Master limited partnership firms may be able to keep their structure if pending legislation makes its way into Congress' final budget bill.
Twenty-two MLPs, including at least four money management firms, have until the end of this year to reorganize, according to Mary Lyman, tax counsel for the Coalition of Publicly Traded Partnerships in Washington.
Legislation now in the Senate, if approved, would allow companies to keep their MLP designation but pay a 3.5% excise tax on gross income. A House version of the bill seeks a 15% excise tax on gross income. If one of the versions survives the final reconciliation process, it will be included in the final budget bill headed to President Clinton this summer, Ms. Lyman said.
Currently, MLPs pay no corporate tax. Investors own limited partner interests in the partnership rather than shares in a corporation and must report, on their individual tax returns, their share of the partnership's income, deductions, gain, loss and credits. MLP units trade publicly like stock, providing investors with more liquidity than ordinary limited partnerships.
Alliance Capital Management L.P. recently announced plans to make the structural change from an MLP to a corporation, saying the process takes time and the company wants to be ready with a corporate structure in case the MLP measure doesn't pass "in a form that makes economic sense for us," according to Alliance spokesman Gary Sullivan.
"And although it (the legislation process) looks good now, we won't know until the bill is completed," Mr. Sullivan said. New York-based Alliance has about $194 billion in assets under management.
If the MLP proposal becomes law, the tax rate for Alliance computed on pre-tax income increases to about 17% from the current 7%, said asset management analysts with Oppenheimer & Co. Inc., New York.
The MLP tax issue has been hanging over Alliance for the past few years, depressing the company's valuation, the analysts said in a recent statement. Resolution of the issue could result in Alliance's stock returning to its higher, historic valuation, the analysts said.
Alliance illustrated how the firm's tax liability would differ, between MLP and corporate taxation, by considering the company's 1996 results. Last year under the MLP structure, Alliance's net income was $2.27 per unit and distributions were $2.19 per unit. If Alliance had been a corporation in 1996, income would have been an estimated $1.23 per share and dividends $1.30 per share.
But it's more complicated than that, said Neil Epstein, New York equity analyst for Putnam, Lovell & Thornton in Los Angeles.
"It's not just a question of paying less tax, but who pays less tax," Mr. Epstein said. Companies debating a structural change are evaluating numerous aspects of the business, such as the firm's margins, the degree of public vs. private ownership and how important liquidity is to the partners, he said.
A structural change also could affect how the company is viewed by institutional investors. For instance, New England Investment Companies L.P. of Boston informed investors in its 1996 annual report that the partnership might have to restructure before Jan. 1, 1998, because of a change in tax laws.
"The expected change in tax status should make New England Investment Companies a more appropriate investment for pension and profit-sharing trusts and other tax-exempt organizations, as these entities would no longer be subject to a tax on their unrelated business taxable income generated by partnerships," according to NEIC's annual report.
NEIC is in the process of developing a plan for restructuring, said Laurence Dwyer, senior vice president of corporate communications for NEIC. The company continues to weigh its options, bearing in mind the pending legislation. The Boston-based company owns 10 money management firms, which, together, manage about $107 billion.
Analysts with Smith Barney Inc. commented in a recent research note: "We have mixed feelings about the relentless push to grandfather the MLPs." A C-Corp structure would dramatically increase the potential ownership base for these companies, for which there has been an increasing interest on the part of institutional investors over the past few months, the analysts noted. However, the ability to pass through cash flow without the corporate tax filter does offer interesting distribution characteristics.
The other two money management companies that are currently MLPs are Oppenheimer Capital L.P. of New York and PIMCO Advisors L.P., Newport Beach, Calif.
The definition of MLP was tightened in 1987 to require 90% of an MLP's gross income to come from real estate or natural resource businesses, such as interest on mortgages, rent from real estate, dividends, sale of oil, gas or timber. Businesses that no longer fit the category, of which there were about 35 in 1987, were given 10 years to reorganize. Ms. Lyman said about 50 companies had the type of income that was acceptable after the 1987 change, and those firms continue as MLPs.
Alliance officials said if the firm changes its structure to a corporation, the new company will be Alliance Capital Management Corp. II. It will own the partnership interests of unitholders exchanging their units for publicly traded common stock in the new corporation. Alliance is 57% owned by Equitable Companies Inc., about 9% by employees and approximately 28% is publicly traded.