

:ALL :OIL & GAS :REAL :OTHER :AGRICULTURE: OTHER 

:ESTATE :HOLDING & :FORESTRY, : 

:INVESTMENT :& LUMBER : 

(Dollar Amounts in Millions) 

Number of Partnerships 273,076 17,395 139,506 28,071 9,221 78,883 

Number of Partners 9,814,343 1,966,632 4,797,033 945,754 278,270 1,826,654 

Average Partners 36' 113 34 34 30 23 

INCOME 

Total Income - Form 1065 88,695 4,621 45,805 5,619 (111) 32,761 

Gross Profits 30,496 3,550 2,186 1,028 381 23,351 

Income from other P/ships (7,347) 290 (5,115) \ 470) (267) (1,785) 

Gross Rental Income 49,623 14 43,893 589 35 5,093 

Net Rental income (18,468) 11 (17,932) (80) 15 (483) 

Taxable Interest & 

Dividends 11,038 194 3,662 3,842 116 3,223 

Other 1065 Income 4,885 573 1,180 630 (376) 2,878 

Total Deductions 1/ 124,212 4,956 72,506 5,689 847 40,214 

Salaries & Wages 8,811 49 2,084 533 64 6,081 

Total Interest Deductions 36,034 443 24,452 2,491 142 8,506 

Depreciation 25,731 922 17,202 319 200 7,090 

Other Rental Expenses 26,838 2 24,503 263 3 2,068 

Other Deductions 25,590 3,501 3,976 1,806 411 15,896 

Guaranteed Payments 1,208 39 289 279 28 573 

Net Income (Less Deficit) (35,517) (335) (26,700) (70) (959) (7,453) 

Net Income 16,752 1,949 5,778 2,715 164 6,145 

Deficit (52,269) (2,284) (32,478) (2,786) (1,123) (13,599) 

DISTRIBUTIVE SHARE ITEMS 

TOTAL 21,764 (875) 12,215 5,279 394 4,752 

Net long-term Gain/loss 14,102 (81) 7,458 4,035 29 2,661 

1231 Gain/loss 13,034 (205) 9,798 962 395 2,084 

"Other" Ordinary Income 3,155 53 503 1,246 12 1,341 

Investment Interest 7,018 29 5,165 813 36 975 

other Deductions 1,509 613 380 152 6 359 

BALANCE SHEET 

Total Assets 691,611 29,455 370,798 86,040 8,801 196,517 

Debt 604,351 11,247 379,288 38,809 4,626 170,381 

Partners' Capital Account 87,260 18,208 (8,490) 47,230 4,175 26,137 

Debt/Equity 6.93 0.62 -44.68 0.82 1.11 6.52 

-1/ Components include rental expenses in appropriate categories. 

SOURCE: 1986 Partnership SOI, Internal Revenue Service. 
-12-

other imited partnerships. Limited partnerships as a whole generated $3 of loss for every $I 

of net income, whereas MLPs produced only about 65 cents of loss for every $I of income. MLPs 

in real estate and other holding and investment companies stand out as being much more likely to 

generate profits than typical limited partnerships in those industries. 

B. Corporations 

The size of MLPs leads them to be compared frequently to corporations. Table 4 presents 

data for the corporate side of the comparison. using the most recently available corporate 

statistics from 1985. The MLP data on a consolidated basis from Table 1 are appropriate for the 

MLP side of the comparison because this approach reflects the substance of the economic unit, 

not the legal form of the entity. 

MLPs in the aggregate are substantially smaller relative to the whole corporate sector than 

they are relative to the partnership sector. Total MLP assets of $17 billion in 1986 amount to 

only 0.3 percent of total assets in nonfinancial corporations of $6 trillion in 1985.’ MLP net 

income of $720 million was equivalent to only 0.2 percent of corporate net income of $321 

billion. 

In the aggregate. MLPs appear to be slightly less profitable than are corporations. in terms 

of tax loss generated per dollar of gain and net income less deficit relative to total assets. 

