The American Government, Big Oil, and Taxation: Why Don't the Companies that Own DAPL Pay Corpor
In Volume 1 of our #NoDAPL series, we discussed the owners of DAPL: Energy Transfer Partners (ETP), Sunoco, and Phillips 66. We also examined how DAPL is just one part of the two part Bakken Pipeline Project and the number of other companies the ETP owns.
In this article, we look deeper at the organization of ETP and Sunoco to highlight the tax privileges they receive as “master limited partnerships.”
Here is another look into a part of the story they don’t want you to see.
General vs. Limited Partnerships
A partnership exists when individuals, groups, or businesses work together to make money. Two different partnerships can exist: 1) general partnerships, and 2) limited partnerships.
A General Partnership exists when both partners are equally responsible for the success or failure of the business.
In the CBS comedy 2 Broke Girls, Max Black and Caroline Channing operate a cupcake business as general partners. They work together to raise capital, make cupcakes, market the shop, and sell their product. In the end, they either profit together or fail together.
(Image retrieved from http://www.cbs.com/shows/2_broke_girls/)
Such a general partnership exists because both partners have general responsibility for management and financial gains or losses. In a Limited Partnership, the partners do not exercise the same authority over the business.
The General Partners oversee and manage the business, author business agreements and legal contracts, and assume unlimited liability for the losses or debts of the business. This means that their personal assets can be seized if the business fails.
On the contrary, the Limited Partners typically do not have any managerial responsibilities or rights to make formal business decisions. And when they do, it is minimal. Their primary responsibility is to invest in the business with the hopes that they will profit off its success. They are only liable for what they invest meaning that their personal assets cannot be seized if the business fails. Nonetheless, if they invested $100,000 and the business fails, they lose all that money.
Limited Partnerships in the Sunoco and Energy Transfer Families
Sunoco Logistics Partners, L.P. (SXL) is a limited partner of Sunoco Partners, LLC (SP). This means that Sunoco Partners oversees and manages the operations of SXL though it does not technically own the company.
There is also a second Sunoco partnership responsible for the retail operations of Sunoco between Sunoco G.P., L.P. and Sunoco, L.P. SXL and Sunoco Partners do not operate or own these retail stores but produce, refine, and ship natural gas, crude oil, and refined products which are sold at Sunoco gas stations and wholesale to many other retailers (for more information see Volume 3).
Both partnerships are owned by Energy Transfer Partners, LP (ETP) as seen in Figure 1 below:
The general partner of ETP is Energy Transfer Partners, G.P. which is also the limited partner of Energy Transfer Partners, LLC. This company is owned by Energy Transfer Equity, L.P., the limited partner of LG GP, LLC.
To better understand this arrangement, let’s take a look at Figure 2:
In this arrangement, each general partner oversees and manages the operations of the immediate limited partner. In return for their services, the general partner receives a portion of the profits made by the partnership.
With energy companies like these, however, things become a bit more complicated. Unlike traditional partnerships, businesses in the energy industry and real estate market can register as master limited partnerships and receive special tax privileges and financial incentives unavailable to individuals or businesses in other market segments.
Limited Partnerships of the Energy Transfer and Sunoco Partnerships
The limited partners in the Energy Transfer and Sunoco Families are publically traded on the New York Stock Exchange (NYSE). They listed below with their ticker symbols (color coded to match figures 1 and 2 above):
Units of the limited partner are sold to unit holders. This gives unit holders partial ownership of the limited partner and the business. For example, if there are 100 units, and a unit holder has 1 unit, then he owns 1% of the business. This is similar to how a corporation functions.
In fact, Section 7704(a) of the IRC states that publically traded partnerships will be treated like corporations except in a few instances. For example, if 90% of qualified incomes is produced through the energy industry or real estate markets, they can be registered as a publically traded partnership. These become “master limited partnerships” (MLPs).
Differences between MLPs and Corporations
In an MLP, the general partner is treated as a “flow-through entity,” and its earnings are treated as “passive income.” This means that whatever money is paid to the general partner is not subject to corporate income tax. Unlike corporations, MLPs are allowed to write off their taxes and defer them to the unit holders.
Proponents of MLPs often argue that treating general partners as “flow-through entities” offers MLPs an escape from “double taxation” which occurs in corporations when taxes on earned income are paid by both the shareholders as capital gains tax and the corporation as corporate income tax.
But while the proponents are technically right, their focus is one-sided. They extol the tax advantages of MLPs but do not analyze the disadvantages corporations and other partnerships face as a result. The double taxation that is evaded by MLPs cannot be evaded by corporations where both the share holders and the corporation have to pay taxes on earned income.
Further, because only specific types of businesses can become MLPs, the ability to escape double taxation appears more fully as an unjust and unfair tax advantage that incentivizes the destruction of Earth.
How the U.S. Government Incentivizes the Destruction of Earth
MLPs only be formed by partnerships which generate income from the sales of real estate property or the exploration, development, mining, production, processing, refining, transportation, storage, or marketing of methanol, ethanol, biodiesel fuel, petroleum, P series fuels, natural gas, liquefied hydrogen, liquid fuel derived from coal, or other types of fuel.
Emerging renewable sources of energy like wind, geo-thermal and solar are excluded.
This means that only businesses in real estate or non-renewable energy markets can qualify as MLPs and explains why so many limited partnerships exist in the ETP and Sunoco Families.
For every limited partner, there is a general partner which acts as a “flow-through entity.” This means that every time money is passed through one of these general partners, more taxes are evaded. Thus, a small group of wealthy individuals continue to grow wealthier off of an industry that continues to pollute the planet.
Conclusion
This privileging of non-renewable sources of energy over renewable sources helps explain why American and Canadian energy companies focus on domestic fracking rather than emerging renewable energy markets. They receive tax privileges for producing dangerous and explosive fuels that create pollution in the air, soil, and waters but do not receive such privileges for building turbines or solar farms that provide clean energy.
In short, the American government has created laws to encourage the destruction of the Earth rather than repairing the damage we have already caused.
(Article by Alexander Fred)
Stay tuned for Volume 3 where we discuss the recently announced merger between Sunoco Logistics Partners and Energy Transfer Partners and the reasons why it might be occurring.