Master Limited Partnerships

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Publication April 12, 2016

Master Limited Partnership investors may be in for a rude surprise when the MLPs have to restructure debt.

An MLP is a partnership whose ownership interests are traded on a stock exchange or secondary market. The United States usually taxes publicly-traded companies as corporations. However, it makes an exception for partnerships that receive at least 90% of their gross income each year from passive sources, like interest or dividends, or from activities tied to minerals or natural resources. Such companies are able to operate without having to pay corporate income taxes. Their income is taxed to the owners directly.

Linn Energy, an oil and gas exploration company structured as an MLP, may be on the verge of bankruptcy. The investment units were trading at 32¢ a share as the NewsWire went to press.

The company negotiated $1 billion worth of debt relief in November and passed along the income from the cancelled debt to investors on the K-1s each investor was sent for 2015. The K-1s show each investor’s share of income at the partnership level.

The company is now offering investors the chance to swap their MLP units for shares in LinnCo, a corporation that manages the MLP and holds a large interest. The swap was offered in late March at the same time the company announced plans to try to restructure its remaining debt. The swap is supposed to shield investors from any further cancellation of debt income, since any such income would be trapped in LinnCo, a corporation. The swap itself is a taxable exchange that could lead to recapture of part of the depletion and depreciation deductions the investors claimed earlier.

Analysts say the potential further cancellation of debt income for investors exceeds the current value of their MLP units by as much as 10 times. The MLP has 350,000 unitholders.


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