Corporate characteristics associated with master limited partnership formation

The extent to which several corporate characteristics, such as debt level, tax costs, and cash flow, are associated with corporate formation of master limited partnerships (MLP) is investigated. Congress and the popular press suggest that tax savings was the sole motivation for using the MLP form. As a result, Congress' concerns about the demise of the corporate tax base led to new rules that changed MLP taxation from partnership to corporate for most publicly traded MLPs. The results of the study suggest that before 1986, MLPs appear to have been formed solely for tax reasons, but during 1986, both debt level and tax benefits appear to have influenced MLP formation. In 1987, debt level and cash flow are important predictors of MLP formation. The strongest result for all periods appears to be the difference in debt levels between firms that formed MLPs and those that did not. The lower tax costs of MLPs alone will not induce a wholesale defection from the corporate form.