Master limited partnerships (MLP) have sold off over the past few days, with the Alerian MLP Index down roughly 4 percent from its high in late April. Some individual names have suffered corrections of a greater magnitude.

The main catalyst for the selloff is a rumor that the US Treasury Dept will introduce a proposal to change the taxation of MLPs and other pass-through entities whose gross annual receipts exceed $50 million, a level that would include most publicly traded partnerships.

This news originated from an email that the National Association of Publicly Traded Partnerships (NAPTP) sent to its members. At this point, it’s not clear whether the Treasury Dept ultimately will introduce such a proposal. But any speculation about new taxes is enough to send investors into a fit.

This isn’t the first time MLPs have sold off after rumors of a change in tax policy circulated. Last year, the debate over the taxation of carried interest confused many investors and weighed on MLPs’ unit prices. Carried interest is a form of compensation paid to a partnership’s managers in exchange for their services.

Carried interest paid to general partners represents a share in the income produced by the partnership and is taxed accordingly. If that carried interest is generated by buying and selling financial assets such as stocks and bonds, it could represent capital gains rather than ordinary income. Under the current law, managers who receive carried interest earned through capital gains would be taxed at the lower capital gains tax rate.

This doesn’t apply to the energy-focused MLPs we recommend in the model portfolios. Energy-related MLPs represent operating businesses; the carried interest income they generate isn’t a capital gain and has always been taxed at ordinary income tax rates–this law wouldn’t affect their tax treatment.

Carried interest has nothing at all to do with those of us who are MLP unitholders. As MLP unitholders, we don’t receive carried interest income as part of our regular quarterly distributions, so this doesn’t change the way we’re taxed.

Some members of Congress support a change in the taxation of carried interest, but legislation introduced in past sessions has failed to pass. A now-infamous article published in The Wall Street Journal a few years ago caused the group to sell off when the writer incorrectly suggested that carried interest taxation would hit MLP unitholders.

Carried interest legislation is aimed squarely at hedge funds and private-equity firms that use the partnership structure to lower their tax bill. This risk is why we have never recommended publicly traded financial partnerships such as AllianceBernstein Holding LP (NYSE: AB) and Icahn Enterprises LP (NYSE: IEP).

At this point, it’s unclear whether the Treasury Dept is contemplating substantive changes to how MLPs are taxed or if the recent rumors refer to another effort to close the carried interest loophole.

However, one point is certain: Even if the Obama administration proposes a change to corporate or individual income taxation that affects MLPs, such a measure would face a long road before becoming law.

Such a change is definitely not something the Obama administration can act on unilaterally; any such measure would need to pass through a gridlocked Congress that’s focused on the 2012 general election. Recall how long it took the government to agree to a budget compromise. Meanwhile, the debate about the government’s debt ceiling rages on. In this environment, any change to corporate or individual tax laws would be difficult to pass. 

Further, MLPs enjoy considerable support in Congress. MLPs account for the vast majority of the nation’s spending on energy-related infrastructure, including natural gas pipelines and storage facilities that are crucial to US energy independence. Obama proposed greater use of natural gas in the transportation industry in a recent speech. 

And in 2007 Congress expanded the purview of an MLP’s approved activities, allowing them to engage in the processing, transportation and storage of alternative fuels such as ethanol. Others have proposed expanding the structure to support alternative-energy investments such as solar and wind power installations.

Finally, the NAPTP and the energy industry represent powerful lobbies in Congress. Elected representatives in Washington are aware of the potential political fallout from supporting a change in taxation that would increase energy prices.

To date, the Treasury Dept has yet to issue a proposal that changes how MLPs are taxed–only rumors. Although such a proposal shouldn’t be ruled out, a change of this nature would face a long and politically difficult route to passage, especially with the 2012 elections around the corner. We will continue to monitor the political debate and issue Flash Alerts to keep you apprised of these developments.

Meanwhile, we continue to focus on the underlying businesses and market conditions for the MLPs we recommend. On that score, the news is favorable: Our picks have reported quarterly results that exceeded expectations, and the number of MLPs that boosted distributions in the first quarter hit its highest level since 2007. We recommend taking advantage of the correction to buy units of any Portfolio holdings that trade under our buy target prices.

Investors should also remember that MLPs are prone to sizable intraday swings from time to time. We have repeatedly warned readers against the use of stop-loss and trailing stop orders when buying MLPs. Stop orders instruct your broker to automatically sell you out of a stock when it touches a predetermined “stop” price. But many investors set stops at similar price levels; when an MLP’s unit price declines and these stops are triggered, the wave of selling can temporarily overwhelm the market and send the MLP even lower.

Often, intraday weakness is reversed by the close of trading, but the damage is already done for those investors who set stops and were sold out of their MLP holdings at unfavorable prices. Do not be tempted to set stops on MLPs.