Friday the 13th was not a happy one for the holders of the Guggenheim Fiduciary/Claymore Energy Infrastructure Fund who were surprised to find out that the fund’s NAV fell from $10.76 to $6.20 in one day with the fund’s apparent 26% discount moving to a 30% premium.

We won’t rehash the whole story here – we already covered it on our SA blog which anyone interested in deferred tax assets / liabilities can consult. Here we will just mention something that has always bothered us about the concept of MLP funds. The thing is that these funds have always been marketed as being tax-efficient due to their distributions getting the ROC-star treatment which means they are not taxed on investor level.

The problem with this is that, yes, the MLP fund distributions are not taxed on investor level but they are taxed on the fund level at 21% (formerly 35%). The reason this happens is that MLP funds are not RICs (registered investment vehicles) but are C-Corps. The reasons they are corporations is because they fail the diversification test for RICs.

So, what can investors do? If investors really really want to own a pure MLP vehicle they should buy an ETN (like AMJ) and hold it in an IRA. This is because an ETN is not a corporation so does not have fund level taxes. Holding a C-Corp in an IRA won’t work.

And if investors don’t care about owning a pure MLP fund, they can own a midstream fund instead which would be a RIC and not have fund-level taxes.

Thanks for reading.

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