Corporations showed deficits of 31 cents for every dollar of gain, compared to 43 cents of loss 

per dollar of gain for MLPs, and net income less deficit of 3.4 percent of assets for 

corporations and 2.4 percent for MLPs. On an industry basis, however, MLPs generally appear 

more profitable, with a higher ratio of tax gains to losses, than are corporations in oil and 

gas. real estate, and other holding and investment companies.8 

MLPs also differ from corporations in their debt/equity structures. With the tax incentives 

for corporate debt. corporations are more highly leveraged than MLPs. overall and on an industry 

by industry basis. However. MLP debt/equity ratios are closer to the corporate ratios than they 

are to the comparable ratios for partnerships. The overall debt/equity ratio for MLPs is 0.75. 
- 13 -

Table 4. SELECTED INCOlIE ARD WCE SREET ITEMS OF AOAPIHAACIAL CORPORATIOllS IA 1985, BY INDUSTRY 

:NONFINANCIAL :OIL &GAS :REAL :HOLDING :AGRICULTURE: OTHER 

:CORPORATIONS : :ESTATE :& OTHER :FORESTRY & : 

:(+REAL EST. &: :INVESTMENT :LUMBER 

:HOLDING COS) : :COMPANIES : 

Number of Corporations 2,948,485.0 33,635 144,266 45,4 103,156 2,621,996 

Dollar amounts in millions) 

INCOME 

Total Receipts A/ 7,371,209.8 102,855.0 30,264.2 124,416 70,383.8 7,037,652.4 

Business Receipts 6,946,746.5 90,259.4 16,989.1 62,212 65,419.4 6,711,866 

Interest 127,678.9 2,710.0 1,689.9 34,333 642.2 88,303 

Rents 70,423.9 448.6 8,194.7 1,649.2 471.4 59,660 

Dividends, Domestic & Foreign 31,681.7 1,485.5 176.1 2,536.1 92.5 27,391.5 

Net Gains, LT & ST ?/ 57,373.7 1,696.3 1,654.4 13,103.8 959.8 39,959.4 

Other income 137,305.1 6,255.2 1,560.0 10,581.6 2,798.5 110,472.2 

Total Deductions 3/ 7,162,581.1 105,593.0 29,233.4 79,490.8 70,451.8 6,872,174.5 

Cost of Sales and Operations 4,710,301.3 61,456.3 5,594.3 48,030.8 45,085.5 4,550,134 

Interest Paid 219,397.2 6,291.5 5,187.7 8,573.4 2,759.0 196,586 

Depreciation 282,434.9 6,519.9 3,112.9 1,835.2 3,639.3 267,328 

Other Deductions 1,950,447.7 31,325.3 15,338.5 21,051.4 18,968.0 1,858,126.9 

NET INCOME (LESS DEFICIT) $/ 221,996.1 (1,941.3) 973.2 41,574.4 (74.3) 181,464 

Net Income - Total 321,250.3 5,082.0 3,818.0 44,111.8 2,930.9 265,308 

Deficit, Total 99,254.3 7,023.2 2,844.9 2,537.4 3,005.2 83,844 

BALANCE SHEET ITEMS 

Total Assets 6,496,135.2 183,291.5 88,059.4 664,433.8 52,651.2 5,507,699 

Capital 5/ 

Debt 6/ 

2,732,662.0 

3,763,473.2 

79,782.9 

103,508.6 

25,659.6 

62,399.8 

565,270.1 

99,163.7 

15,406.1 2,046,543.3 

37,245.1 3,461,156.0 

DEBT/EQUITY 1.38 1.30 2.43 0.18 2.42 1.69 

NOTE: Nonfinancial corporations here include corporations in real estate and holding and other 

investment companies. 

1/ Total Receipts here includes net loss, noncapital assets. -

2/ Net gains, LT & ST includes: net ST capital gain less net LT loss; net LT capital gain less net SI - loss; net gain, noncapital assets; and net loss, noncapital assets. 

