Publicly Traded Partnerships (PTPs) have become popular investment vehicles as investors look for higher distribution yields.  Unfortunately what is being touted as “dividend income” is, in reality, just a return of capital (return of investment or basis) and therefore should not be used as a basis for comparison to dividend paying corporations, according to Gies College of Business professor Tom Sternburg.

For example, the December 2017 issue of Kiplinger’s Personal Finance has an article “Our Top Dividend Picks” that lists two PTPs as high yield dividend companies (Blackstone Group and Enterprise Products Partners) without noting that the listed companies were in fact partnerships and the distributions were not dividends.  To an unknowing investor, the discussion of cash flow and the high yield from a PTP might seem attractive, especially if the investor is unaware of any tax reporting requirements beyond what is required when holding stock in a company.  This may cause the investor to find themselves in a tax reporting nightmare. 

In addition to the cash flow being a return of investment basis, the owner of an interest in a PTP must deal with the many tax issues that are present from the flow through information provided on the annual Schedule K-1 from the partnership.  There are numerous pieces of tax information that must be reported correctly on the investor’s annual tax return.  Also, the sale of a PTP interest results in rather complex reporting requirements. 

This is in stark contrast with the simple reporting of dividend income received from the ownership of stock on Form 1099-DIV (or Form 1099-B if inside a brokerage account) or the simple reporting of the sale of the stock on Schedule D.

"Investors need to fully understand what they are investing in,” said Sternburg, a teaching assistant professor of accountancy at Gies College of Business. “There is a big difference between distributions that are dividend income versus a return of basis. One is income and the other is just a return of your own money."

Sternburg’s article, “Publicly Traded Partnerships: Tax Treatment of Investors”, co-authored with Dawn Drnevich (Indiana University), was published in The Tax Adviser, (April 2019).