Wells Fargo believes the weakness in LINN Energy (LINE) and LinnCo (LNCO) can be attributed to speculation that LinnCo could realize a large tax liability in 2016, though the firm does not think that speculation is accurate. Wells attributes the widened spread between LINN and LinnCo shares to increased short interest in LINN, which is easier to short. Wells Fargo maintains Outperform ratings on both LINN and LinnCo and thinks the closing of the Berry Petroleum (BRY) merger in Q3 will be a catalyst for shares of both.
From the press release dated February 21, 2013, titled "LINN Energy and LinnCo to Acquire Berry Petroleum Company for $4.3 Billion":
In order to avoid immediate tax on LINN's acquisition of the Berry assets, LinnCo incurred a deferred tax liability. Because of the incremental costs for LinnCo resulting from this deferred tax liability, LINN has agreed to pay LinnCo $6 million per year for three years (2013, 2014 and 2015) or roughly $0.06 per LinnCo share. Due to the significant estimated shield provided by LINN to LinnCo, LinnCo's cash tax liability is estimated to be zero for the last two quarters of 2013. In future periods, assuming current estimates for taxable income and capital spending, management estimates that LinnCo's tax liability will be in the range of 2 percent — 5 percent of dividends paid, which is the same as the estimates provided in the prospectus for the LinnCo IPO. Therefore, this transaction is not estimated to give rise to any additional tax liability for LinnCo over and above the guidance that was previously provided. LINN's management and board have also agreed to evaluate the need for any additional payments from LINN Energy to LinnCo should taxes be higher than expected.
== Bottom line is there will be taxes from the acquisition of BRY and those will be deferred over three years. Yes, the taxes could be more, but mgmt has estimated a total of $18 million. After that (2015) they will have been paid.
Ummm: shorts are using this as a scare tactic? Really?
Don't know what year LNCO will get nailed, but when the distribution cost basis reaches zero (and could it be quicker than with individuals?) , LNCO will have to pay taxes, thus reducing their distributions.
That's actually an interesting question and one that LINE must have discussed with the IRS prior to issuing LNCO and stating how it will function from a tax standpoint. That said, it makes no sense to think LNCO will have to recapture the distributions on an annual basis. But I'm sure you can ask IR or better yet, call the IRS and ask them. You probably wont get an answer but I'm quite sure LINE did.