3/ Total Deductions here excludes net loss, noncapital assets. -

4/ Unlike Total receipts minus Total deductions, Net income (less deficit) includes "constructive - taxable income from related foreign corporations" and excludes "interest on State and local 

government obligations." 

5/ Capital equals the sum of: capital stock, paid-in or capital surplus; appropriated and - unappropriated. 

6/ Debt equals the difference between total assets and capital. -

SOURCE: Corporation Source Book of Statistics of Income, 1985, Internal Revenue Service, 1988 
- 14-

and for corporations 1.38, while for partnerships it is 5.16 and 6.93 for limited partnerships. 

This pattern of MLPs with leverage ratios more like corporations than like partnerships is 

repeated in individual industries. In oil and gas, the MLP debtlequity ratio is again closer to 

the corporate than the partnership ratio, but MLPs and corporations have higher debt/equity 

ratios than do partnerships. 

C. Averages 

On an entity basis. the average MLP has much larger assets than either the average 

partnership or average corporation. Although corporations are frequently viewed as being large. 

in fact the vast majority of corporations and partnerships are relatively small. with assets 

under $10 million (Table 5). The distribution of firms by asset size is remarkably similar for 

Table 5. PERCENTAGE DISTRIBUTIONS OF ASSETS AND MLPS, PARTNERSHIPS, 

AND NONFINANCIAL CORPORATIONS (1985) 

BY ASSET SIZE 

Asset Size I MLPs I All Partnerships I Limited Partnerships 1 Corporations 

($ millions) I # $ I # $ I # $ I # $ 

0 0.00 0.00 30.18 0.00 13.34 0.00 3.87 0.00 

0-10 8.33 0.19 68.73 46.73 82.71 40.57 95.27 15.50 

10-50 20.83 2.60 0.94 22.50 3.44 26.31 0.67 6.49 

50-I50 37.50 14.11 0.12 11.66 0.41 12.80 0.11 4.36 

150-250 11.11 9.29 0.02 4.07 0.05 3.76 0.03 2.34 

250- 1.000 16.67 40.62 0.0 I 8.02 0.05 8.89 0.03 8.15 

1,000+ 5.56 33.18 0.00 7.01 0.01 7.67 0.02 63.17 

Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 

Sources: Unpublished tax return data: 1986 Partnership Sol; and 

Corporation Source Book of Statistics of Income. 1985 (IRS). 
-15-

partnerships and corporations. Ninety-nine percent of all corporations and all partnerships, 

and 96 percent of all limited partnerships have fewer than $10 million in assets. Only 8 

percent of the MLPs examined have less than $10 million in assets. Corporations stand out in 

the distribution of assets, with nearly two-thirds of all corporate assets held by the 0.02 

percent of firms with over $1 trillion in assets. MLPs do not quite match this extreme. but 

they do show 33 percent of the assets held by similarly gigantic MLPs. 

IV. Econoinic Efficiency Considerations of Tax Treatment of MLPs 

Taxing MLPs as partnerships rather than as corporations is frequently supported on grounds 

of improving economic efficiency by providing ad hoc integration of the corporate and individual 

income tax systems. While partnership taxation of MLPs would improve efficiency in some 

respects. it might worsen it in others. Although efficiency is not the only consideration in 

determining a desired tax policy. understanding the efficiency implications of alternative 

treatments is important for making informed tax policy decisions. 

When economists say that taxes (such as the corporate income tax) reduce economic 

efficiency. they mean that the tax distorts the decisions that would have been made in the 

absence of the tax. This leads to an "inefficient" allocation of resources because, as the 

market equalizes after-tax rates of return on marginal investments. pre-tax rates of return will 

differ and resources will not move to their highest valued uses. 

