10-86 Plans

So what are they talking about, 10-86 plans,  little known tax loophole, 10-86 payback plans, 10-86 loophole, gas pump revenge, 10-86 gas pump payback plans and what does it have to do with Ronald Regan?  What is a 10-86 plan?

www4.law.cornell.edu/uscode/26/7704.html. But you can get the full gist of it below.

In short Energy MLP s (Master Limited Partnerships).  When people talk about Reagans secret taxpayer loophole they are going back to the Tax Reform Act of 1986 and the tax benefits set up for real estate related items of which oil and gas actually falls into.  (watch the video below)

MLPs are investments that offer high yield and mix the tax loophole benefits of an LP (limited partnership) with the liquidity of an exchange listed common stock.   MLPs have the structure of LPs but offer investment units that trade on an exchange.  You could actually buy the units through your regular brokerage account.   Because of the Tax Reform Act of 1986 (which directly affects Title 26 funds) put forth by the Reagan administration MLPs were formed around the energy sector, pipeline ownership in particular.  But in order to qualify the MLP must derive 90% of its income from activities related to commodities, natural resources or real estate.  Most MLPs trade on the large exchanges such as NYSE and NASDAQ and relate to US oil and gas infrastructure.

In an MLP, instead of paying a corporate income tax, the tax liability of the entity is passed on to its unitholders.

Energy MLP are highly attractive for a couple reason:

The cash distributions made are not treated like dividends, you dont get taxed when you receive them, but are considered to reduce the cost basis of your investment, this liability is deferred until you sell your units of the MLP.

Because of the loophole in the Tax Reform Act of 1986 related to oil and gas production, transportation and storage, these MLPs are able to claim significant depreciation against any income.  In essence, you as an MPL unit get taxed on a much lower percentage of your cash distribution.

As entities that distribute the majority of their cash flow to shareholders, MLPs dont have to pay taxes at the company level, which greatly lowers their cost of capital.

Examples Of Energy MLPs

Below are some examples of Energy MLPs: