Sunoco 2014 Annual Report Download - page 31

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TAX RISKS TO OUR 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") treats us as a
corporation or we become subject to a material amount of entity level taxation for state tax purposes, it would substantially
reduce the amount of cash available for distribution to unitholders.
The anticipated after-tax economic benefit of an investment in the 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 on this
matter. Despite the fact that we are a limited partnership under Pennsylvania law, we would be treated as a corporation for
federal income tax purposes unless we satisfy a “qualifying income” requirement. We believe that we satisfy the qualifying
income requirement based on our current operations. Failing to meet this 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 for federal income tax purposes, we would pay federal income tax at the corporate tax
rate, and likely would pay state income tax at varying rates. Distributions to unitholders generally would be taxed again as
corporate distributions, and none of our income, gains, losses or deductions would flow through to unitholders. Therefore,
treatment of us as a corporation would result in a material reduction in anticipated cash flow and after-tax return to 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
The sale or exchange of 50 percent or more of our capital and profit interests during any twelve-month period will result in
our termination as a partnership for federal income tax purposes.
Our partnership will be considered to have been terminated for tax purposes when there is a sale or exchange of 50
percent or more of the total interests in our capital and profits within a twelve-month period (a "technical termination"). For
purposes of determining whether the 50 percent threshold has been met, multiple sales of the same interest will be counted only
once. A sale or exchange would occur, for example, if we sold our business or merged with another company, or if any of our
unitholders, including ETP and its affiliates, sold or transferred their partnership interests in us. Our termination would, among
other things, result in the closing of our taxable year for all of our unitholders which could result in us filing two tax returns
(and unitholders receiving two Schedule K-1s) for one calendar year. Our termination could also result in a deferral of
depreciation deductions allowable in computing our taxable income. Our termination would not affect our classification as a
partnership for federal income tax purposes. Instead, we would be treated as a new partnership for federal income tax
purposes, in which case we must make new tax elections and could be subject to penalties if we are unable to determine that a
termination occurred. The IRS has recently announced a relief procedure whereby if a publicly traded partnership that has
technically terminated requests and the IRS grants special relief, among other things, the partnership may be permitted to
provide only a single Schedule K-1 to unitholders for the tax years in which the termination occurs.
As a result of ETP's acquisition of the Partnership in October 2012, the 50 percent threshold described above was
exceeded. Our classification as a partnership was not affected, but instead, we were treated as a new partnership for federal
income tax purposes. The technical termination resulted in the closing of our taxable year for all unitholders. In the case of a
unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may have
resulted in more than twelve months of our taxable income or loss being includable in the unitholder's taxable income for the
year of termination. As a result of the technical termination, we were required to file two tax returns for the calendar year 2012.
We were required to make new tax elections after the technical termination, including a new election under Section 754 of the
Internal Revenue Code, and the termination resulted in a deferral of our deductions for depreciation. A termination could also
result in penalties if we had been unable to determine that the termination had occurred. Moreover, the technical termination
could accelerate the application of, or subject us to, any tax legislation enacted before the technical termination. The IRS has
recently announced a publicly traded partnership technical termination relief procedure whereby if a publicly traded partnership
that has technically terminated requests publicly traded partnership technical termination relief and the IRS grants such relief,
among other things, the partnership will only have to provide one Schedule K-1 to unitholders for the calendar year
notwithstanding two partnership tax years. We were successful in petitioning the IRS for this technical termination relief.