Richard Kinder, of Kinder Morgan. Reuters

Energy giant Kinder Morgan Inc. is pursuing a reorganization that could trigger surprise tax bills for investors in its two publicly traded master limited partnerships: Kinder Morgan Energy Partners and El Paso Pipeline Partners.

Investors long have cherished the hefty payouts from MLPs, and the two partnerships—led by Richard Kinder, who also heads Kinder Morgan—have done well. According to Chicago-based investment researcher Morningstar, Kinder Morgan Energy Partners—the more widely held investment—has generated an average return of nearly 18% annually over the past five years and 12% over the past 10 years.

The potential obligations to Uncle Sam, however, are a reminder of the complex tax issues that come with MLP investments. That is especially true when shares—or units, as they are known—are sold. Here is what is happening, and what taxpayers can do about it:

Why MLP taxes are different. Because MLPs are partnerships and not corporations, they don't owe federal income tax. Instead, investors—who are technically members of the partnership—record a proportional share of the partnership's income, depreciation, losses and other items on their personal tax returns. Investors receive this information in a document called a K-1.

Incorporating K-1 information into the investor's tax return often takes far more time (or fees to tax preparers) than reporting dividend information, experts say.

The reason many investors owe little to no tax each year on MLP payouts is that most taxes are deferred until units are sold. There are tax effects that accumulate over time, however. An important one is that, unlike with dividends, MLP payouts reduce the investor's "cost basis," the starting point for measuring income tax after a sale. The lower the cost basis, the higher the taxable income.

When units are sold, there is a reckoning with the Internal Revenue Service. The investor's cost basis is often much lower than his purchase price, and some of his profit could be taxed at rates for ordinary income, which are higher than capital-gains rates.

Many tax issues disappear if MLP investors hold units until death, says Don Williamson, who heads the Kogod Tax Center at American University. At death, no income tax on the MLPs is owed and heirs get a fresh start—a cost basis equal to full market value at the date of death.

"Death is the best tax planning for MLPs," Mr. Williamson says.

Most Kinder Morgan MLP investors won't be able to use this strategy. The coming reorganization counts as a taxable sale, with investors slated to receive $10.77 in cash and 2.1931 shares of the new firm for each Kinder Morgan Energy Partners unit they currently hold.

Kinder Morgan is seeking to combine its energy-pipeline operations into a single company. Bloomberg News

How much tax investors will owe. Kinder Morgan has said the average investor could owe from $12.39 to $18.16 of tax per Kinder Morgan Energy Partners unit, depending on a number of factors.

Ethan Bellamy, an MLP analyst in Denver with Robert W. Baird, estimated federal taxes for investors by assuming they would pay a 35% tax rate on ordinary income and 15% on capital gains, and weighing various other factors. (He didn't include the 3.8% surtax on net investment income owed by higher earners.)

The longer the units are held, the higher the taxes are likely to be, Mr. Bellamy says. He estimates that investors who acquired units from 1992 through 2000 could owe from $25.22 to $24.04 per unit. Investors who acquired units from 2001 through 2010 could owe from $23.72 to $10.78, and investors who got their units from 2011 through 2013 could owe from $7.13 to $4.62.

Mr. Bellamy says actual taxes due from individual investors will vary. To calculate the tab, the investor will need records for all years of ownership. According to a Kinder Morgan spokesman, investors can obtain missing K-1s at no charge from

What happens to MLP units in IRAs. Advisers often warn investors not to hold MLP units in individual retirement accounts or Roth IRAs because certain income in such accounts could be taxable—even though the account is tax-exempt. The income is called "unrelated business taxable income," and a K-1 gives the amount of UBTI generated by the MLP each year.

Experts say many people holding MLPs in retirement accounts escape this tax because the first $1,000 a year of UBTI is tax-exempt. But the Kinder Morgan reorganization could "trigger substantial taxable income for units held in IRAs, even for people who don't usually have it," says Scott Bakal, a lawyer with Neal, Gerber & Eisenberg in Chicago.

What you can do. An investor's choices are limited, say experts. One option: Taxpayers planning to make gifts to relatives or friends in lower tax brackets could give MLP units instead. The recipient would owe tax, if any, on the reorganization and own the new Kinder Morgan shares.

Contributing units to charity often doesn't make sense because there is no deduction for their full market value, as there is for many donations of appreciated stock. Instead, the write-off is limited to the giver's "adjusted cost basis," which is likely to be low, says Mr. Williamson.

Mr. Bellamy suggests that investors swallow hard and pay up: "Even if the tax news is the worst, these have been massively outperforming investments for a long time."