Get Rid Of Your Linn Energy Shares Now

| About: Linn Energy (LNGG)
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This is serious: Get rid of your Linn Energy shares.

If you want to do it the best possible way, you have a single day to act.

If you fail to act during that time frame, you might have to sell those shares at any price as they'll be worth less than zero to you.

Source: Stock photo.

This is an urgent warning for unaware Linn Energy LLC (LINE) unitholders out there: You need to get out of your LINE units. You need to either sell them or accept LINE's offer to exchange them for Linn Co. LLC (LNCO) shares. This offer has been extended, but expires on April 25 at midnight.

I am putting out this note because LINE unitholders could be exposed to losses that would go over and beyond just losing all of their investment in LINE units. The likelihood of LINE (and LNCO) being worth zero is already high, but this problem goes well beyond that.

The Problem

To start, you have to understand that LINE is not like the other stocks you usually trade. It's not structured as a corporation. Instead, it's structured like a partnership. In this structure, the company does not pay income taxes -- you'll be familiar with it. LINE does not pay taxes, only its unitholders do. Previously, it made distributions and you paid taxes on those distributions.

Ordinarily, those distributions would come from regular profits and you'd pay taxes just on those distributions. But right now, something a lot weirder is about to happen. LINE is about to file Chapter 11. And when it does (actually, when it comes out of it), unitholders will be in a world of hurt.

With a regular corporation, upon filing for Chapter 11 shareholders would be exposed to total losses. They'd lose all the money they had put into the stock. However, with a partnership like LINE things can get a whole lot stranger. It might be that unitholders won't just lose all the money they invested, but they might also face a large tax liability beyond those losses. This is so because unitholders will be liable for taxes on profits LINE reports during the bankruptcy process, even if it makes no distributions (as it won't, since all resources will go toward paying its creditors).

How Can That Happen? Profits? Bankruptcy?

By now you're thinking: "How could LINE report profits during bankruptcy and thus have me be liable for taxes on them?" But the thing is, not only can it record large profits, it's also very likely to do so.

You see, a profit "generically" happens when your assets grow in excess of your liabilities. The excess goes into "equity" as a profit. What happens during bankruptcy? A lot of debt gets cancelled. And how is that extinguishment of liabilities recorded? As a profit. See the problem? If the company owes $10 billion and gets $5 billion in debt forgiven, the company records a "profit" of $5 billion.

It is that mechanism, which is very common during bankruptcies, that can in this case hit your finances -- hard. That's because, as we saw before, you're liable for taxes on profits LINE records, even if it distributes nothing for them (which it won't).

The Exchange Offer

All of this mechanism is actually the reason why LINE is offering to exchange your LINE shares for LNCO shares. That's because LNCO is a regular company, and thus even if it goes bankrupt (which it likely will) it won't expose its shareholders to those additional losses. It's spelled out in the exchange presentation:

Source: LINN Energy Presentation; red highlights are mine.

Here's a bit more detail on what "CODI" is:

Source: LINN Energy Presentation.

How large could this issue be for you (beyond the zero)? Again, the presentation offers a few estimates:

Source: LINN Energy Presentation; red highlights are mine.

See that highlight? Imagine how your finances would look if you had to report a $2.83, $8.50 or $14.17 taxable gain per each unit of LINE you hold. This differs from shareholder to shareholder. Tax bracket to tax bracket. It differs even depending where the units are held. But it's easy to see that it can get pretty ugly.

This is the reason why you can stand not just to lose all the money you put in LINE, but even well beyond that.

The Funny Part

It's not just that you should exchange your LINE units for LNCO to avoid this possibly massive liability. You should also do so because it's a 1:1 offer (1 LINE unit is transformed into 1 LNCO share), and LINE actually trades at $0.37 per share, whereas LNCO trades for $0.43.


Depending on your tax situation, it might be very urgent for you to either tender the LINE shares you hold in exchange for LNCO shares (whose deadline expires on Monday, April 25) or just sell the LINE shares. If you don't do either, you are exposed to not just losing all your investment, but also to losing over and beyond such investment in tax payments. Run, don't walk, to rid yourself of this potentially massive liability.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.