Energy Transfer 2010 Annual Report Download - page 52

if any, of such prior excess distributions with respect to the units sold will, in effect, become taxable income to
the Unitholder if they sell such units at a price greater than their tax basis in those units, even if the price received
is less than their original cost. Furthermore, a substantial portion of the amount realized, whether or not
representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation
recapture. In addition, because the amount realized includes a Unitholder’s share of our nonrecourse liabilities, if
a Unitholder sells units, the Unitholder may incur a tax liability in excess of the amount of cash received from the
sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning Common Units that may result
in adverse tax consequences to them.
Investment in Common Units by tax-exempt entities, including employee benefit plans and individual retirement
accounts (known as IRAs) and non-U.S. persons raises issues unique to them. For example, virtually all of our
income allocated to Unitholders who are organizations exempt from federal income tax, may be taxable to them
as “unrelated business taxable income.” Distributions to non-U.S. persons will be reduced by withholding taxes,
generally at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States
federal and state income tax returns and generally pay United States federal and state income tax on their share of
our taxable income.
We treat each purchaser of Common Units as having the same tax benefits without regard to the actual
Common Units purchased. The IRS may challenge this treatment, which could result in a Unitholder owing
more tax and may adversely affect the value of the Common Units.
The IRS may challenge the manner in which we calculate our Unitholder’s basis adjustment under
Section 743(b) of the Internal Revenue Code. If so, because neither we nor a Unitholder can identify the units to
which this issue relates once the initial holder has traded them, the IRS may assert adjustments to all Unitholders
selling units within the period under audit as if all Unitholders owned such units.
Any position we take that is inconsistent with applicable Treasury Regulations may have to be disclosed on our
federal income tax return. This disclosure increases the likelihood that the IRS will challenge our positions and
propose adjustments to some or all of our Unitholders.
A successful IRS challenge to this position or other positions we may take could adversely affect the amount of
taxable income or loss allocated to our Unitholders. It also could affect the gain from a Unitholder’s sale of
Common Units and could have a negative impact on the value of the Common Units or result in audit
adjustments to our Unitholders’ tax returns without the benefit of additional deductions. Moreover, because one
of our subsidiaries that is organized as a C corporation for federal income tax purposes owns units in us, a
successful IRS challenge could result in this subsidiary having more tax liability than we anticipate and,
therefore, reduce the cash available for distribution to our partnership and, in turn, to our Unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units
each month based upon the ownership of our units on the first day of each month, instead of on the basis of
the date a particular unit is transferred. The IRS may challenge this treatment, which could change the
allocation of items of income, gain, loss and deduction among our Unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each
month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a
particular unit is transferred. The use of this proration method may not be permitted under existing Treasury
Regulations. Recently, however, the Department of the Treasury and the IRS issued proposed Treasury
Regulations that provide a safe harbor pursuant to which a publicly traded partnership may use a similar monthly
simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the
proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS
were to challenge our proration method or new Treasury Regulations were issued, we may be required to change
the allocation of items of income, gain, loss and deduction among our Unitholders.
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