HESM

What are the tax implications for shareholders who participate in the repurchase?

Created August 06, 2025 at 07:41 PM

Tax‑treatment of a share‑repurchase (redemption) by an LP is not unique to this announcement—it follows the same U.S. tax rules that apply to any “buy‑back” of partnership interests.

Below is a thorough, step‑by‑step overview of the tax implications for shareholders (i.e., unit holders) who decide to sell their units back to Hess Midstream LP (HESM) in the $100 million repurchase program announced on 5 August 2025.

1. What the transaction is for tax purposes

Term in the news	What it means for tax
“Repurchase” / “Buy‑back”	A redemption of partnership interests. The transaction is treated as a sale of the units, not as a dividend.
“Accretive”	The repurchase price is higher than the price paid by the sponsor in an earlier transaction, so the seller will likely have a capital gain (or a loss if the price is lower than the holder’s adjusted basis).
“From Sponsor and the Public”	Both the sponsor (who typically holds a large block of units) and public shareholders may sell. The tax treatment is the same for any seller; the source of the money (sponsor or the partnership) does not change the tax result.

2. How the IRS views a redemption of partnership interests

It is a taxable event.

The IRS treats the redemption as a sale (or exchange) of the partnership interest. The selling shareholder must recognize a gain or loss for the year the redemption occurs (2025).
Classification of the proceeds

Capital gain/loss – The default classification for a redemption is a capital transaction.
Return‑of‑capital (ROC) – If the repurchase price does not exceed the owner’s adjusted basis in the units, the amount is first treated as a return of capital, which reduces the basis in the remaining units (or reduces basis to zero).
Capital gain – Any amount above the adjusted basis is a capital gain (short‑term or long‑term depending on the holding period).
Loss – If the repurchase price is below the adjusted basis, the excess is a capital loss (subject to the usual capital‑loss limitation rules).

Holding‑period rule

Short‑term – If the unit has been held ≤ 1 year before the redemption, the gain is short‑term (taxed at ordinary income tax rates).
Long‑term – If held > 1 year, the gain qualifies for long‑term capital‑gain rates (0 %, 15 % or 20 % for most taxpayers, plus any applicable 3.8 % net‑investment‑income tax for high‑income taxpayers).

Basis adjustments

Initial basis = purchase price + any capitalized costs (e.g., commissions, fees).
Adjustment for ROC – If you receive an ROC portion, subtract it from the basis of any remaining units. Once the basis reaches $0, any further amount received is treated as a gain.
Effect of the sponsor’s contribution – If the sponsor previously contributed units at a low price, its units may have a low basis; the sponsor may therefore recognize a large gain when it sells its own units in the same repurchase.

3. What appears on the shareholder’s tax return

Form	What it reports
Schedule K‑1 (Form 1065)	The partnership will issue a K‑1 for 2025 reporting any allocation of ordinary income, capital gains, and any return‑of‑capital distributions that occurred before the redemption. The repurchase itself does not appear on the K‑1, but the final K‑1 for the year will reflect the sale in Part III – Partner’s Share of Income, Deductions, Credits.
Form 8949 & Schedule D	The shareholder reports the sale of partnership interest on Form 8949 (sale price, basis, gain/loss). The resulting gain or loss is then transferred to Schedule D (Capital Gains and Losses).
Form 1040	The net capital gain (or loss) from Schedule D is entered on Form 1040. If the gain is long‑term, it may be subject to the 3.8 % net‑investment‑income tax (NIIT) for high‑income taxpayers.
State tax return	Most states follow the federal treatment. Some states have different capital‑gain rates or may treat the transaction as a “sale” for state income‑tax purposes. Check state‑specific rules.
Form 1099‑B (if applicable)	The brokerage or the partnership may issue a 1099‑B for the gross proceeds if the transaction is executed through a broker. The amount on the 1099‑B is gross; the shareholder must subtract their basis to calculate the taxable amount.

4. Potential Special Situations

Situation	Tax Consequence	Remarks
Losses	If the repurchase price is lower than the adjusted basis, the shareholder may realize a capital loss. The loss can offset other capital gains and, if excess, up to $3,000 (or $1,500 for married filing separately) can offset ordinary income each year, with the remainder carried forward.
Holding‑period split	If a shareholder’s holding period straddles the one‑year mark (e.g., 8 months before and 5 months after), the long‑term portion is allocated proportionally; the IRS uses a “prorated” method for mixed periods.
Foreign shareholders	For non‑U.S. persons, the redemption is a U.S. source capital‑gain transaction. A 30 % (or treaty‑reduced) withholding may apply, but many treaties eliminate the withholding for capital gains on partnership interests. A foreign investor should consult the tax treaty between the U.S. and their country.
State‑level return‑of‑capital	Some states (e.g., California, New York) treat a return‑of‑capital as a non‑taxable reduction of basis but may have specific reporting rules for the ROC portion.
Net‑Investment‑Income Tax (NIIT)	If the shareholder’s modified adjusted gross income (MAGI) exceeds $200,000 (single) or $250,000 (married filing jointly), 3.8 % NIIT applies to the net gain.

5. Practical Steps for a Shareholder Who Decides to Participate

Obtain the exact redemption price per unit (the press release only announces the $100 M total size; the actual per‑unit price will be disclosed in the formal repurchase offer).
Determine your adjusted basis in each unit (original purchase price + any capitalized costs – any prior ROC).
Calculate the gain/loss:

[
\text{Gain/Loss} = \text{(Price Received × Units Sold)} - \text{Adjusted Basis of those units}
]

Document any broker/transaction fees (they can increase the basis or reduce the proceeds).
Track the holding period to decide on short‑ vs. long‑term treatment.
Keep the repurchase agreement and any statements showing the repurchase price for your tax records (the IRS can request evidence of basis).
Consult a tax professional especially if:

You hold a large position (e.g., > 10 % of the partnership).
You are subject to the NIIT or other high‑income tax provisions.
You are a foreign investor.

6. Bottom‑Line Summary for the Shareholder

The repurchase is a taxable sale of your LP units.
If the sale price exceeds your basis, the excess is a **capital gain (short‑term or long‑term).**
If the sale price is lower than your basis, the excess is a **capital loss.**
If the price is exactly equal to your basis, the transaction is a **return of capital that reduces the basis of any remaining units.**
The transaction must be reported on Form 8949 / Schedule D (and on the appropriate state return).
The tax rate you pay depends on your holding period and your overall taxable income.
The $100 M size of the repurchase does not affect the tax treatment—it only determines the total amount of money that will be available for shareholders who elect to sell.

Final Advice: Because the exact price per unit and your individual basis will determine the exact tax outcome, each shareholder should run the numbers for their specific situation and consult a tax advisor to confirm the correct reporting and to explore any possible tax‑planning opportunities (e.g., timing of sale, use of losses, or NIIT considerations).

Disclaimer: The analysis above is a general description of U.S. federal tax consequences for a partnership‑interest buy‑back. It is not personalized tax advice. Shareholders should seek individualized advice from a qualified tax professional before completing the repurchase.