Distortions can come in several areas: (I)in the decision between consuming now or saving 

for future consumption (taxes on capital generally distort this choice. encouraging more 

consumption and less saving, but lower tax rates distort this choice less than high tax rates 

do): (2) in the decision on the choice of assets (by encouraging investment in equipment. the 

investment tax credit, for example. distorted the allocation of investment funds between 

equipment and structures); (3) in the choice of portfolio. whether to use debt or equity 

finance. and whether to pay out earnings as dividends or retain them within the business: and 

(4) in the decision of whether to undertake an activity in the corporate or noncorporate sectors 

(presuming there are nontax reasons that a given enterprise would prefer one sector over the 
-16-

other). The relevant efficiency question for the taxation of MLPs is whether. taking the 

existence of a corporate tax as given, treating MLPs as partnerships minimizes the distorting 

effects of the corporate income tax. 

Taxing MLPs either as partnerships or as corporations would have little effect on efficiency 

in the first two of these four areas, or margins. On the first margin, the corporate tax does 

not necessarily distort the saving versus consumption decision any more than an alternative 

revenue-neutral tax on capital would. Consequently. the lower taxes imposed on MLP income by 

treating MLPs as partnerships instead of as corporations should not be seen as necessarily 

reducing the distortion in the saving/consumption choice. On the second margin, the primary 

components of the tax law that distort the choice of assets. such as the schedule of 

depreciation deductions and the pre-TRA investment tax credit, are generally available 

regardless of the form of business. The minimum tax might provide some differential distortion. 

to the extent that investment decisions of corporations respond to the corporate minimum tax 

more than MLP behavior responds to the individual minimum tax, but this effect is likely to be 

small, Consequently, there is probably little distortion in the choice of assets from taxing 

MLPs as partnerships. 

The main efficiency considerations regarding MLP taxation relate to the third and fourth 

margins -- the choice of portfolio and the choice between corporate and noncorporate form. The 

corporate tax is not neutral among different financing arrangements. It favors debt relative to 

equity. and favors retention of earnings over payout as dividends. The corporate tax also 

distorts a firm's choice of sector by encouraging partnership status on businesses that, in the 

absence of the tax, would prefer the benefits of incorporation, which include limited liability, 

liquidity, and administrative simplicity for handling business transactions with a large number 

of owners. 

The efficiency consequences differ among firms. (1) "For partnerships that would have 

preferred corporate status apart from tax considerations and that can become MLPs, taxing MLPs 

as partnerships would improve efficiency in the choice of organizational form by providing them 

much of the limited liability, liquidity. and access to capital markets of corporate form. 
-17-

although at the expense of added operational and administrative complexities. (2) For 

corporations that switch to MLP status to receive partnership taxation, efficiency in the choice 

of organizational form would decline because they would give up administrative simplicity, 

although keeping much of the limited liability and liquidity, but efficiency in the portfolio 

decisions would improve. The net effect would depend on the importance of the administrative 

complexity relative to the reduced distortion in financing and payout decisions. (3) For 

corporations that choose not to switch to MLP status because the costs of switching are higher 

than the tax benefits. partnership taxation of MLPs puts them at a disadvantage relative to 

competitors that do switch. While this does not necessarily reflect an inefficiency from the 

perspective of the economy, it does point out that MLPs can undertake less productive 

investments in terms of pre-tax rate of returns than can Corporations and still pay the required 

after-tax rate of return. (This assumes that the shift to MLPs is small enough that it does not 

affect the market-determined required after-tax rate of return.) To the extent that MLPs put 

their capital to lower-valued uses than do corporations, there would be a less efficient use of 

resources in the economy. 

While quantifying the various efficiency consequences of MLP taxation is beyond the scope of 

this paper. comparisons of the debt/equity and payout ratios for MLPs. corporations, and all 

partnerships would suggest whether the distortions in those ratios are apt to be large or small. 

Tables 6A and 6B suggest that MLPs did respond to partnership taxation by choosing lower 

TABLE 6A. DEBT/EQUITY RATIOS OF MLPS, PARTNERSHIPS (1986) 

AND NONFINANCIAL CORPORATIONS (1985) BY INDUSTRY 

I I I Holding & I Agriculture, I

I I Real I Investment1 Forestry & 1 

All lOil & Gas I Estate I Companies1 Lumber I Other 

MLPs 

Entity Basis 0.75 1.03 1.27 0.09 0.12 0.58 

Duplicated Basis 0.49 0.58 1.27 0.08 0.08 0.47 

All Partnerships 5. I6 0.50 56.66 1.14 3.34 3.73 

All Limited Partnerships 6.93 0.62 -44.68 0.82 1.77 6.10 

Corporations ( 1985) 1.38 1.30 2.43 0.18 2.42 1.69 

Source: Tables 1-4. 

I 
- 18 -

Table 6B. DISTRIBUTIONS AND WITHDRAWALS BY MLPS, ALL PARTNERSHIPS (1986),

AND NONFINANCIAL CORPORATIONS (1985), BY INDUSTRY 

In Millions of Dollars and as a Percentage of Assets 

: ALL :OIL & GAS:REAL :HOLDING & :AGRICULTURE,:OTHER 

:ESTATE :INVESTMENT : FORESTRY & : 

:COMPANIES : LUMBER 

MLPS 

Distributions & 

Withdrawals 4374 

As % Assets 25.3 

ALL PARTNERSHIPS 

Distributions & 

Withdrawals 242739 

As % Assets 17.29 

LIMITED PARTNERSHIPS 

Distributions & 

Withdrawals 125388 

As % Assets 18.1 

CORPORATIONS (1985) 

Distributions to 

Stockholders 149968 

As % Assets 2.3 

2820 429 232 674 220 

28.1 21.3 21.2 40.0 9.0 

48847 51650 74323 2982 64938 

87.2 7.5 40.8 12.0 14.3 

40395 19530 51941 917 1 2605 

137.1 5.3 57.4 14.5 6.5 

2097 2396 42286 520 102669 

1.1 2.7 6.4 1.0 1.9 

SOURCES: Unpublished tax return data; 1986 Partnership SOI; and Corporation Source Book 

of Statistics of Income, 1985 (IRS). 
-- -- 

- 19-

debt/equity ratios and higher distribution-to-asset ratios than did corporations. These 

differences would be consistent with. but are not proof of. distorting effects of the corporate 

income tax. Factors other than taxes could contribute to these differences. For example. the 

assertion that cash flow is an important ingredient in the stock market’s valuation of the firm 

provides a non-tax explanation for high distribution rates by MLPs. 

Table 6A summarizes the debt/equity ratios (based on book value of assets) presented in 

Tables I through 4 for MLPs. for partnerships as a whole, and for corporations. Overall. and by 

industry. MLP tax returns showed lower debt/equity ratios in 1986 than corporation returns did 

in 1985. MLPs had an average debtlequity ratio of 0.75, compared to the corporate average of 

I .38. Table 6B presents data on distributions and withdrawals by MLPs, partnerships in general, 

and nonfinancial corporations. As expected, MLP distributions and withdrawals are larger 

relative to assets than are corporate distributions to stockholders and by substantial amounts: 

25.3 percent for MLPs compared to only 2.3 percent for the corporations. The differences are 

substantial within specific industries as well. For example, oil and gas MLPs distribute 28 

percent of assets while oil and gas corporations distribute just I. 1 percent of assets. 

Interestingly. however, MLPs do not appear typical of partnerships in general. MLP leverage 

is closer to that of corporations than of partnerships. The difference between MLPs and the 

overall partnership sector may largely result from the prevalence of non-MLP real estate 

partnerships. which are traditionally highly leveraged, and from the influence of tax shelters. 

