USO liquidation?

Discussion in 'Options' started by FSU, Apr 21, 2020.

  1. Sig


    I just bought the weeklies for this week and next at $.02 to $.06. I figure it's either going to go under in the near term or not at all, so a very cheap long shot but the expected value on it seemed pretty good at the time given my read of the probabilities, even though the chance of it panning out is now pretty low.
    #51     Apr 22, 2020
    #52     Jul 6, 2020
  3. Cabin111


    I'll say it one more time for those who are new here. USO IS A MASTER LIMITED PARTNERSHIP!! It is not an ETF. Please know the difference...It can be a big headache if it is ever liquidated!! Here is just one thing I found online...There are many if you bother to look. Buyer beware...

    The decline in oil prices since 2014 has caused the less-resilient MLPs to fall out of favor, leading investors to sell their positions. Those investors are now realizing that those tax-free “dividends” are treated as a reduction in their cost basis. Investors holding an MLP long enough have seen their cost basis significantly reduced and nearly eliminated. What makes that reduced basis even worse is the tax treatment of the gain upon sale.
    The sale of an MLP triggers a recapture of those deductions that allowed the distributions to be tax-free in the first place. Instead of a capital gain upon the sale of the MLP, that recaptured amount is taxed as ordinary income, and the cost can be significant. In extreme cases, the entire gain might be taxed as ordinary income.
    The trickiest part of this is that the recapture amount is unknown by the investor until it’s reported on the K-1 issued in the year the MLP is sold. In general, the bigger the difference between the annual distributions and the income on the K-1, the more recapture income to recognize. However, the details needed to accurately calculate the recapture are unavailable to the investor.
    The financial struggles of some MLPs have prompted them to look at restructuring their debt, although doing so can result in investors recognizing income to the extent any debt is forgiven. This cancellation of debt income is also taxed as ordinary income, a double-whammy for investors already seeing a sharp decline in the value of the MLP itself.
    To avoid the CODI for their investors, some MLPs have restructured as C corporations. Doing so protects their investors from having to recognize CODI, with it instead being taxable to the C Corp. entity itself. This restructuring is considered a sale of the MLP units, though, which brings the investor back to the recapture issues discussed earlier.
    One strategy some investors have tried as a way to manage these tax issues is to hold MLPs inside their individual retirement account. Unfortunately, these investors have learned a new four-letter word — UBIT, or Unrelated Business Income Tax. This is a tax on income earned inside an IRA, and it can be surprisingly expensive. While not all MLP income is subject to the tax, the portion that is taxable is subject to the trust tax rates — which reach 39.6% at just $12,400 of income.
    #53     Jul 6, 2020
  4. ph1l


    Current ETPs with a Commodity Pool structure like USO don't create any unrelated business income according to
    Do I Have to Worry About UBTI If I Own an MLP ETF in an IRA?
    The short answer is no. ... because you own the ETF, not the underlying LP units (aka unrelated business)."
    #54     Jul 6, 2020
  5. Cabin111


    I just grabbed something off the internet...2016. The main point MLP is different from an ETF. Hope you don't mind, I'll just copy and paste from an April thread...My thoughts, Schwab and Fidelity's WORDS.

    You are correct in this part. It may be more like airlines or trucking companies will use it for a hedge. It is also an LLP. I'll repeat that, so it can sink in...It is also an LLP!!

    Does the government treat LLPs different than other ETFs? Yes!! If a LLP is liquidated, does it send a red flag to the IRS? Yes!! I have been audited 3 times...All with my wife. We had our ducks lined up in a row with my CPA before we went in. IRS auditors are not very bright. They want to find unpaid taxes quickly then move on. You could be there an hour explaining an unwound LLP (and not knowing what you're talking about). The auditor may reject your answers and say you had full knowledge of the LLP and may owe more in taxes. Or may ask for a revision of your taxes. Both cost money. You may need to hire a tax professional. I said may...LLPs CAN be tricky. When I had USO and showed my CPA the end of year statement, he suggested I get out of it and never return to that company. Yeah, so tell it to my CPA...He must be an idiot!! Yes, you are correct on the first part...But down the road, headaches could be ahead. If I remember...If the LLP does get unwound and it creates over $1,000. to your account, you need to file an extra 4 pages of documents to the IRS. Turbo Tax or H & R Block may not know what they are doing.

    Edited 5 minutes later. I went to Fidelity to buy 1 share of USO (just to see what would happen), no, I didn't buy. Below is the response...They are covering their ass.

    Error:(DI2002) You are placing an order for a security that requires you to execute Fidelity's Designated Investments Agreement for this account.

    Review and execute the Designated Investments Agreement, and review important information about this investment. If you do not agree to the terms of the agreement and review the important information, you may not purchase this security.

    For important information on these securities and their risks, see Master Limited Partnerships .

    One more thing from Schwab...

    • Taxes on distributions not received. According to the SEC, MLP unitholders may still need to pay applicable taxes even if the MLP doesn’t provide the unitholder with cash distributions. For example, “if debt owned by an MLP is discharged in a restructuring or bankruptcy, the amount of debt discharged may be treated as income,” meaning investors may owe income taxes despite not receiving a cash distribution.5 A restructuring or bankruptcy is rarely a good thing for investors, but in the case of MLPs it can add an additional headache when it comes to taxes.

    • State taxes. According to the SEC, investors may need to file state tax returns in states that the MLP operates in, even if the investor doesn’t live in that state.6

    • MLPs held in retirement accounts. Sometimes an MLP will generate unrelated business taxable income, or UBTI, which could lead to a tax bill even if the MLP is held in a tax-deferred individual retirement account (IRA). While the income earned in a retirement account is generally tax deferred, UBTI may actually be taxed in an IRA. In other words, an investor holding an MLP in a retirement may still owe tax. If an MLP is held in a tax-deferred retirement account, it’s usually up to the MLP unitholder to send the Schedule K-1 to the IRA or retirement account custodian.
    • Again below was from April...But still can and does apply to USO...
    Could USO go under...

    If you thought the collapse in oil prices this week was bad, next month could be “fundamentally worse,” with prices falling to -$100 a barrel, says one energy strategist.

    “Oil is difficult to handle and if you can't put it anywhere, it becomes an environmental liability literally. So over this next month storage is now effectively full, you could see some extreme negatives in terms of prices offered,” Paul Sankey, managing director at Mizuho Group, told Yahoo Finance.

    “The problem in the market today is really one of infrastructure and storage. Of course the biggest problem being that demand is down at absolutely previously unseen levels in the modern era,” said Sankey.

    Crude prices could go negative again as 40 million barrels of Saudi oil are currently on route to the U.S. The shipment was agreed upon in March before much of the economy came to a grinding halt amid COVID-19.

    “Those barrels take 45 to 60 days to arrive. And we can see this a flotilla of tankers that are coming towards the U.S. market ... We really can't handle it at all.”
    Last edited: Jul 6, 2020
    #55     Jul 6, 2020