What are the unrelated business taxable income (UBTI) implications for investors in Tortoise’s closed-end funds?
Certain U.S. tax-exempt investors, including employee benefit plans, pension funds, private foundations, 401ks and IRAs, are generally subject to tax on their UBTI. Distributions paid by corporations (such as TYG and NTG) or regulated investment companies (such as TPZ, TTP and NDP) are specifically excluded from UBTI.
Thus, distributions from Tortoise’s closed-end funds are not treated as UBTI and tax-exempt investors are not subject to federal income tax on such income, unless the stock is debt financed. If the stock is debt-financed, the net dividend income will be treated as UBTI.
Will I receive a 1099 or multiple K-1s from Tortoise’s closed-end funds?
Stockholders of Tortoise’s closed-end funds receive a single form 1099-DIV. Furthermore, stockholders in the funds will not be required to file state income tax returns in each state in which any underlying portfolio MLPs operate.
What determines the taxability of distributions I receive from a Tortoise closed-end fund?
The answer depends on whether the closed-end fund is taxed as a regular C-Corporation or if it meets the requirements of a Regulated Investment Company (“RIC”).
For funds taxed as C-Corporations (TYG and NTG):
The taxability of the distributions you receive depends on whether the fund has annual earnings and profits (“E&P”). E&P is primarily comprised of the taxable income (loss) from MLPs, fund operating expenses, net realized gains (losses) and certain specified adjustments as reported on annual K-1s. If the fund has E&P, it is first allocated to the preferred shares and then to the common shares. In the event the fund has E&P allocated to its common shares, all or a portion of the fund’s distributions will be taxable at the Qualified Dividend Income (“QDI”) rate, assuming various holding requirements are met by the stockholder. The QDI rate is variable based on the taxpayer’s taxable income. Distributions in excess of E&P are return of capital (“ROC”), which is not taxable and reduces the stockholder’s cost basis.
For RICs (NDP, TTP, and TPZ):
Distributions paid on common shares will generally consist of: (i) investment company taxable income (“ICTI”) which includes ordinary income net of deductions plus any short-term capital gains in excess of net long-term capital losses; (ii) long-term capital gain (net gain from the sale of a capital asset held longer than 12 months over net short-term capital losses) and (iii) ROC. ICTI will be designated as dividend income, a portion of which may be taxable as QDI to the extent of any QDI received from our investment in common stocks (assuming various holding requirements are met by the stockholder). The QDI and long-term capital gain tax rates are variable based on the taxpayer’s taxable income. Distributions in excess of ICTI and long-term capital gain are ROC, which is not taxable and reduces the stockholder’s cost basis.
What are the tax implications if I sell my closed-end fund shares?
Upon sale of common shares, a stockholder generally will recognize capital gain or loss measured by the difference between the sales proceeds received and the stockholder's federal income tax basis of the common shares sold. Generally, such capital gain or loss will be long-term capital gain or loss if the shares were held as a capital asset for more than twelve months.
Tax matters are very complicated, and the tax consequences of an investment will depend on the facts of each stockholder’s situation. Investors are encouraged to consult their own tax advisors regarding the specific tax consequences that may affect them.