Tax Executives Institute Houston Chapter

Tax Executives Institute Houston Chapter Interesting Partnership Transactions May 3, 2016 Michael Bresson, Baker Botts Bruce DeMyer, KPMG Maher Haddad, Baker & McKenzie 1

Agenda 1. Part 1: Linnco Exchange Offer for Linn Energy Units 2. Part 2: Partnership Freeze / IP Migration 3. Part 3: Up-C Spins and Wayne Farms

PART 1: LINNCO EXCHANGE OFFER FOR LINN ENERGY UNITS

Pre-Exchange Offer Structure of Linn and LinnCo Linn Energy (Linn) is an upstream MLP LinnCo is an LLC taxed as a corporation and controlled by Linn LinnCo Shareholders Linn Unitholders LinnCo owns one Linn unit for every LinnCo share outstanding When LinnCo received a cash distribution on a Linn unit it made a distribution on a LinnCo share in the same amount, reduced for LinnCo income taxes Control LinnCo 64% of Linn units Both suspended distributions in 2015 Investors who do not wish to receive allocations of Linn s taxable income or loss on a Form K-1 can invest instead in a LinnCo share 36% of Linn units Linn 4

Linn May Engage in Transactions That Produce Substantial COD Income Allocations to Unitholders Linn may engage in transactions that produce large allocations of COD income to its unitholders relative to the value of the units Each $1 BB of Linn COD income means $2.83 of COD income per Linn unit Before late 2014, Linn traded above $20 per unit In 2016, Linn has not traded above $2 per unit Linn unitholders must pay tax on the COD income allocated to them, unless they are bankrupt or insolvent The COD income can be offset by other allocations of Linn deductions and any past unused Linn passive activity losses LinnCo Shareholders LinnCo Allocation of COD income Linn Linn Unitholders Transaction with creditors producing COD income to Linn Allocation of COD income 5

COD Income Hypothetical Character Whipsaw Assume a unitholder purchased one Linn unit for one dollar in 2016 Later in 2016, Linn engages in a transaction that produces $3 billion of total COD income The unitholder is allocated $8.50 of COD income with respect to the unit COD income is ordinary income, taxable at rates of up to 39.6% The Section 108 exclusion for bankruptcy or insolvency applies at the partner level, so the unitholder itself must be bankrupt or insolvent to apply the exclusion The COD income allocation to the unitholder increases the net basis of the unitholder in the unit to $9.50 ($1 purchase price plus $8.50 COD income) Assume for simplicity that other items of Linn income and deduction allocable to the unit are relatively insignificant during the holder s holding period On any later sale of the unit for less than $9.50, the unitholder will have a capital loss For example, if the unitholder later sells the unit for one dollar, it will have a capital loss of $8.50 Long term capital losses generally cannot be offset against ordinary income Potential character whipsaw 6

LinnCo Shareholders Pay No Tax on Linn COD Income Allocated to LinnCo LinnCo shareholders generally pay tax only if they receive a taxable distribution from LinnCo or dispose of their LinnCo shares LinnCo itself is a Linn unitholder that must pay tax on any Linn COD income allocated to it LinnCo can offset the COD income with any other deductions allocated to it by Linn or any past LinnCo NOLs LinnCo can exclude the COD income from its income to the extent it is bankrupt or insolvent at the time of the COD income event LinnCo shareholders pay no tax on allocations of Linn COD income to LinnCo No COD income LinnCo Shareholders LinnCo Allocation of COD income Linn Linn Unitholders 7

LinnCo has Offered to Exchange Newly Issued LinnCo Shares for Outstanding Linn Units The exchange will maintain the ratio of one LinnCo share outstanding for each Linn unit held by LinnCo The exchange is intended to be a taxable transaction to a participating Linn unitholder Exchanging Linn unitholders will become LinnCo shareholders, so they generally will not owe tax on future COD income of Linn LinnCo Shares LinnCo Linn Units Linn Unitholders Linn 8

Tax Treatment of Exchange The exchange is a fully taxable transaction Section 351 does not apply because pre-exchange shareholders of LinnCo will own far more than 20% of LinnCo s shares after the exchange Depending upon the circumstances, a unitholder may have a gain or a loss on the exchange Gain or loss is generally capital gain or loss, subject to ordinary income recapture No character whipsaw effect (or at least more limited than in COD income scenario) Tax consequences are similar to a sale of the Linn units in the market Risk of recharacterization if exchange and a COD income event occur in quick succession? 9

Resulting Structure is Similar to Pre-Exchange Structure, Except More of Linn is Held Through LinnCo The same number of Linn units is outstanding after the transaction LinnCo owns a larger portion of the outstanding Linn units LinnCo has one additional share outstanding for each Linn unit acquired LinnCO Shareholders (including participants in exchange offer) Linn Unitholders who do not participate in exchange LinnCo Larger interest in Linn Linn 10

Prior Incorporation of a Troubled MLP US Shipping, a shipping MLP Elected to check the box to be classified as a corporation effective as of January 1, 2009 Filed a bankruptcy petition in April 2009 11

Part 2: Partnership Freeze / IP Migration

Introduction US grants a license to a non-us entity to exploit intangible property in local markets. Typically, the consideration for the license is either a royalty, or sales proceeds. In either case, the transaction represents a recognition event for US tax purposes. A contribution of property to a partnership is not an income recognition event. The partner contributes property for a partnership interest, but does not recognize income currently. Must comply with requirements of Notice 2015-54 and any regulations enacted pursuant thereto. 13

Introduction In the proposed IP partnership transaction, the partner grants a license (property) in exchange for a participating preferred interest. The preferred interest gives the partner the right to a receive a fixed return on the value of the property contributed. There are two elements that require economic analysis. The value of the license of intangible property. The rate of preferred return. 14

Case Study: Partnership Freeze IP Migration Parent (U.S.) USCO has IP that Parent wants offshore. FORCO has significant cash or other non-us assets. USCO Preferred +5% Common 95% Common FORCO USCO Contributes IP to Foreign JV Need to value contributed property. Principal value of preferred interest limited to value of pre-existing IP. IP JV (Foreign) Cash + Principal Sub Not subject to immediate taxation under section 721(c) if Foreign JV complies with requirements of Notice 2015-54 (and regulations to be enacted pursuant thereto). FORCO Contributes Cash + Principal Sub. Principal Sub 15

Case Study: Partnership Freeze IP Migration Parent (U.S.) JV enters into contract R&D agreement with Parent. Parent retains R&D Credit for research performed in the United States. JVlicenses Principal Sub for running royalty. USCO Preferred +5% Common 95% of Common FORCO If Principal Sub is regarded, royalty in excess of preferred return is allocable to FORCO and is not considered subpart F income provided section 954(c)(6) is in place. Appreciation in IP inures to the benefit of FORCO, not USCO. Contract R&D JV (Foreign) Principal Sub uses IP to make/sell products to third parties. Royalty Principal Sub 16

Tax Considerations Contribution of intangibles tax-free under section 721. Provided requirements of Notice 2015-54 are complied with. Compare to section 367(d). Generally, section 367 does not apply. Gain recognition relating to principal of preferred interest deferred. Principal limited to value of pre-existing intangibles. Value is fixed and not subject to change, regardless of results of R&D investment. If contributed intangibles are amortizable, Notice 2015-54 requirement to use remedial method for section 704(c) purposes will force built-in gain to be recognized by Parent over recovery period. Remainder of built-in gain deferred indefinitely and taxable only on redemption (i.e., when partnership is terminated, if ever), provided contributed intangibles are not sold or distributed to foreign partner. Proportionate cost of future R&D borne by foreign structure. 17

Tax Considerations Parent taxed annually on preferred yield plus 5% of remaining partnership profits. Foreign tax credits should be available. US tax deferral on foreign earnings. Does section 482 (or CWI) apply to tax-free section 721 exchange? See Treas. Reg. 1.704-1(b)(1)(iii) and Treas. Reg. 1.704-1(b)(2)(iv)(h). Under Notice 2015-54, section 704(c)(1)(B) would apply indefinitely to force USCO to recognize built-in gain in contributed intangibles even if intangibles are distributed to FORCO after expiration of statutory seven-year waiting period for mixing bowl transactions. 18

Part 3: Up-C Spins and Wayne Farms

Agenda 1. Background and Purpose of the Up-C 2. Traditional Up-C Transaction Overview (Simplified) 3. Up-C Spin Transaction Overview (Simplified) 4. Case study Wayne Farms Appendices: Appendix A TRA Payments Example Appendix B Summary of Similar Recent Transactions with TRAs Appendix C Illustrative Up-C Spin Benefits

1. Background and Purpose of the Up-C Tax Basis Step-Up in Transactions Generally, a sale of corporate shares will not deliver a tax basis step-up in the underlying assets of the corporation (absent an election under IRC section 338). Conversely, a sale of assets or a sale of partnership interests will generally deliver a tax basis step-up in the assets or the underlying assets of the partnership to the buyer. In many transactions, a significant amount of the this step-up will be allocable to intangibles items such as goodwill, trademarks, and customer relationships which are amortizable over a 15-year period for tax purposes, subject to certain limitations. In a typical third party transaction, the buyer and seller will negotiate to share a certain amount of the net present value of the potential tax basis step-up (i.e., the buyer will pay the seller an additional amount of consideration equal to an agreed upon amount of the negotiated net present value of the potential tax benefit, generally 15% to 50%). Valuation of an IPO When it comes to placing a value on an IPO, the public will generally value the company based on a multiple of EBITDA. Due to this valuation methodology, market experience has been that the public investors place little or no value on the company s tax attributes whether they be favorable or unfavorable. The Up-C IPO The Up-C IPO is meant to deliver additional value to the sellers by having the public pay the sellers for the utilization of the tax-basis step-up delivered as part of the transaction (and future transactions). In an Up-C IPO, the public will generally pay for 85% of the additional deductions utilized well above the upper end of the observed experience in third party transactions. Additionally, each payment will itself create additional deductible basis, which further increases the value of these payments. 21.

Traditional Up-C Transactions

2. Traditional Up-C Transaction Overview (Simplified) Historical Owners Prospective TRA Payments Class B High Vote Shares Public Cash (from public) 3 Common Units Common Units PubCo Cash Class A Common Shares 1 Legend Cash (from Public) 2 Corporation Disregarded entity New LLC HoldCo Common Units Partnership Public Lender Historical owners OpCo, LLCs Cash (from public) 4 Bank Debt Third Party Lender 23

2. Traditional Up-C Transaction Tax Considerations 3 Put Right Historical Owners Common Units Prospective TRA Payments Class B High Vote Shares New LLC HoldCo OpCo, LLCs Common Units Cash (from Public) PubCo Common Units Cash (from public) 4 Bank Debt 2 Cash Public Class A Common Shares Third Party Lender 1 Up-C Transaction Mechanics: The Up-C structure provides a partial liquidity event for the Historical Owners of an existing pass-through entity, while increasing realized value in comparison to a traditional initial public offering ( IPO ), through the use of a tax receivable agreement ( TRA ). 1. Public Offering: The public transfers cash to PubCo in exchange for Class A common shares. 2. Basis Step-Up: PubCo uses IPO proceeds to purchase New LLC HoldCo Common Units from the Historical Owners. This exchange will result in a stepped-up tax basis for the benefit of PubCo. Two Classes of Units: PubCo becomes the managing member of New LLC HoldCo. Historical Owners will hold PubCo Class B high voting shares, and thus voting control over the business, with a reduced equity interest as a result of monetizing a portion of their equity. Alternative governance structures exist. TRA: Historical Owners will be a party to a TRA with PubCo, whereby the Historical Owners will be compensated for certain tax benefits realized by PubCo in prospective tax years. In recent Up-C transactions, TRA terms resulted in Historical Owners receiving 85% of realized tax benefits resulting in 12-20% of increased pre-tax cash proceeds on a PV basis. 3. Put Right: Historical Owners have an exchange right and may put their interests to New LLC HoldCo, which has the option to satisfy this put with cash or PubCo shares. The structure provides for an orderly exit mechanism via prospective exchanges and subsequent sale of PubCo shares. 24

Up-C Spin Transactions

3. Up-C Spin Transaction Overview (Simplified) Sponsor Public Sponsor Parent TRA Payments Retained Operating Business Subsidiaries CARVE-OUT HoldCo Class B High Vote Shares Public Legend 1 Cash 2 Corporation Disregarded Entity Carve-Out Assets 90% @ IPO 51% @ 2+ yrs Unit Ownership 10% @ IPO 49% @ 2+ yrs PubCo Class A Common Shares Partnership Public Lender Multi-Corporation 4 Distribution from New Loan New LLC HoldCo From IPO proceeds 3 IPO Proceeds Assumed Debt (Revolver) Sponsor Public New Lenders (Term) New Loan CARVE-OUT Assets 26

3. Up-C Spin Transaction Tax Considerations Retained Operating Business Subsidiaries 1 Carve-Out Assets New Lenders (Term) Sponsor Public Sponsor Parent CARVE-OUT HoldCo 4 New Loan Distribution from New Loan TRA Payments Class B High Vote Shares New LLC HoldCo CARVE- OUT Assets PubCo From IPO proceeds 3 IPO Proceeds Cash Assumed Debt (Revolver) Public 2 Class A Common Shares Up-C Spin Transaction Observations: The Up-C Spin provides a partial liquidity event for the Sponsor that is partially or completely tax-deferred, while increasing realized value through the use of a TRA. The Sponsor will be a party to a TRA with PubCo, whereby the Sponsor will be compensated for certain tax benefits realized by PubCo in prospective tax years (i.e. 704(c) allocation and 743(b) deductions) We would expect Up-C Spin transactions to provide increased pre-tax cash proceeds similar to traditional Up-C transactions (12-20% of increased pre-tax cash proceeds on a PV basis). The Sponsor has an exchange right and may put their interests to Carve-Out Opco LLC, which has the option to satisfy this put with cash or PubCo shares. The structure provides for an orderly exit mechanism via prospective exchanges and subsequent sale of PubCo shares. In comparison to other carve-out transactions, the Up-C provides for a flexible exit timeline, flexibility in consolidation, and increased value (via the TRA) that is generally not available in other carve-out transactions. The initial capitalization can be structured for the Sponsor to extract cash on a tax-deferred basis, but the TRA benefits generally will not begin accruing until gain is recognized by Sponsor (with certain exceptions). 27

Who is a candidate to implement an Up-C Spin Structure? Any business that is unable to meet the qualifying income requirements of section 7704. - Generally, non-natural resource type businesses. Ideal candidate is a business that has substantial value in excess of the existing tax basis - The TRA benefit is generally based on the excess of the purchase price over the existing tax basis. generates taxable income - Without taxable income, the tax receivable agreement is not cash flow accretive. - The structure has been used by businesses that generate losses with future projected income. AND with recurring levels of free cash flows to fund partnership distributions. - Funds payment of tax liabilities of partners, - Prospective Pubco obligations under the tax receivable agreement, and - Dividends to the public investors (subject to business plan). 28

Case Study: Wayne Farms

4. Wayne Farms Transaction CGC Owners Legend Corporation Disregarded Entity Partnership Public Lender Multi-Corporation Sponsor Public Retained Operating Business Subsidiaries 1 Wayne Farms Assets >39M New Lenders Capital Grain Company ( CGC ) Wayne Farms Holdings LLC 4 $161M $161M from New Loan + $39M IPO Proceeds New LLC HoldCo TRA Payments $200M Distribution from New Loan and IPO Class B High Vote Shares 76% Units 24% Units Wayne Farms Assets 5 PubCo $161M From IPO proceeds $250M IPO Proceeds 3 $275M Cash Assumed Debt (Revolver) Public Class A Common Shares 30 2

4. Case Study Wayne Farms CGC Owners Wayne Farms Transaction Observations: In March of this 2015, Wayne Farms filed an initial S-1 to go public via an Up-C IPO. Prior to the IPO, Wayne Farms is held as a wholly-owned subsidiary of Capital Grain Company ( CGC ). Retained Operating Business Subsidiaries 1 Wayne Farms Assets >39M New Lenders Capital Grain Company ( CGC ) Wayne Farms Holdings LLC 4 $161M $161M from New Loan + $39M IPO Proceeds New LLC HoldCo TRA Payments $200M Distribution from New Loan and IPO Class B High Vote Shares 76% Units 24% Units Wayne Farms Assets 5 PubCo $161M From IPO proceeds $250M IPO Proceeds $275M Cash Assumed Debt (Revolver) Public Class A Common Shares 3 2 CGC (via its subsidiaries) will be a party to a TRA with Wayne Farms, Inc., whereby CGC will be compensated for certain tax benefits realized by Wayne Farms in prospective tax years. CGC (via its subsidiaries) has an exchange right and may put their interests to Wayne Farms, LLC, which has the option to satisfy this put with cash or Wayne Farms, Inc. shares. The structure provides for an orderly exit mechanism via prospective exchanges and subsequent sale of Wayne Farms, Inc. shares. This IPO is intended to be structured such that CGC will monetize $[200]M on a tax deferred basis. This is available to CGC because of significant investment into the Wayne Farm business over the past two years, as well as the issuance of new debt. As a result of deferring the tax on the $[200]M distribution to CGC, Wayne Farms, Inc. is entitled to an increased share of the tax deductions generated by Wayne Farms, LLC (in addition to the tax benefits realized on subsequent future exchanges). In this transaction, the TRA would be placed on the additional allocation of tax deductions to Wayne Farms, Inc. (in addition to tax benefits realized from future exchanges). This would increase the realized value to CGC even beyond that of a traditional TRA. Transaction Update: Wayne Farms has put their IPO on hold due to unfavorable market conditions. 31

Appendices

Appendix A TRA Payments Example Year 1: Sale of a partnership interest generates an I.R.C. Section 743(b) adjustment of $150 million. Amortizable over 15 years ($150 million / 15 years) = $10.00 million of potential tax deduction. At a tax rate of 40%, potential annual cash benefit = $4.00 million. Year 1 TRA Payment (85% of cash benefit) = $3.40 million. Year 2: TRA payment in year one increases the previous I.R.C. Section 743(b) adjustment, and results in a higher TRA payment at the end of Year 2. Incremental TRA payment (($3.40 million / 15 years) x 40% x 85%) = approximately $77 thousand. Year 2 TRA payment ($3.40 million + $77 thousand) = $3.48 million. Subsequent Years: Iterative TRA payments continually increase previous I.R.C. Section 743(b) adjustments, and result in higher TRA payments each year. In effect, the Sellers receive TRA payments on prior TRA payments. 33

Appendix B Summary of Similar Recent Transactions with TRAs 34

Tax Executives Institute Houston, May 3, 2016 Interesting Partnership Transactions Michael Bresson, Baker Botts (713) 229-1199 michael.bresson@bakerbotts.com Your Presenters Bruce DeMyer, KPMG (713) 319-2737 bdemyer@kpmg.com Maher Haddad, Baker & McKenzie (312) 861-2666 maher.haddad@bakermckenzie.com 35

