Dividends and Distribution Information
Tax Matters
The following discussion of federal income tax matters is based
on the advice of our counsel, Paul, Hastings, Janofsky & Walker
LLP. This section and the discussion in our SAI summarize the
material U.S. federal income tax consequences of owning our
securities for U.S. taxpayers. Tax laws and interpretations change
frequently, and this summary does not describe all of the tax
consequences to all taxpayers. For example, this summary generally
does not describe your situation if you are a non-U.S. person, a
broker-dealer, or other investor with special circumstances. In
addition, this section does not describe your state, local or
foreign taxes. As with any investment, you should consult your own
tax professional about your particular consequences.
We are treated as a corporation for federal income tax purposes.
Thus, we are obligated to pay federal income tax on our net taxable
income. We are also obligated to pay state income tax on our net
taxable income, either because the states follow the federal
treatment or because the states separately impose a tax on us. We
invest our assets principally in MLPs, which generally are treated
as partnerships for federal income tax purposes. As a partner in
the MLPs, we report our allocable share of the MLP's taxable
income, loss, deduction, and credits in computing our taxable
income. Based upon our review of the historic results of the type
of MLPs in which we invest, we expect that the cash flow received
by us with respect to our MLP investments will exceed the taxable
income allocated to us. There is no assurance that our expectation
regarding the tax character of MLP distributions will be realized.
If this expectation is not realized, there will be greater tax
expense borne by us and less cash available to distribute to
stockholders. In addition, we will take into account in our taxable
income amounts of gain or loss recognized on the sale of MLP units.
Currently, the maximum regular federal income tax rate for a
corporation is 35%, but we may be subject to a 20% alternative
minimum tax on our alternative minimum taxable income to the extent
that the alternative minimum tax exceeds our regular income
tax.
Deferred income taxes reflect (1) taxes on unrealized
gains/(losses) which are attributable to the difference between the
fair market value and tax basis of our investments and (2) the tax
benefit of accumulated capital or net operating losses. We will
accrue a net deferred tax liability if our future tax liability on
our unrealized gains exceeds the tax benefit of our accumulated
capital or net operating losses, if any. We will accrue a net
deferred tax asset if our future tax liability on our unrealized
gains is less than the tax benefit of our accumulated capital or
net operating losses or if we have net unrealized losses on our
investments.
To the extent we have a net deferred tax asset, consideration is
given as to whether or not a valuation allowance is required. The
need to establish a valuation allowance for deferred tax assets is
assessed periodically based on the criterion established by the
Statement of Financial Standards, Accounting for Income Taxes (ASC
740) that it is more likely than not that some portion or all of
the deferred tax asset will not be realized. In our assessment for
a valuation allowance, consideration is given to all positive and
negative evidence related to the realization of the deferred tax
asset. This assessment considers, among other matters, the nature,
frequency and severity of current and cumulative losses, forecasts
of future profitability (which are highly dependent on future MLP
cash distributions), the duration of statutory carryforward periods
and the associated risk that capital or net operating loss
carryforwards may expire unused.
Recovery of the deferred tax asset is dependent on continued
payment of the MLP cash distributions at or near current levels in
the future and the resultant generation of taxable income.
Unexpected significant decreases in MLP cash distributions or
significant further declines in the fair value of our portfolio of
investments may change our assessment regarding the recoverability
of the deferred tax asset and would likely result in a valuation
allowance.
If a valuation allowance is required to reduce the deferred tax
asset in the future, it could have a material impact on our net
asset value and results of operations in the period it is
recorded.
Our earnings and profits are calculated using accounting methods
that may differ from tax accounting methods used by an entity in
which we invest. For instance, to calculate our earnings and
profits we will use the straight-line depreciation method rather
than the accelerated depreciation method. This treatment may, for
example, affect our earnings and profits if an MLP in which we
invest calculates its income using the accelerated depreciation
method. Our earnings and profits would not be increased solely by
the income passed through from the MLP, but we would also have to
include in our earnings and profits the amount by which the
accelerated depreciation exceeded straight-line depreciation.
