The move to convert diversified MLP, Compass Diversified Holdings (CODI) to a corporation has been approved by their board of directors.
The conversion will take place effective 9/21/2021.
CODI has 3 issues of preferred units outstanding which can be seen here.
The company press release can be read here.
If I buy Codi in ab IRA will it be taxed As a corp or as a partnership? Yes or no???
CODI converted to a corp last year. your broker better pay it as a dividend.
Al,
Looks to me like CODI stock will be taxed as a corp. No more K-1s (for commons and the preferreds).
On their website:
https://ir.compassdiversified.com/Tax-Information/year-end-tax-information/default.aspx
On September 1, 2021 Compass Diversified (the “Trust”) elected to be treated as an association taxable as a corporation for U.S. federal income tax purposes. Stockholders will no longer be allocated pass through income from the Trust and the Trust will no longer issue Schedule K-1s. As a result, tax-exempt shareholders will no longer be allocated any “unrelated business taxable income” (or “UBIT”) from the Trust. Moreover, distributions from the Trust will now be treated as corporate dividends to the extent paid from the Trust’s earnings and profits and reported to stockholders on Form 1099-DIV, which may be obtained from your broker.
Their FAQ page addresses the issue of holding their stock in an IRA:
https://s23.q4cdn.com/733782328/files/doc_downloads/2022/03/CODI_FAQ_3.pdf.
In theory, CODI will have the ability to reduce the common dividend and grow internally using retained earnings. This should make the preferreds relatively safer I would think.
This doesn’t look to me like a conversion of a partnership to a corporation. Rather, it is an election of the entity to be treated as a corporation for federal income tax purposes. I take it that they are doing something some shipping companies do, being an LP but being taxed as a corporation. Just sayin’
i owned them at one time back when they bought out 2 local companies, Fox suspension and Camelbak. They had another couple holdings, one a office furniture manufacturer (probably Halo ) and Liberty safe both of which had been losing money. Maybe should of stayed, but I felt they sold some good Companies, ( Fox and Camelbak ) just to pay the dividends to the partners ( ROC? ) Now years later 3 high dividend Preferred’s
An investment you would need to watch closely.
Silly question — will the preferred also convert to a corporation so no more k-1’s?
Yes going forward but you will still get a K-1 for part year 2021.
Perhaps obvious to many here, but what if you buy CODI or any of its preferreds after effective date 9/21/2021 you avoid K1 for this year? Or, the effective only applies to only the common stock and each Preferred has to do its own re-org after the 9/21?
fyi, CODI common currently has divd of appx 14% almost twice of CODI_pA, B or C all in 7.5%-ish yield at current prices
Yes, if you buy them after 9/21, no K-1.
Mseni19–no, I think good question.
I called CODI yesterday and they informed me that if you owned the preferreds before September 1 that you would receive a K-1.
However, I forget to ask whether the dividends on the preferreds would be qualified after September 1, as was the case for example with TGP-A. Does anyone know the answer to that?
mseni19,
The election permitted to be made by certain entities as to how they will be taxed is made at the entity (CODI) level, not at the level of particular securities of the entity. So if CODI uses the “check-in-the-box” rules to elect to be taxed as a corporation, then CODI’s preferred stock will become preferred stock of a corporation, for tax purposes.
It has been CODI’s existing election to be taxed as a partnership that has made some of its income potentially subject to the UBTI (unrelated business taxable income) rules. Because a partnership for tax purposes is a “pass-through entity,” it’s income is not taxed at the entity (partnership) level and instead its income is generally taxed at the partner level. And a tax-exempt entity such as an IRA holding securities of the partnership may be treated as a partner for these purposes. IRC 512(c).
While interest and dividend and many other types of income are not generally treated as UBTI of a tax-exempt entity such as an IRA, an exception applies for income traceable to leverage. In that case generally, the income may be treated as UBTI and subject to tax in an IRA. IRC 514.
So, again, CODI electing to be taxed as a corporation means that income from the securities of CODI will not be subject to tax under the UBTI rules when those securities are held by an IRA.
I’ll stop there. The rules are obviously very complex. I have tried to describe the general rules responsive to your question.
Will distributions of the common and the preferred now be characterized as dividends and will these both be QDI?
Generally, yes, it is QDI, though as a partnership, they have no retained earnings on day one as a corporation, so the potential for ROC in 2021 is higher than in most years on the common shares on the first dividend after the conversion.