I currently own shares in LINE and not in LNCO. LNCO didn't exist when I invested in Linn Company. I am middle class, which means that I currently pay a 15% rate of dividends (this rate may go higher should the Bush tax cuts not be renewed).
Last year was the first year that I received dividends from LINN, I believe that they are taxed at 0% until I have been paid the cost basis of the shares (if this is true I may not have to pay any taxes on my LINN shares as I may be dead before the dividends reach cost basis as I will turn 65 years old soon).
For my particular situation, am I correct in thinking that all the tax advantages for dividends are with my holding LINN shares and not LNCO shares? Thanks
As long as you don't sell the LINN you are better off. If you become half dead and care costs force you to sell, recapture comes in to play for all previously untaxed amounts at full ordinary rates. I switched from KMP to KMR after 2 years 10 years ago and remember the surprise. KMR is like LNCO but no cash and no 1099, only more shares for tax free compounding. Now there is LNCO, at over 65 I could use another check.
Today, 12/12, LNCO is/ was above LINN. Seems popular.
Tax code does change and Progressives do not like any type of tax deferment. They are even assaulting 401k and IRAs again Progressives do not wish Americans who wish to be self reliant engage in saving for retirement and being able to avoid their collective. Hopefully the Republicans will be able to maintain the 15% rate on dividends for middle income families who desperately need to save.
You are correct that a very small portion of the income stream from the partnership units are taxable income. Most of the distribution is return of capital and adjusts your basis downward until it reaches zero. A fully absorbed basis is an excellent gift to younger folks with little or no other income like college students or as an inheritance. Although they are also gunning for basis step up. Doubt it will happen as this is how old money Progressive families avoid taxes like Kennedys, Rockfellers and such.
In theory the partnership units and corporate structure will deliver about the same cash flow except for some minor Alternative 1% to 3% minimum - for now. But gifting the corp LNCO is much easier and simple. So for nearly all of us who are not Kennedy's or Rockefeller with tax lawyers and accountants on staff, LNCO it is the way to go - if the valuations are close.
I believe it is a solid long term investment at today's prices. But you need to keep an eye on tax changes.
A very likely out come is dividends get double taxed at ordinary rates while some allowance is made for capital gains. So LNCO would become a great way to turn income taxed at the highest margin rates into capital gains. In which case LNCO could trade at a premium to even the underlying partnership units. But if no allowance is made for capital gains then it probably should be at a small discount. Recapture is just like the partnership units at ordinary rates.
LNCO is simpler so I think buying LNCO over the units is the way to go for us regular Americans - unless we get to a significant premium over the units.
I'm not sure if I agree with you, but as for "regular Americans" I must add that my income is a small social security check and my dividends! I use Turbo Tax software at tax time to easily prepare my own income tax return. The middle priced one handles the K-1 information for me easily. The only think I do is keep a notebook of my partnerships and remember to reduce my cost basis by the amount of the distributions. You can do that yearly although they all pay at least quarterly. Simple arithmetic.
When (and if) your distributions nearly equal your basis, just buy a few more shares to stay ahead of it! The K-1's actually keep track for you: on page 1 of the form it always lists your number of units owned and other data that ends with your total cost as of the end of the year.
I've been thinking of investing in both. Why? Because my LINE units will never be taxed to my beneficiaries after my death (units in partnerships are inherited at their current market value without regard to my cost or previous distributions received). Shares of LNCO are also inherited at current market value but while I am living I will continue to collect LINE's distributions tax free!
I think the only other differences in the two are this: LINE pays nontaxable distributions vs. LNCO pays taxable dividends. For those who hate dealing with K-1's at tax time, LNCO is an easy solution. I have no problem with K-1's because I use Turbo Tax premium version and that makes it easy to report any taxable things from LINE. Paperwork is only involved for your own record keeping: distributions are deducted from your cost (basis). In a way, distributions are a return of capital to the IRS, yet you don't report that unless your basis is reduced to zero.