Because of the differences in the manner in which earnings and
profits and taxable income are calculated, we may make
distributions out of earnings and profits, treated as tax
dividends, in years in which we have no taxable income.
In addition, in calculating our alternative minimum taxable
income, certain percentage depletion deductions and intangible
drilling costs may be treated as items of tax preference. Items of
tax preference increase alternative minimum taxable income and
increase the likelihood that we may be subject to alternative
minimum tax.
We have not, and we will not, elect to be treated as a regulated
investment company under the Code. The Code generally provides that
a regulated investment company does not pay an entity level income
tax, provided that it distributes all or substantially all of its
income and satisfies certain source of income and asset
diversification requirements. Thus, the regulated investment
company taxation rules have no current application to us or to our
stockholders.
Unlike a holder of a direct interest in MLPs, a stockholder will
not include its allocable share of our gross income, gains, losses,
deductions, or credits in computing its own taxable income. Our
distributions are treated as a tax dividend to the stockholder to
the extent of our current or accumulated earnings and profits. If
the distribution exceeds our earnings and profits, the distribution
will be treated as a return of capital to our common stockholder to
the extent of the stockholder's basis in our common stock, and then
as capital gain. Common stockholders will receive a Form 1099 from
us (rather than a Schedule K-1 from each MLP if the stockholder had
invested directly in the MLPs) and will recognize dividend income
only to the extent of our current and accumulated earnings and
profits.
Generally, a corporation's earnings and profits are computed
based upon taxable income, with certain specified adjustments. As
explained above, based upon the historic performance of the MLPs,
we anticipate that the distributed cash from an MLP will exceed our
share of such MLP's income. Thus, we anticipate that only a portion
of distributions of cash and other income from investments will be
treated as dividend income to our common stockholders. As a
corporation for tax purposes, our earnings and profits will be
calculated using (i) straight-line depreciation rather than
accelerated depreciation, and cost rather than a percentage
depletion method, and (ii) intangible drilling costs and
exploration and development costs are amortized over a five-year
and ten-year period, respectively. Because of the differences in
the manner in which earnings and profits and taxable income are
calculated, we may make distributions out of earnings and profits,
treated as dividends, in years in which we have no taxable
income.
Our distributions that are treated as dividends generally will
be taxable as ordinary income to holders, but (i) are expected to
be treated as "qualified dividend income" that is currently subject
to reduced rates of federal income taxation for noncorporate
stockholders, and (ii) may be eligible for the dividends received
deduction available to corporate stockholders, in each case
provided that certain holding period requirements are met.
Qualified dividend income is currently taxable to noncorporate
stockholders at a maximum federal income tax rate of 15% for
taxable years beginning on or before December 31, 2010. Thereafter,
qualified dividend income will be taxed at ordinary income rates
unless further legislative action is taken.
If a distribution exceeds our current and accumulated earnings
and profits, such distribution will be treated as a non-taxable
adjustment to the basis of the stock to the extent of such basis,
and then as capital gain to the extent of the excess distribution.
Such gain will be long-term capital gain if the holding period for
the stock is more than one year. Individuals are currently subject
to a maximum tax rate of 15% on long-term capital gains. This rate
is currently scheduled to increase to 20% for tax years beginning
after December 31, 2010. Corporations are taxed on capital gains at
their ordinary graduated rates.
If a holder of our common stock participates in our automatic
dividend reinvestment plan, such stockholder will be taxed upon the
amount of distributions as if such amount had been received by the
participating stockholder and the participating stockholder
reinvested such amount in additional common stock, even though such
holder has received no cash distribution from us with which to pay
such tax.
Sale of Our Common Stock
The sale of our stock by holders will generally be a taxable
transaction for federal income tax purposes. Holders of our stock
who sell such shares will generally recognize gain or loss in an
amount equal to the difference between the net proceeds of the sale
and their adjusted tax basis in the shares sold. If such shares of
stock are held as a capital asset at the time of the sale, the gain
or loss will generally be a capital gain or loss, generally taxable
as described above. A holder's ability to deduct capital losses may
be limited.
Investment by Tax-Exempt Investors and Regulated
Investment Companies
Employee benefit plans and most other organizations exempt from
federal income tax, including individual retirement accounts and
other retirement plans, are subject to federal income tax on
unrelated business taxable income, or UBTI. Because we are a
corporation for federal income tax purposes, an owner of our common
stock will not report on its federal income tax return any of our
items of income, gain, loss and deduction. Therefore, a tax-exempt
investor will not have UBTI attributable to its ownership or sale
of our common stock unless its ownership of our common stock is
debt-financed. In general, common stock would be debt-financed if
the tax-exempt owner of common stock incurs debt to acquire common
stock or otherwise incurs or maintains a debt that would not have
been incurred or maintained if that common stock had not been
acquired.
As stated above, an owner of our common stock will not report on
its federal income tax return any of our items of gross income,
gain, loss and deduction. Instead, the owner will simply report
income with respect to our distributions or gain with respect to
the sale of our common stock. Thus, distributions with respect to
our common stock will result in income that is qualifying income
for a regulated investment company. Furthermore, any gain from the
sale or other disposition of our common stock will constitute gain
from the sale of stock or securities and will also result in income
that is qualifying income for a regulated investment company.
Finally, our common stock will constitute qualifying assets to
regulated investment companies, which generally must own at least
50% in qualifying assets and not more than 25% in certain
non-qualifying assets at the end of each quarter, provided such
regulated investment companies do not violate certain percentage
ownership limitations with respect to our stock.
Backup Withholding and Information
Reporting
Backup withholding of U.S. federal income tax at the rate of 28%
may apply to the distributions on our common stock to be made by us
if you fail to timely provide taxpayer identification numbers or if
we are so instructed by the Internal Revenue Service, or IRS. Any
amounts withheld from a payment to a U.S. holder under the backup
withholding rules are allowable as a refund or credit against the
holder's U.S. federal income tax liability, provided that the
required information is furnished to the IRS in a timely
manner.
Other Taxation
Foreign stockholders, including stockholders who are nonresident
alien individuals, may be subject to U.S. withholding tax on
certain distributions at a rate of 30% or such lower rates as may
be prescribed by any applicable treaty. In addition, recently
enacted legislation may impose additional U.S. reporting and
withholding requirements on certain foreign financial institutions
and other foreign entities with respect to distributions on and
proceeds from the sale or disposition of our stock. This
legislation will generally be effective for payments made on or
after January 1, 2013. Foreign stockholders should consult their
tax advisors regarding the possible implications of this
legislation as well as the other U.S. federal, state, local and
foreign tax consequences of an investment in our stock.
Under present law, we are of the opinion that Series A MRP
Shares constitute our equity, and thus distributions with respect
to Series A MRP Shares (other than distributions in redemption of
Series A MRP Shares subject to Section 302(b) of the Code) will
generally constitute dividends to the extent of our allocable
current or accumulated earnings and profits, as calculated for
federal income tax purposes.
Unlike a holder of a direct interest in MLPs, a preferred
stockholder will not include its allocable share of our gross
income, gains, losses, deductions, or credits in computing its own
taxable income. Our distributions are treated as a tax dividend to
the stockholder to the extent of our current or accumulated
earnings and profits. If the distribution exceeds our earnings and
profits, the distribution will be treated as a return of capital to
our common stockholder to the extent of the stockholder's basis in
our common stock, and then as capital gain. Common stockholders
will receive a Form 1099 from us (rather than a Schedule K-1 from
each MLP if the stockholder had invested directly in the MLPs) and
will recognize dividend income only to the extent of our current
and accumulated earnings and profits.
Generally, a corporation's earnings and profits are computed
based upon taxable income, with certain specified adjustments. As
explained above, based upon the historic performance of the MLPs,
we anticipate that the distributed cash from an MLP will exceed our
share of such MLP's income. As a corporation for tax purposes, our
earnings and profits will be calculated using (i) straight-line
depreciation rather than accelerated depreciation, and cost rather
than a percentage depletion method, and (ii) intangible drilling
costs and exploration and development costs are amortized over a
five-year and ten-year period, respectively. Because of the
differences in the manner in which earnings and profits and taxable
income are calculated, we may make distributions out of earnings
and profits, treated as dividends, in years in which we have no
taxable income.
