What Are The Tax Differences Between The Three Types of Kinder Morgan?

After my recent article on the lucrative performance of Kinder Morgan over the past two decades, I received several questions from readers that wanted to know the taxation differences between KMP, KMR, and KMI.

I’ll try to put this as succinctly as I can without the risk of oversimplification:

Kinder Morgan Partners, whose ticker symbol is KMP, is the largest pipeline master limited partnership in the world. It owns 54,000 miles of pipelines. It is currently investing in a $5.4 billion project in British Columbia. Its daily product is north of 2 million barrels of oil per day, and over 8 billion cubic feet of natural gas today. It is legally structured as an MLP, meaning that it pays distributions rather than dividends. If you own KMP, you will receive a K-1 each year. For those of you curious as to how the MLP gets taxed, as well as some other rules regarding partnership units that generate a K-1, I highly recommend that you read this “Factsheet” about the three companies on the Kinder Morgan website (click here).

Kinder Morgan Management, whose ticker symbol is KMR, is structured as an LLC C-corp. This is not an MLP, even though it consists of ownership in Kinder Morgan Partners. To get around the K-1 tax headache, KMR pays stock dividends to its holders. You do not collect cash from KMR, but rather, you receive additional shares of stock four times per year. While you hold KMR, you receive absolutely no tax documentation. You receive no 1099s. You receive no K-1s. When you sell your stake in KMR, you receive a 1099. To calculate how much of a stock dividend you will receive, you take the amount of the KMP declared dividend and divide it by the average price of KMR over the previous ten days.

So if KMP pays shareholders $2 per share, and if KMR had an average price of $75 over the past ten days, then you will receive 0.026 shares added to your total for each share of KMR that you hold.

And then there is Kinder Morgan, Inc., whose ticker symbol is KMI, which is structured as a C-Corp and pays regular old cash dividends. This is where Richard Kinder keeps the bulk of his fortune. KMI owns El Paso Pipelines and KMP (which is mentioned above). This has 75,000 miles of pipelines. With KMI, you receive a regular 1099 each year like with other dividend stocks, and there is no K-1 involved or threat of unrelated business tax income.

In short, if you buy KMP, you own an MLP and receive a K-1 each year. If you buy KMR, you receive stock dividends each year, as you are paid in shares (you receive no tax documentation until you sell and then receive a 1099). If you own KMI, you receive cash dividends and will receive a 1099 each year. For retirement accounts, you probably wouldn’t want to hold a huge chunk of KMP, as that would raise the risk of generating over $1,000 in unrelated business tax income,  and then you would have to start paying taxes within your IRA and enter the world of 990-T forms. KMI is the most straightforward if you want to deal with the 1099 regular cash dividends that are custom with the dividend stocks I usually discuss. KMR works if you are committed to automatic reinvestment into the same company, and do not mind forfeiting the autonomy to deal with each payout as you please. I promise I won’t make a habit of these sorts of posts, but for those of you interested in the tax nitty gritty, hopefully it helps.



Originally posted 2013-12-22 08:11:26.

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12 thoughts on “What Are The Tax Differences Between The Three Types of Kinder Morgan?

  1. George says:

    Mea culpa, if that's the case. I looked at dividend.com earlier today and they have it listed as non-qualified. Will check to company website.

  2. George says:

    Kinder-Morgan confirmed KMI dividends are qualified–apologies for the confusion. There is apparently a lot of misleading info out there on MLPs and their various permutations.

    1. Tim McAleenan says:

      George, no biggie. It's a screwed up tax code that is not intuitive in many respects, and that's why we have to play these games with different legal classifications of the ownership interests. It is a circus, my brother.

  3. Vijdave says:

    An excellent article. 

    You have a unique talent for making complicated things very simple and easy to understand. I thoroughly enjoyed this article. And please………now and then DO WRITE these kinds of articles. I am sure a few of your subscribers will appreciate it, like I did.

    Vijay Dav'e

  4. Sumflow says:

    Nicely done from an Investors point of view.

    How are they generally treated for foreign investors?

    What happens to the securities if you do not sell them and die?

  5. Sumflow says:

    Nicely done from an Investors point of view.

    How are these generally treated by holders who do not reside in the US?

    What happens if you never sell and you die?

  6. AlanyaBoyerKolberg says:

    I appreciate it too Tim! I actually was thinking of adding some Kinder Morgan, couldn’t remember the tax stuff, and came to your site to find this article! Seems like this one is one that no one can ever remember, Like Royal Dutch Shell. I appreciate you spelling it out for me. Oh, btw, have you considered putting in a search bar? Or do I just not have one because I’m usually stalking your site from my phone?

  7. Ivan Alvarez says:

    No way! Just last week I saw the same article on compacom.com website but the author was different. Are these two same thinking people or one of them is cheating? Websites should pay more attention to the uniqueness of their information.

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