The partnership sector as a whole and limited partnerships in particular had much higher levels 

of debt a debtlequity ratio of 5.16 than did the corporate sector. When real estate 

partnerships are excluded, the ratio falls to 2.31, but remains above corporations. Tax 

shelters undoubtedly account for some of this remaining difference. When only partnerships with 

positive ordinary income (including real estate) are considered. the debt/equity ratio falls to 

1.84. much closer to the corporate leverage rate. For positive income and non-real estate 

partnerships. the ratio is 1.25, slightly below the overall corporate figure. With the passive 

loss limitations of the Tax Reform Act of 1986. partnership debt is likely to drop in the 

future. On the corporate side, the reduction in corporate tax rates may reduce their 

debt/equity ratios as well, and the lower personal tax on dividends and higher tax on capital 

gains may increase corporate payout rates and lower retained earnings, an important source of 

corporate equity. 
-20-

V. MLP Iiiconie for Tax Purposes 

The ordinary income and losses that MLPs generated in 1986 and that are reported in Tables 1 

and 2 above provide only part of the picture of MLPs for tax purposes that year because of the 

flow-through nature of partnership income. A number of items of income and expense generated by 

many partnerships are excluded from the ordinary income of the partnership because they are 

subject to separate limitations and treatment at the level of the individual partners. Such 

items include long-term capital gains (and losses), Section 1251 gains and losses (on trade or 

business assets). investment interest expenses, oil and gas depletion allowances, and intangible 

drilling costs. Consequently. in many cases ordinary income provides neither a complete measure 

of partnership income nor an accurate measure of partnership income for tax purposes. 

Table 7 shows the derivation of a more complete measure of income for tax purposes for MLPs 

(on a consolidated basis) and for partnerships in general. Because certain items which are 

reported on attachments to the regular tax schedules. most notably intangible drilling costs and 

potential depletion allowances. are not entered into the computer files by IRS. the full measure 

of income for tax purposes is available only for the MLPs for which we had actual tax returns on 

hand. This measure does not indicate how much partnership income is actually included in the 

partners‘ taxable income that year because of the limitations and special treatment to which 

these distributive share items are subject at the partner level. Nevertheless. we judge that 

this measure of “partnership income for tax purposes” better approximates income subject to tax 

than does ordinary income which simply excludes all specially treated items. 

We define rr Income for Tax Purposes--Pre-TRA” to equal: Form 1065ordinary income plus 40 

percent of long-term capital gains, plus other ordinary income (principally nontaxable dividends 

and ”other” schedule K income). minus distributive share deductions (principally investment 

interest expenses: ”other” schedule K deductions; and intangible drilling costs (IDC‘s). 

potential depletion allowances, and windfall profit taxes for the MLPs with those items reported 

on the paper copy of their tax returns.) ”Income for Tax Purposes-Post-TRA” is the same except 

that it includes 100 percent of capital gains.9 
-- 

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-22-

Column ( 1) in Table 7 (Form I065 ordinary income) presents quite a different picture of MLP 

and partnership income from the picture that emerges from columns (5) and (6) (income for tax 

purposes. pre-TRA and post-TRA. respectively). In a few instances, the sign even differs on 

ordinary income and income for tax purposes. For MLPs. this occurs in oil and gas. which 

switches from a gain of $355 million in ordinary income to a loss for tax purposes because of 

IDC's. depletion, and windfall profits taxes. and in timber and agriculture, which move from an 

ordinary loss of $47.5 million to a gain for tax purposes because of capital gains. 

Even where the signs on ordinary income and income for tax purposes are the same. the sizes 

are frequently quite different, particularly when the comparison involves post-TRA income for 

tax purposes. For the partnership sector as a whole, an ordinary loss of $17 billion drops to a 

loss of only $4 billion for pre-TRA tax purposes and becomes a gain of $29 billion for post-TRA 

tax purposes. For real estate, an ordinary loss of $33 billion drops by 16 percent to a loss of 

$28 billion for pre-TRA tax purposes. but by almost 80 percent to $-7 billion for post-TRA tax 

purposes. Limited partnerships also display differences between ordinary and tax purpose income 

that are substantial. though somewhat smaller proportionately. 