Our distributions that are treated as dividends generally will
be taxable as ordinary income to holders, but (i) are expected to
be treated as "qualified dividend income" that is currently subject
to reduced rates of federal income taxation for noncorporate
stockholders, and (ii) may be eligible for the dividends received
deduction available to corporate stockholders, in each case
provided that certain holding period requirements are met.
Qualified dividend income is currently taxable to noncorporate
stockholders at a maximum federal income tax rate of 15% for
taxable years beginning on or before December 31, 2010. Thereafter,
qualified dividend income will be taxed at ordinary income rates
unless further legislative action is taken.
If a distribution exceeds our current and accumulated earnings
and profits, such distribution will be treated as a non-taxable
adjustment to the basis of the stock to the extent of such basis,
and then as capital gain to the extent of the excess distribution.
Such gain will be long-term capital gain if the holding period for
the stock is more than one year. Individuals are currently subject
to a maximum tax rate of 15% on long-term capital gains. This rate
is currently scheduled to increase to 20% for tax years beginning
after December 31, 2010. Corporations are taxed on capital gains at
their ordinary graduated rates.
Sale of Our Preferred Stock
The sale of our preferred stock by holders will generally be a
taxable transaction for federal income tax purposes. Holders of our
stock who sell such shares will generally recognize gain or loss in
an amount equal to the difference between the net proceeds of the
sale and their adjusted tax basis in the shares sold. If such
shares of stock are held as a capital asset at the time of the
sale, the gain or loss will generally be a capital gain or loss,
generally taxable as described above. A holder's ability to deduct
capital losses may be limited.
Similarly, a redemption by us (including a redemption resulting
from our liquidation), if any, of all our preferred stock actually
and constructively held by a stockholder generally will give rise
to capital gain or loss under Section 302(b) of the Code if the
stockholder does not own (and is not regarded under certain tax law
rules of constructive ownership as owning) any of our common stock,
and provided that the redemption proceeds do not represent declared
but unpaid dividends. Other redemptions may also give rise to
capital gain or loss, but certain conditions imposed by Section
302(b) of the Code must be satisfied to achieve such treatment, and
Holders should consult their own tax advisors regarding such
conditions.
Backup Withholding
Backup withholding of U.S. federal income tax at the rate of 28%
may apply to the distributions on our common stock to be made by us
if you fail to timely provide taxpayer identification numbers or if
we are so instructed by the Internal Revenue Service, or IRS. Any
amounts withheld from a payment to a U.S. holder under the backup
withholding rules are allowable as a refund or credit against the
holder's U.S. federal income tax liability, provided that the
required information is furnished to the IRS in a timely
manner.
Other Taxation
Foreign stockholders, including stockholders who are nonresident
alien individuals, may be subject to U.S. withholding tax on
certain distributions at a rate of 30% or such lower rates as may
be prescribed by any applicable treaty. In addition, recently
enacted legislation may impose additional U.S. reporting and
withholding requirements on certain foreign financial institutions
and other foreign entities with respect to distributions on and
proceeds from the sale or disposition of our stock. This
legislation will generally be effective for payments made on or
after January 1, 2013. Foreign stockholders should consult their
tax advisors regarding the possible implications of this
legislation as well as the other U.S. federal, state, local and
foreign tax consequences of an investment in our stock.
Federal Income Tax Classification of Our Debt
Securities
Under present law, we are of the opinion that our debt securities
constitute indebtedness of ours for federal income tax purposes,
which the below discussion assumes. We intend to treat all payments
made with respect to our debt securities consistent with this
characterization.
Taxation of Interest on Our Debt
Securities
Payments or accruals of interest on our debt securities will
generally be taxable to you as ordinary income at the time such
interest is received (actually or constructively) or accrued, in
accordance with your regular method of accounting for federal
income tax purposes.
Purchase, Sale and Redemption of Our Debt
Securities
Initially, your tax basis in our debt securities acquired will
generally be equal to your cost to acquire such debt securities.
This basis will increase by the amount, if any, that you are
required or elect to include in income under the rules governing
market discount, and will decrease by the amount of any amortized
premium on such debt securities, as discussed below. When you sell
or exchange any of our debt securities, or if any of our debt
securities are redeemed, you generally will recognize gain or loss
equal to the difference between the amount you realize on the
transaction (less any accrued and unpaid interest, which will be
subject to tax in the manner described above under "Taxation of
Interest on Our Debt Securities") and your tax basis in our debt
securities relinquished. Except as discussed below with respect to
market discount, the gain or loss that you recognize on the sale,
exchange or redemption of any of our debt securities generally will
be capital gain or loss. Such gain or loss will be long-term
capital gain or loss if the disposed debt securities were held for
more than one year and will be short-term capital gain or loss if
held for one year or less. Net long-term capital gain recognized by
a noncorporate U.S. holder generally will be subject to tax at a
lower rate (currently a maximum rate of 15%, although this rate
will increase to 20% for taxable years beginning after 2010) than
net short-term capital gain or ordinary income (currently a maximum
rate of 35%). A holder's ability to deduct capital losses may be
limited.
Amortizable Premium
If you purchase our debt securities at a cost greater than the
stated principal amount, plus accrued interest, you will be
considered to have purchased our debt securities at a premium, and
you may generally elect to amortize this premium as an offset to
interest income, using a constant yield method, over the remaining
term of our debt securities. If you make the election to amortize
the premium, the election generally will apply to all debt
instruments that you hold at the time of the election, as well as
any debt instruments that you subsequently acquire. In addition,
you may not revoke the election without the consent of the IRS. If
you elect to amortize the premium, you will be required to reduce
your tax basis in our debt securities by the amount of the premium
amortized during your holding period. If you do not elect to
amortize premium, the amount of premium will be included in your
tax basis in our debt securities. Therefore, if you do not elect to
amortize the premium and you hold our debt securities to maturity,
you generally will be required to treat the premium as a capital
loss when our debt securities are redeemed.
Market Discount
If you purchase our debt securities at a price that reflects a
"market discount," any principal payments on, or any gain that you
realize on the disposition of, our debt securities generally will
be treated as ordinary interest income to the extent of the market
discount that accrued on our debt securities during the time you
held such debt securities. "Market discount" is defined under the
Code as the excess of the stated redemption price at maturity over
the purchase price of the note, except that if market discount is
less than 0.0025% of the stated redemption price at maturity,
multiplied by the number of complete years to maturity, the market
discount is considered to be zero. In addition, you may be required
to defer the deduction of all or a portion of any interest paid on
any indebtedness that you incurred or continued to purchase or
carry our debt securities that were acquired at a market discount.
In general, market discount will be treated as accruing ratably
over the term of our debt securities, or, at your election, under a
constant yield method.
You may elect to include market discount in gross income
currently as it accrues (on either a ratable or constant yield
basis), in lieu of treating a portion of any gain realized on a
sale of our debt securities as ordinary income. If you elect to
include market discount on a current basis, the interest deduction
deferral rule described above will not apply. If you do make such
an election, it will apply to all market discount debt instruments
that you acquire on or after the first day of the first taxable
year to which the election applies. This election may not be
revoked without the consent of the IRS.
Taxation of Non-U.S. Beneficial Owners
If you are a non-resident alien individual or a foreign
corporation (a "non-U.S. holder"), the payment of interest on our
debt securities generally will be considered "portfolio interest"
and thus will generally be exempt from United States federal
withholding tax. This exemption will apply to you provided that (1)
interest paid on our debt securities is not effectively connected
with your conduct of a trade or business in the United States, (2)
you are not a bank whose receipt of interest on our debt securities
is described in Section 881(c)(3)(A) of the Code, (3) you do not
actually or constructively own 10 percent or more of the combined
voting power of all classes of our stock entitled to vote, (4) you
are not a controlled foreign corporation that is related, directly
or indirectly to us through stock ownership and (5) you satisfy the
certification requirements described below.
