Page 3 - Tax Consequences of Unit Ownership
SPECTRA ENERGY PARTNERS, LP filed this Form 8-K on 2/21/2018
If we fail to meet the Qualifying Income
Exception, other than a failure that is determined by the IRS to be inadvertent and that is cured within a reasonable time after
discovery (in which case the IRS may also require us to make adjustments with respect to our unitholders or pay other amounts),
we will be treated as transferring all of our assets, subject to all of our liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception in return for stock in that corporation and then
as distributing that stock to our unitholders in liquidation of their interests in us. This deemed contribution and liquidation
should not result in the recognition of taxable income by our unitholders or us so long as the aggregate amount of our liabilities
does not exceed the adjusted tax basis of our assets. Thereafter, we would be treated as an association taxable as a corporation
for federal income tax purposes.
The present U.S. federal income tax treatment
of publicly traded partnerships, including us, or an investment in our units may be modified by administrative or legislative action
or judicial interpretation at any time. From time to time, members of the U.S. Congress have proposed and considered substantive
changes to the existing federal income tax laws that would affect publicly-traded partnerships. One such legislative proposal would
have eliminated the Qualifying Income Exception upon which we rely for our treatment as a partnership for federal income tax purposes.
In addition, on January 24, 2017, final
regulations regarding which activities give rise to qualifying income (the “Final Regulations”) within the meaning
of Section 7704 of the Code were published in the Federal Register. The Final Regulations are effective as of January 19, 2017,
and apply to taxable years beginning on or after January 19, 2017. We do not believe the Final Regulations affect our ability to
qualify as a publicly traded partnership.
It is possible that a change in law could
affect us and may be applied retroactively. Any such changes could negatively impact the value of an investment in our units. If
for any reason we are taxable as a corporation in any taxable year, our items of income, gain, loss and deduction would be taken
into account by us in determining the amount of our liability for federal income tax, rather than being passed through to our unitholders.
At the state level, several states have
been evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise, or other
forms of taxation. Imposition of a similar tax on us in the jurisdictions in which we operate or in other jurisdictions to which
we may expand could substantially reduce our cash available for distribution to our unitholders.
Our taxation as a corporation would materially
reduce the cash available for distribution to unitholders and thus would likely substantially reduce the value of our units. Any
distribution made to a unitholder at a time when we are treated as a corporation would be (i) a taxable dividend to the extent
of our current or accumulated earnings and profits, then (ii) a nontaxable return of capital to the extent of the unitholder’s
adjusted tax basis in its units (determined separately for each unit), and thereafter (iii) taxable capital gain.
The remainder of this discussion is based
on the opinion of Vinson & Elkins L.L.P. that we will be treated as a partnership for federal income tax purposes.
Tax Consequences of Unit Ownership
Limited Partner Status
Unitholders of the Partnership who are
admitted as limited partners of the partnership will be treated as partners of the Partnership for federal income tax purposes.
In addition, assignees who have executed and delivered transfer applications, and are awaiting admission as limited partners, and
unitholders whose 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 units will be treated as partners of the Partnership for federal income
As there is no direct or indirect controlling
authority addressing assignees of 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, Vinson & Elkins L.L.P.’s
opinion does not extend to these persons. Furthermore, a purchaser or other transferee of 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 units unless
the units are held in a nominee or street name account and the nominee or broker has executed and delivered a transfer application
for those units.