Stock Market Investment Ideas

10-86 Plan Loophole Revealed

10-86 Plan Loophole Revealed

You may have seen advertisements going around, or have heard people talking about the 10-86 Plan.  There has been a fairly large buzz about them in various forums since they came out.  You may have heard people refer to them as 10 -86 Payback plans, 10-86 Investment plan or something similar.  But what are they and where did they come from?

In this article we will attempt to trace these illusive investment vehicles and try to figure out how to locate and figure out what the best 10-86 plans are.  Is there a 10-86 Plan scam?

From a little research, we have determined that the 10-86 Plan is actually a name labeled to a loophole that was created during the Reagan era when he overhauled the tax code by a marketer.   More on this in just a bit.

Ronald Reagan’s tax reform of 1986 left quite a few tax breaks for real estate.  Whatever the controversy or conspiracy was about his intentions here were, the fact remains that these tax loopholes were in place.   So anything deemed real estate and structured in the proper format could take advantage of certain loopholes in the tax code.  Whether these loopholes were overlooked or not will probably remain a mystery.  Master Limited Partnerships (MLPs) have become very popular since then.

Most people know that there are many tax advantages with real estate investment vehicles, however, some of the more clever securities firms set out to find other ways to take advantage of this.  As it turns out, many aspects of oil and gas investing actually falls into under real estate in relation to taxes.  This posed a very interesting scenario for brokers and broker dealers, not to mention those in the oil business.  In fact, there are many aspects of the energy production industry that could fall into this category too.

If you have ever been pitched an oil well project you’ve probably seen that one of the big advantages touted of investing in an oil well was the tax advantages.  However, investing in oil wells are extremely risky.  You either hit gushers, hit a dry well, or the well produces very little.  Most turn out to be dry or low producing.  But we digress.

What does this have to do with the 10-86 Plan?  As we stated before, the name 10-86 plan was made up by marketers of investment advice products.  As it turns out the 10-86 plan is actually Energy Master Limited Partnerships or Energy MLPs.  But they don’t focus on oil wells per say.  They focus on all facets of energy production.  Things like pipelines, drilling, drilling equipment, building roads to the fields where energy is produced, transportation of oil and natural gas.

Definition of ‘Master Limited Partnership – MLP’ from Investopedia:

A type of limited partnership that is publicly traded. There are two types of partners in this type of partnership: The limited partner is the person or group that provides the capital to the MLP and receives periodic income distributions from the MLP’s cash flow, whereas the general partner is the party responsible for managing the MLP’s affairs and receives compensation that is linked to the performance of the venture.

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So how that we have figured out that the 10-86 Plan is actually an Energy MLP, are they worth looking into?  It is our understanding, and we are not tax experts by any means, that its probably not the best idea to place these in your IRA.  You should probably consult a tax professional about this part of it if you have questions.

Because MLPs trade on a public exchange, you could potentially benefit from the trading price action, as in the buy low, sell high mantra, and the tax advantages of actually owning a piece of an MLP and not to mention the dividend yield.   The 10-86 Plan discusses energy MLPs specifically though.  Why?  Because energy and energy production will always be a hot sector.  The need for energy, whether it be from fossil fuels or clean alternatives will always be in demand.

Before we said that investing in oil wells was extremely risky.  We have not changed this belief.  However, what about oil pipelines?  Or the trucking companies that move the oil to the pipeline?  Or the company that rents out drilling rigs? It is our understanding that these things can be placed in an energy MLP.   Can you see any reason for us to stop transporting oil through a pipeline for the foreseeable future?

So how do you find energy MLPS?   You can join an online service such as Dividend Stocks Online that actually track ALL dividend yielding funds on the market.  They track ratings, performance and payouts and very affordable.  Here is a sample list of dividend stocks and funds in the energy sector below:

Company Symbol P/E Yield Payout
1 Year
Return %
Transocean Ltd RIG 5.28 Members Only Members Only
Ensco PLC ESV 12.02 2.7 Members Only Members Only
Seadrill Ltd SDRL 22.57 8.21 Members Only Members Only
CNOOC, Ltd. CEO 9.09 2.46 Members Only Members Only
Linn Energy LLC LINE 8.73 6.86 Members Only Members Only
Vanguard Natural Resources, LL VNR 7.58 9.53 Members Only Members Only
CKX Lands, Inc. CKX 15.97 2.02 Members Only Members Only
Baytex Energy Corp BTE 18.12 5.46 Members Only Members Only
Talisman Energy Inc TLM 15.41 2.53 Members Only Members Only
Penn Virginia Corporation PVA 2.72 Members Only Members Only

Or you can try to find them yourself using a free stock screener, which is probably a bit more difficult and time consuming, if you don’t know what factors you should be looking for and filters you should be applying to the screener.  If you want to do this yourself, one of the best free stock screeners (which covers dividend stocks too) is the Yahoo Stock Screener found here

Let’s say your looking for oil and gas pipeline MLPs.  Once your at the yahoo screener, select “Oil and Gas Pipelines (Basic Materials)”.  Then go down the page and select the dividend yield you are looking for. Keep in mind this value will be the minimum it will pull up.  The higher you set this the less your results.  Next, down near the bottom of the fields, choose the analyst buy/hold/sell recommendations.  You probably want to select from ones that don’t have “sell” ratings from analysts.

The yahoo screener will come up with a list of securities for you to choose from, and you can go about your due diligence on each of these.

There is no doubt about it, most professionals will tell you that you need dividend paying funds in your long term portfolio.  This is probably not bad advice, because over years of investing and reinvesting your dividends with a carefully cultivated portfolio, you could end up with a nice tidy some and a very shiny nest egg to crack open when all is said and done.   This is the power of compound that all banks successfully depend on.

So when it comes down to it, you have three options for selecting good dividend stocks. 

1. Listen to your broker (if you have one), keep in mind that most will pitch you products that their firm endorses or owns so they could be biased.

2. Do the research yourself using free stock screeners and tons of due diligence.  Keep in mind here, that if you don’t understand or are not knowledgeable in this area there are many things you could miss and end up selecting a bad investment.

3. Combination of the first 2, find a research firm or service that specializes in researching, rating and tracking dividend stocks and funds, access this research and build your long term portfolio as you see fit.  Again, we think that Dividend Stocks Online is a great service for this. They have the research, they track the funds, and they are very affordable.

Which ever way you decide to go, good luck, and remember, question authority when it comes to your hard earned money.  Don’t give it up so easily.  Check your emotions at the door and depend on your brain.

We are not investment advisers, broker dealers, or professionals in anyway, and we surely are not offering to buy or sell securities in any fashion.  If you have questions regarding taxes or investing, please consult a licensed professional.

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