Bruce R. DeMyer, Jr., Senior Manager Background Bruce is a senior manager in KPMG s Mergers and Acquisitions Tax Services Practice with over seven years of tax experience in Big 4 Public Accounting. Bruce previously served on tax compliance, tax consulting, and ASC-740 (tax provision) engagements for public and privately held clients. Bruce is also a member of KPMG s Partnership Transactions Group, which focuses on tax and structuring consultation related to a variety of complex partnership transactions. Bruce R. DeMyer, Jr. Senior Manager, Mergers & Acquisitions - Tax KPMG LLP 811 Main Street Suite 4500 Houston, TX 77002 Tel 713-319-2737 Fax 225-208-1780 Cell 225-615-0499 bdemyer@kpmg.com Function and Specialization Bruce is a member of KPMG s M&A Tax Services practice. His previous experience includes working in Real Estate Financial Services in New York City and on construction clients in Louisiana. Education, Licenses & Certifications BBA, Hofstra University Certified Public Accountant (CPA) NY, LA, TX Professional and Industry Experience Bruce s practice generally focuses on mergers, acquisitions, and divesture tax planning and tax due diligence services. Bruce specifically focuses on transaction modeling and Subchapter K matters, including various IPO transactions including the Up-C, YieldCo, and MLP structures. Bruce has served multistate public and private across the United States of various industries, including the engineering and construction, financial services, real estate, oil and gas services, manufacturing, and healthcare service sectors. Bruce has technical experience with corporate clients, including ASC 740 Accounting for Income Taxes. Additionally, Bruce has worked with large clients in helping implement flow-through structures as well as assisting with the structuring of privately held flow-through clients looking to become public. He has extensive tax compliance experience with flow-through clients in tiered structures. He has helped them comply with the unique federal tax implications with Subchapters K including transactions between owners and the flow-through entities. Representative Clients The Habit Restaurants, Shred-it International, Spark Energy, CenturyLink, Southcross Energy Partners, Valero Energy Partners, CrossAmerica Partners, Edgen Group, Albemarle Corporation, ITOCHU International, LongueVue Capital, Lamar Advertising Company, The Shaw Group, Wilbur Marvin Foundation 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 396612 36 36

Mike Bresson Partner Tax Houston Mike Bresson is a partner in the Houston office of Baker Botts. He concentrates on federal income tax matters, with a particular emphasis on publicly traded partnerships, YieldCos, private equity transactions and mergers & acquisitions. EDUCATION JD, University of Oklahoma College of Law 1987 Mr. Bresson is nationally recognized for his experience in transactions involving MLPs. He is the head of the firm s MLP/YieldCo Tax Practice. BSCHE, University of Oklahoma 1983 BAKER BOTTS 37

Practice description Maher Haddad is an associate in Baker & McKenzie s Global Tax Practice Group in Chicago. He has been advising various US and multinational clients on tax planning matters since 2007. Mr. Haddad provides tax structuring advice to corporations, partnerships, limited liability companies, and other pass-through entities. Maher Haddad Associate Chicago, USA Tel: +1 312 861 2666 Fax: +1 312 861 2899 Maher.Haddad @bakermckenzie.com Practices Tax Global Areas of Practice General Tax Planning Practice focus Mr. Haddad concentrates his practice on advising US and non-us clients on federal income tax issues. He is experienced in tax matters related to joint ventures, private equity fund investments, and real estate transactions, including fund and REIT structures. He also provides advice on matters related to complex mergers and acquisition transactions and corporate restructurings. In addition, he has extensive experience structuring investments in renewable energy projects, using partnership and leasing structures to efficiently allocate energy tax credits and other tax benefits. Education and admission Education University of Michigan Law School (J.D. cum laude) (2007) Admission University of Michigan (B.S. Industrial and Operations Engineering magna cum laude) (2001) Illinois~United States (2007) Baker & McKenzie LLP 300 East Randolph Street, Suite 5000 Chicago, IL 60601 USA Languages Arabic English French 2016 Baker & McKenzie LLP