Sunoco 2015 Annual Report Download - page 33

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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.
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 the Tax Equity and Fiscal Responsibility Act ("TEFRA") audit provisions for partnerships.
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 percent 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.
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