Energy Transfer 2015 Annual Report Download - page 62

Table of Contents
or approvals. The failure by LCL to timely receive and maintain the remaining approvals necessary to complete and operate the liquefaction project could
have a material adverse effect on its operations and financial condition.
Tax Risks to Common Unitholders
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of entity-
level taxation by individual states. If the Internal Revenue Service (“IRS”) were to treat us as a corporation for federal income tax purposes or if we
become subject to a material amount of entity-level taxation for state tax purposes, then our cash available for distribution would be substantially
reduced.
The anticipated after-tax economic benefit of an investment in our Common Units depends largely on our being treated as a partnership for federal income
tax purposes. We have not requested, and do not plan to request, a ruling from the IRS, with respect to our classification as a partnership for federal income
tax purposes.
Despite the fact that we are a limited partnership under Delaware law, we would be treated as a corporation for federal income tax purposes unless we satisfy a
“qualifying income” requirement. Based upon our current operations, we believe we satisfy the qualifying income requirement. Failing to meet the
qualifying income requirement or a change in current law could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us
to taxation as an entity.
If we were treated as a corporation, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%,
and we would likely pay additional state income taxes at varying rates. Distributions to Unitholders would generally be taxed again as corporate
distributions, and none of our income, gains, losses or deductions would flow through to Unitholders. Because a tax would then be imposed upon us as a
corporation, our cash available for distribution to Unitholders would be substantially reduced. Therefore, treatment of us as a corporation would result in a
material reduction in the anticipated cash flow and after-tax return to the Unitholders, likely causing a substantial reduction in the value of our Common
Units.
Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation
or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, the minimum quarterly distribution amount and the target
distribution amounts may be adjusted to reflect the impact of that law on us. 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 case available for distribution to our
Unitholders.
On November 2, 2015, President Obama signed into law the Bipartisan Budget Act of 2015 (the Act). The Act includes significant changes to the rules
governing the audits of entities that are treated as partnerships for U.S. federal income tax purposes. The new rules under the Act, which are effective for tax
years beginning after December 31, 2017, repeal and replace the regimes under current “TEFRA” audit provisions for partnerships. The Act allows a
partnership to elect to apply these provisions to any return of the partnership filed for partnership taxable years beginning after the date of the enactment,
November 2, 2015. The Partnership does not intend to elect to apply these provisions for any tax return filed for partnership taxable years beginning before
January 1, 2018.
Under the new streamlined audit procedures, a partnership would be responsible for paying the imputed underpayment of tax resulting from the audit
adjustments in the adjustment year even though partnerships are “pass through entities.” However, as an alternative to paying the imputed underpayment of
tax at the partnership level, a partnership may elect to provide the audit adjustment information to the reviewed year partners, whom in turn would be
responsible for paying the imputed underpayment of tax in the adjustment year.
Should a partnership not elect to pass the audit adjustments on to its partners, the partnerships’ imputed underpayment generally would be determined at the
highest rate of tax in effect for the reviewed year. Currently, the highest rate of tax would be 39.6% for individual taxpayers. However, the Act authorizes the
Treasury to establish procedures whereby the imputed underpayment amount may be modified to more accurately reflect the amount owed, if the partnership
can substantiate a lower tax rate or demonstrate a portion of the imputed underpayment amount is allocable to a partner that would not owe tax (a tax exempt
entity) or a partner has already paid the tax. It is not yet clear how state and local tax authorities will respond to the new regime. The Partnership is closely
monitoring the development and issuance of regulations or other additional guidance under the new partnership audit regime.
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