According to conference call, 2013 LNCO distribution will be nearly all ROC, but 2014 and forward distributions will be classified as "qualified dividends". Given this, it is highly unlike that LNCO will ever trade at a premium to LINE again, whose dividend characterization will continue to be mosting ROC and thus will have a tax advantage over LNCO. The current spread will likely continue IMHO. I am curious if this was an off shoot of the SEC informal inquiry and was one of the changes LNCO mgmt agreed to satisfy Feds. It would have been nice to know this 6 months ago, when LINE pps crossed over LNCO pps.
You are so right. Do not understand all the time wasted talking about the MLP(distribution/no tax until sell stock) or C-Corp(LNCO stock Dividend subject to 15% tax) as all one has to do is go to LINN web site, hit far left box then in next screen, click on two choices where one is MLP(.2416=income distribution) and other is C-corp(.2416=dividend income/subject to 15% tax) What is so hard to understand and choose your own poison. Also, I have never seen such fickled stock from a up and down price variation, but do like the company and dividend which now seems to be very solid & safe with some growth potential in both stock price and distribution or dividend whether it be LINEor LNCO. GLTA
call center - The dividend classification change was due to the transaction with Berry Petroleum. Berry Petroleum had accumulated earnings and profits that LNCO now has. The LNCO dividend will be qualified dividends for a few years ( ignoring any other transactions that could impact this).
Source: Investor Relations - Line Energy
You do understand the main reason to create a LNCO was for adding LINE to IRA's and ROTH IRA's to relieve them of the Tax liability of the K-1 and payouts every year .....The 1000 dollar limit ....LNCO as just a pure Dividend payer has no such problem in IRA's....My tax guy does not want to deal with K-1's in IRA's. He had some customers get beat up by the IRS.
No, I don't understand. According to LINN announcements, LNCO was formed as a C Corp for acquisition purposes, with Berry Petroleum as its target. A "side benefit" for shareholders was simplifying tax reporting and IRA contribution, but this was not the main reason. The latest announcement that LNCO would be treating distributions in 2014 as "qualified dividends" to me is a game changer because now the tax advantage of an MLP is lost. At 2014 year end, a LNCO $2.90 distribution will be taxed at 20% plus the possible Obamacare surcharges if all of the distribution is treated as such. The 2014 LINE $2.90 will mostly go untaxed unless the stock is sold. Yes, there is a deferred tax obligation upon sale. I bought LINE and LNCO to earn a nice dividend (now monthly which is even better) for its long term income, and I can cover any capital gain with prior losses.
That was part of it, they were also hoping that funds might accumulate LNCO. But the main reason was to provide a vehicle for taking advantage of corporate mergers to acquire properties inside C corporations without the seller paying a third or more of the gain in taxes. It's not a complete free ride, LINE ends up getting the properties for tax purposes at basis rather than the sales price, but it lubricates the transaction and reduces the cost.
There's something wrong with that, it could have been a misstatement. You can't have taxable dividends without accumulated earnings and profits, and management said they expected zero net taxable income through 2018. I have a question into IR.
I mistook the same statement in the earnings press release, that zero net taxable income would equate to all distributions being ROC. But during conference call, mgmt stated that 2013 was last year LNCO distributions would be ROC and that going forward, most if not all distributions would be "qualified dividends". This differs significantly from LINE, whose shareholders get distributions tax free until they either sell their stock, or cumulative distributions exceed cost basis, at which time distributions are taxed as capital gains. Even though qual. div and capital gains are currently same rate, one big difference is that cap gains can be offset by cap losses, whereas qual div. taxes must always be paid.
Actually, I'll leave Clay alone, I realized I was incorrect. I'll have to cite some tax law here.
Dividends are taxable if they supported by current earnings and profits, or accumulated earnings and profits. AE&P is not taxable income due to timing differences, depletion is at cost, etc. A corporation can have negative taxable income and positive AE&P.
Second, a corporation can have negative AE&P, but positive current E&P, since a net operating loss carryover isn't accountable for current earnings and profits. Since dividends are deemed to come first from current E&P, you could have a taxable dividend when the corporation has a tax loss AND negative AE&P.
So, yeah, this should trade at a discount. Oops, I screwed up, because I read the "no tax through 2018" comment and figured, great, no difference between the two. But, the market is providing a gift, as LNCO was up a lot more than LINE, and I have a profit on this position. Monday I may swap back.
What should the discount be? Well, it's a potential 45 cent per unit cash flow hit, plus state taxes of course, maybe 50 cents overall. But, it's not permanent. So long as LNCO doesn't have a tax liability, 100% of LINE distributions will flow through. Eventually of course you will pay long-term capital gains tax on the gain, same rate as a qualifying dividend (under current law). So one would have to calculate purely the discount on the time value of that cash flow stream. It's pretty minor, depending on the rate and period you choose.
By the way, this has nothing to do with the SEC, it's purely a mechanical calculation.