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 regulated investment companies (such as TYG and TEAF) 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?
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) Return of Capital (“ROC”). ICTI will be designated as dividend income, a portion of which may be taxable as Qualified Dividend Income (“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.