To satisfy the certification requirements, either (1) the
beneficial owner of any of our debt securities must certify, under
penalties of perjury, that such holder is a non-U.S. person and
must provide such owner's name, address and taxpayer identification
number, if any, on IRS Form W-8BEN, or (2) a securities clearing
organization, bank or other financial institution that holds
customer securities in the ordinary course of its trade or business
and holds our debt securities on behalf of the beneficial owner
thereof must certify, under penalties of perjury, that it has
received a valid and properly executed IRS Form W-8BEN from the
beneficial holder and comply with certain other requirements.
Special certification rules apply for our debt securities held by a
foreign partnership and other intermediaries.
Interest on our debt securities received by a non-U.S. holder
which is not excluded from U.S. federal withholding tax under the
portfolio interest exemption as described above generally will be
subject to withholding at a 30% rate, except where a non-U.S.
holder can claim the benefits of an applicable tax treaty to reduce
or eliminate such withholding tax and such non-U.S. holder provides
us with a properly executed IRS Form W-8BEN claiming such exemption
or reduction.
Any capital gain that a non-U.S. holder realizes on a sale,
exchange or other taxable disposition (including a redemption) of
our debt securities generally will be exempt from United States
federal income tax, including withholding tax. This exemption will
not apply to you if your gain is effectively connected with your
conduct of a trade or business in the U.S. or you are an individual
holder and are present in the U.S. for a period or periods
aggregating 183 days or more in the taxable year of the disposition
and either your gain is attributable to an office or other fixed
place of business that you maintain in the U.S. or you have a tax
home in the United States. Investors are encouraged to consult
their own tax advisors regarding the specific tax consequences that
may affect them.
Information Reporting and Backup
Withholding
In general, information reporting requirements will apply to
payments of principal, interest, and premium, if any, paid on our
debt securities and to the proceeds of the sale of our debt
securities (including redemption proceeds) paid to U.S. holders
other than certain exempt recipients (such as corporations).
Information reporting will generally apply to interest payments on
our debt securities to non-U.S. holders and the amount of tax, if
any, withheld with respect to such payments. Copies of the
information returns reporting such interest payments and any
withholding may also be made available to the tax authorities in
the country in which the non-U.S. holder resides under the
provisions of an applicable income tax treaty. In addition, for
non-U.S. holders, information reporting will apply to the proceeds
of the sale of our debt securities within the United States or
conducted through United States related financial intermediaries
unless the certification requirements described above have been
complied with and the statement described above in "Taxation of
Non-U.S. Beneficial Owners" has been received (and the payor does
not have actual knowledge or reason to know that the beneficial
owner is a United States person) or the holder otherwise
establishes an exemption.
We may be required to withhold, for U.S. federal income tax
purposes, a portion of all taxable payments (including redemption
proceeds) payable to holders of our debt securities who fail to
provide us with their correct taxpayer identification number, who
fail to make required certifications or who have been notified by
the IRS that they are subject to backup withholding (or if we have
been so notified). Certain corporate and other stockholders
specified in the Code and the regulations thereunder are exempt
from backup withholding. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the holder's U.S.
federal income tax liability provided the appropriate information
is furnished to the IRS. If you are a non-U.S. holder, you may have
to comply with certification procedures to establish your non-U.S.
status in order to avoid backup withholding tax requirements. The
certification procedures required to claim the exemption from
withholding tax on interest income described above will satisfy
these requirements.
Payment and distributions with respect to our common stock and
preferred stock also may be subject to state and local taxes.
Tax matters are very complicated, and the federal, state local
and foreign tax consequences of an investment in and holding of our
common stock and preferred stock will depend on the facts of each
investor's situation. Investors are encouraged to consult their own
tax advisers regarding the specific tax consequences that may
affect them.
Investing in our common stock involves certain tax risks, which
are more fully described in our prospectus and other SEC
filings.
As required by U.S. Treasury Regulations governing tax practice,
you are hereby advised that any written tax advice contained herein
was not written or intended to be used (and cannot be used) by any
taxpayer for the purpose of avoiding penalties that may be imposed
under the Internal Revenue Code. The advice was prepared to support
the promotion or marketing of the transactions or matters addressed
by the written advice.
Any person reviewing this discussion should seek advice based on
such person's particular circumstances from an independent tax
advisor.