For MLPs. all partnerships. and limited partnerships. the most common difference is for 

income for tax purposes to exceed (or have a smaller loss than) ordinary income. indicating that 

the specially treated income items (mainly capital gains) exceed the distributive share 

deductions. A notable exception is the oil and gas industry, where ordinary income is larger 

(or the loss smaller) than is income for tax purposes (both pre-TRA and post-TRA) for MLPs as 

well as for all partnerships and limited partnerships. If all IDC's and depletion allowances 

were included in the data as they are for many of the MLPs, the excess of ordinary income over 

income for tax purposes would be even larger. 

In addition to the regular income tax. corporations and individuals may be subject to the 

alternative minimum tax on specified tax preferences. To the extent that MLPs. and other 

partnerships generate tax preferences. and to the extent that the partners are subject to 

minimum tax, ordinary income moves farther from being the relevant measure of income subject to 

tax. Since MLPs are promoted as being income generators, not tax shelters. it would be 
-23-

interesting to see in fact whether they have a higher or lower rate of tax preferences than do 

other partnerships. (In spite of their promotion. over one-quarter of the MLPs examined for 

this paper indicated that they were required to file an "Application for Registration of a Tax 

Shelter" with the IRS. indicating investors could expect deductions in excess of twice their 

r investments.) 

Column (7) of Table 7 presents the amount of tax preferences reported on Schedule K (but not 

on attachments to it) for MLPs. all partnerships. and limited partnerships. These preferences 

primarily include the preference component of depreciation allowances. the excluded portion of 

capital gains, and excess IDCs. The preference component of oil and gas depletion allowances is 

not reported on the Schedule K because it depends in large part on information available only to 

the specific partner. 

For MLPs. tax preferences are significant in the oil and gas; agriculture, forestry, and 

lumber; and Irother" industries. but surprisingly not in real estate. In agriculture. etc. the 

preferences come mainly from the excluded portion of timber gains. in oil and gas from excess 

IDCs. For partnerships in general. tax preferences are important. relative to the various 

measures of income. in industries where they are important for MLPs (in oil and gas. 

agriculture. etc. and "other") and not important where they are not important for MLPs (other 

holding and investment companies). The exception is real estate where partnerships in general 

generate substantial amounts of tax preferences. while MLPs do not, suggesting that real estate 

MLPs are doing different things or operating in different ways than are ordinary real estate 

partnerships. 

VI. Suininary and Conclusion 

This paper has presented data from tax returns of master limited partnerships in 1986 that 

allows them to be compared with partnerships in general and with corporations. From some 

perspectives MLPs seem important, while from others they seem almost inconsequential. From the 

perspective of the partnership sector as a whole. MLPs represent a very small share: however. 

they conduct a large percentage of the activity of oil and gas limited partnerships. Compared 

to the corporate sector. the aggregate amount of income and assets in MLPs is minor. 
-24-

In'the respects examined here. a picture of MLPs emerges as entities that in some ways 

resemble partnerships, in others corporations. while overall they are perhaps unique. MLPs are 

larger than the vast majority of both corporations and partnerships, though smaller than the 

largest corporations. MLPs are more likely to be profitable than are all partnerships or 

limited partnerships. They appear less profitable than corporations overall, but the opposite 

is true for some industries. In terms of financial structure, MLPs have lower leverage ratios 

than either corporations or other partnerships. 

In a world with a corporate income tax. the efficiency consequences of taxing MLPs as 

partnerships instead of as corporations are complex and to some extent unclear. As the paper 

discusses. for partnerships that became MLPs there would be a gain in efficiency; for 

corporations that switched to MLP status a gain on the portfolio margin but at the expense of 

the complexities of operating an MLP; and corporations that remained corporate might find 

themselves unable to attract investment for projects that were more profitable in pre-tax terms 

than the projects undertaken by their counterparts that became MLPs. The sum of these effects 

is uncertain. 

