Please note that LinnCo does not advise on any tax requirements or issues. Information from this site is subject to update or change without notice. Use of any information from this site is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for any tax questions and assistance.
Why was LinnCo created?
LinnCo was created to enhance LINN’s ability to raise additional equity capital to execute its acquisition and growth strategy. As LINN continues to grow, the size of individual acquisitions it pursues and its related financing needs are expected to increase. LINN believes that the LinnCo structure will allow LINN to expand its investor base through offerings of LinnCo shares, the proceeds of which will go to LINN for use in executing its strategy, in return for a number of LINN units equal to the number of LinnCo shares sold.
Why does LINN believe that LinnCo will enhance LINN’s ability to raise equity?
LinnCo is taxed as a corporation, which enables holders of LinnCo shares to invest indirectly in LINN without the associated tax-related obligations of owning a LINN unit. For example, holders of LinnCo shares will receive a Form 1099-DIV rather than a Schedule K-1, will generally not have unrelated business taxable income (UBTI), and will not be required to file state income tax returns as a result of owning LinnCo shares. LINN believes that this structure will appeal to investors that would like to invest in a dividend-paying oil and natural gas exploration and production company, but currently do not invest in LINN units because of UBTI consequences and more onerous tax-reporting requirements.
Why doesn’t LINN just increase the size of its LINN unit offerings?
While LINN has been one of the most active energy-focused master limited partnership equity issuers in recent years, we believe that expanding the investor base to include institutions, individual retirement accounts, foreign investors and tax-exempt investors will provide LINN with equity-raising opportunities significantly beyond its current capacity.
How will LinnCo quarterly dividends be determined?
LinnCo owns a number of LINN units equal to the number of LinnCo shares outstanding and will receive the same distribution per LINN unit as all other LINN unitholders. When LinnCo receives a quarterly distribution from LINN, it will reserve an amount equal to LinnCo’s estimated income tax liability, and will distribute the balance as a dividend to LinnCo shareholders. We currently estimate that for the periods ending December 31, 2012, 2013, 2014 and 2015, LinnCo’s income tax liability will be between 2% and 5% of the cash LINN distributes.
What rights will LinnCo shareholders have with respect to the governance of LINN and LinnCo?
LinnCo will submit to a vote of its shareholders any matter submitted by LINN to a vote of its unitholders, which will include the annual election of the LINN board of directors. LinnCo will vote the LINN units it holds in the same manner as our shareholders vote on those matters. Our shareholders will also be entitled to vote on certain fundamental matters affecting LinnCo, but will not have the right to elect the LinnCo board of directors. LINN holds the sole voting share in LinnCo, and therefore will elect the LinnCo board. LinnCo’s initial board of directors will be composed of the same members as LINN’s board of directors.
Will there be future offerings of LinnCo shares?
As LINN continues to execute on its acquisition and growth strategy, it expects to continue to require additional equity capital. LinnCo may make future sales of LinnCo shares to facilitate this strategy, and such future sales may be made separately or in tandem with future sales of LINN units depending on, among other factors, the amount of equity capital to be raised and the relative trading prices of the LinnCo shares and the LINN units. Any proceeds from the sale of both LinnCo shares and LINN units will ultimately be used by LINN to execute its strategy.
What portions of my cash distributions are subject to the 3.8% surtax on net investment income enacted by the Health Care and Education Reconciliation Act of 2010?
For tax years beginning after 2012, new Internal Revenue Code (“IRC”) Section 1411 imposes a 3.8% surtax on certain passive investment income of individuals and of trusts and estates. All distributions treated as a taxable dividend or gain for US federal income tax purposes would be considered net investment income for purposes of IRC Section 1411. This includes the net gain or loss on the sale of LinnCo, LLC shares. We encourage you to consult your tax advisor concerning the impact of IRC Section 1411 to you.
How do I know what portion of the distributions I receive are qualified dividends and what portion are nondividend distributions (i.e. non-taxable return of capital)?
Distributions are treated as dividends under US tax law only to the extent that they are paid out of current or accumulated earnings and profits (“E&P”). If cash dividends exceed current or accumulated E&P for a taxable year, the excess cash dividends would not be taxable as a dividend but rather they would be treated as a return of capital for US federal income tax purposes. Amounts treated as such would result in a reduction in the adjusted tax basis of your LinnCo shares. Any amounts in excess of your adjusted basis would be treated as a gain for US federal income tax purposes. Each January LinnCo, LLC will announce the estimated tax characteristics of the cash distributions for the previous calendar year. By the following March, LinnCo, LLC will announce the final tax characteristics if they differ from the January estimate. The current tax characteristics can be viewed here.
Amounts reported to you as qualified dividends are taxed at the dividend tax rate. Any amount treated as a dividend or a gain for US federal income tax purposes may be subject to the 3.8% surtax on net investment income imposed by Internal Revenue Code Section 1411.