Page 6 - Entity-Level Collections of Unitholder Taxes
SPECTRA ENERGY PARTNERS, LP filed this Form 8-K on 2/21/2018
In addition to this limitation on the deductibility
of a partnership’s business interest, the deductibility of a non-corporate taxpayer’s “investment interest expense”
is generally limited to the amount of that taxpayer’s “net investment income.” Investment interest expense includes:
|·||interest on indebtedness allocable to property held for investment;|
|·||interest expense allocated against portfolio income; and|
|·||the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent allocable against
The computation of a unitholder’s
investment interest expense will take into account interest on any margin account borrowing or other loan incurred to purchase
or carry a unit. Net investment income includes gross income from property held for investment and amounts treated as portfolio
income under the passive loss rules, less deductible expenses, other than interest, directly connected with the production of investment
income. Net investment income does not include qualified dividend income (if applicable) or gains attributable to the disposition
of property held for investment. A unitholder’s share of a publicly-traded partnership’s portfolio income and, according
to the IRS, net passive income will be treated as investment income for purposes of the investment interest expense limitation.
Entity-Level Collections of Unitholder Taxes
If we are required or elect under applicable
law to pay any federal, state, local or non-U.S. tax on behalf of any current or former unitholder or our general partner, our
partnership agreement authorizes us to treat the payment as a distribution of cash to the relevant unitholder or general partner.
Where the tax is payable on behalf of all unitholders or we cannot determine the specific unitholder on whose behalf the tax is
payable, our partnership agreement authorizes us to treat the payment as a distribution to all current unitholders. We are authorized
to amend our partnership agreement in the manner necessary to maintain uniformity of intrinsic tax characteristics of units and
to adjust later distributions, so that after giving effect to these distributions, the priority and characterization of distributions
otherwise applicable under our partnership agreement is maintained as nearly as is practicable. Payments by us as described above
could give rise to an overpayment of tax on behalf of a unitholder, in which event the unitholder may be entitled to claim a refund
of the overpayment amount. Please read “—Administrative Matters—Information Returns and Audit Procedures”.
Each unitholder is urged to consult its tax advisor to determine the consequences to them of any tax payment we make on its behalf.
Allocation of Income, Gain, Loss and Deduction
In general, if we have a net profit, our
items of income, gain, loss and deduction will be allocated amongst our unitholders and our general partner in accordance with
their percentage interests in us. Specified items of our income, gain, loss and deduction will be allocated under Section 704(c)
of the Code (or the principles of Section 704(c) of the Code) to account for any difference between the adjusted tax basis and
fair market value of our assets at the time such assets are contributed to us and at the time of any subsequent offering of our
units (a “Book-Tax Disparity”). As a result, the federal income tax burden associated with any Book-Tax Disparity immediately
prior to an offering will be borne by our partners holding interests in us prior to such offering. In addition, items of recapture
income will be specially allocated to the extent possible (subject to the limitations described above) to the unitholder who was
allocated the deduction giving rise to that recapture income in order to minimize the recognition of ordinary income by other unitholders.
An allocation of items of our income, gain,
loss or deduction, other than an allocation required by the Code to eliminate a Book-Tax Disparity, will be given effect for federal
income tax purposes in determining a unitholder’s share of an item of income, gain, loss or deduction only if the allocation
has “substantial economic effect.” In any other case, a unitholder’s share of an item will be determined on the
basis of the unitholder’s interest in us, which will be determined by taking into account all the facts and circumstances,
including (i) the unitholder’s relative contributions to us, (ii) the interests of all the partners in profits and losses,
(iii) the interest of all the partners in cash flow and (iv) the rights of all the partners to distributions of capital upon liquidation.
Vinson & Elkins L.L.P. is of the opinion that, with the exception of the issues described in “— Section 754 Election”
and “— Disposition of Units — Allocations Between Transferors and Transferees,” allocations of income,
gain, loss or deduction under our partnership agreement will be given effect for federal income tax purposes.