Whether MLPs are taxed as partnerships or as corporations. the paper also reports that 

ordinary income is a poor measure of income for tax purposes. Income that is relevant for the 

tax system includes many distributive share items that ordinary income excludes. most notably 

capital gains. When such items are taken into account. MLPs generally look even more profitable 

than they do in terms of ordinary income. 
-- 

-25-

ENDNOTES 

i 

I 

, 

1 MLPs are a subset of PTPs. OBRA added Section 7704 to the Intemal Revenue Code. 

Subsection (b) states: "...the term 'publicly traded partnership' means any partnership if 

(I) interests in such partnership are traded on an established securities market. or 

(2) interests in such partnership are readily tradable on a secondary market (or the 

substantial equivalent thereof)." 

2 Because there is at present no reliable list of partnerships viewed as publicly traded 

outside the major exchanges, the analysis here is confined to partnerships traded on the 

exchanges, referred to as master limited partnerships. Indeed, IRS has only recently issued 

regulations regarding the definition of "publicly traded" (Notice 88-75). Having been listed on 

a major exchange or NASDAQ by the end of 1986 was the criterion we used for determining 

whether a partnership was or was not an MLP in 1986. 

3 A comparison of the different pictures one obtains of MLP's depending upon the source of 

data is beyond the scope of this paper. 

4 MLPs listed in 1986 for which we could not obtain tax return data generally were first 

listed on a stock exchange in the last part of the year. 

5 An exception to this is Lowell Dworin, "An Analysis of Partnership Activity, 1981-1983.'' 

SO1 Bulletin, Spring 1986. 

6

Thirty of the 72 MLPs examined in this paper appear to function through operating 

partnerships. In 16 of those 30 cases, returns were available for both the MLP and the OP. 

'Nonfinancial corporations here include corporations in real estate and other holding and 

investment companies, since many MLPs operate in these industries. 

a Changes in the economy between 1985 and 1986 might affect the comparisons between 

MLPs and corporations somewhat. A drop in oil prices depressed the energy sector of the economy 

in 1986 relative to 1985. Consequently, 1986 corporate data will probably show oil and gas 

corporations even less profitable than they were in 1985. This would strengthen the conclusion 

that. at least in that industry, MLPs appear more profitable than corporations. 

9

This measure is similar to Dworin's (I 986) income measure termed "Contribution to partners' 

taxable income before ITC adjustment." The primary differences are that the measure here: (I) 

keeps guaranteed payments to partners as a deduction to the partnerships. and (2) except for 

MLPs, includes income or loss from other partnerships. 
- 26 -

Recent OTA Papers published by

The Office of Tax Analysis

U.S.Department of the Treasury

Washington, DC 20220 

56. A Kce.mmiriatiori of tlir Use of dbilrtb to l’q Taws 0~ 

Local Go\lerrinierirs 

Timothy J. Goodspeed ’ 

April 1987 

57. Tavatiori of Foreigii E.vcliarige Gniris mid Losses 

Jenny Bourne Wahl 

October 1987 

58, Goverriiiierit Forecasts arid Birdget Projectioris: 

Ai1 Annlvsis of Recent History 

George A. Plesko 

October 1987 

59. NoiiCoiporate Birsiriess Tawtioii: 

Before arid Aftcr, tlic Tar Reform Act of 1986 

Susan C. Nelson 

May 1988 

60. Tlic Tav Esyeriditiri.e Birdget Bc7for.c arid Afiei. tlic 

Tat Refor.ni Act of 1986 

Thomas S. Neubig 

David Joulfaian 

October 1988 

6 1. Recerit lssirrs in Transfer Pricirig 

Barbara L. Rollinson 

Daniel J. Frisch 

November 1988 

62, Measirres of Goodiiess of Fir ,for.Estrapolations: 

Iiiitial Results Using the Ii~dividirnlTay Model Database 

Robert E. Gillette 

February 1989 

Copies of these OTA Papers ma? be purchased from the National Technical Information 

Service. 5285 Port Royal Road. Springfield. VA 22 161 (phone: 703-487-4660).