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Linn Energy, LLC (LINE) Message Board

  • lexpress56 lexpress56 Oct 27, 2012 10:35 AM Flag

    Would some please explain re LinnCo v Line

    Would one of the more knowledgeable posters please explain something to me regarding the LinnCo vs Line relationship?

    I read an article suggesting LinnCo only expects to pay taxes on 2% to 5% of revenues received from its Line shares. How is that possible?

    If LinnCo is a corporation, how is it that Linnco avoids paying corporate tax rates on revenues it receives? When I initially heard of the set up, I thought Linnco's discount would be more like 30% with Line paying a 7.5% yield, Linnco payiing 30% corporate taxes on that revenue, and Linnco paying out the remaining revenue at an approximate 5% yield (which I thought would be a great alternative in the marketplace). Obviously, I missed the boat. Would someone please take a moment to briefly explain what I am missing?

    Thanks in advance for your time. Lex

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    • Short answer – I assume the answer is IRC section 704, a section in the partnership tax law.

      Long answer -

      First, a small point -LNCO won't pay tax on 2 - 5% of the distributions it receives from LINE. Rather, LNCO's tax liability is expected to be between 2% - 5% of the distributions, which means LNCO will be taxed on 7.5% - 15% of the distributions. A small point, but we might as well be accurate.

      Second, the answer - Because LNCO is a partner in LINE, it does not pay tax on distributions any more than you or I pay tax on the distributions we receive. Instead we all pay tax on our shares on LINE's taxable income. In general, because of depletion and depreciation deductions, LINE's cash available for distribution exceeds taxable income, so you would expect LNCO's share of taxable income to be less than the amount of distributions it receives. This is a small part of your answer.

      But there's another reason. When you or I buy units in LINE, we are buying them from another partner. LINE has made a section 754 election which allows LINE to compute a special tax depreciation deduction based on the amount we paid for our units, which reduces the taxable income allocated to us.

      But LNCO is different. It bought its units directly from LINE, not from an existing partner, so the section 754 election is not available. Further, direct unit buys from the partnership itself are treated as capital contributions, not taxable purchases of units (that is, LINE is not taxed on the sale of units to LNCO). However, IRC section 704 applies when a partner makes a cash partnership contribution and the amount of cash contributed exceeds the contributing partner's share of the partnership's tax basis in its assets. Stated simply, LINE allocates a smaller amount of taxable income to a cash contributing partner until its capital account eventually equals its share of LINE's tax basis in its assets. So LNCO's share of LINE's taxable income is much smaller than its share of distributions.

      Hope this helps. It's the last one I can hope to post today - this storm has been cutting my power off and on all day today. I've tried to post this response since this morning, but I don't type fast enough.

    • anyone?

 
LINE
10.85-0.080(-0.73%)Dec 26 4:00 PMEST

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