Our partnership agreement contains specific provisions that are intended to discourage a person or group from attempting to remove
Hi-Crush GP LLC as our general partner or from otherwise changing our management. Please read Withdrawal or Removal of Our General Partner for a discussion of certain consequences of the removal of our general partner. If any
person or group, other than our general partner and its affiliates, acquires beneficial ownership of 20% or more of any class of units, that person or group loses voting rights on all of its units. This loss of voting rights does not apply in
certain circumstances. Please read Meetings; Voting.
If at any time our general partner and its affiliates own more than 80% of the then-issued and outstanding limited partner interests of any
class, our general partner will have the right, which it may assign in whole or in
part to any of its affiliates or beneficial owners or to us, to acquire all, but not less than all, of the limited partner interests of the class held by unaffiliated persons, as of a record date
to be selected by our general partner, on at least 10, but not more than 60, days notice. The purchase price in the event of this purchase is the greater of:
As a result of our general partners right to purchase outstanding limited partner interests, a holder of limited partner interests may
have his limited partner interests purchased at an undesirable time or at a price that may be lower than market prices at various times prior to such purchase or lower than a unitholder may anticipate the market price to be in the future. The tax
consequences to a unitholder of the exercise of this call right are the same as a sale by that unitholder of his common units in the market. Please read Material Tax ConsiderationsDisposition of Units.
To
avoid any adverse effect on the maximum applicable rates chargeable to customers by us or any of our future subsidiaries, or in order to reverse an adverse determination that has occurred regarding such maximum rate, our partnership agreement
provides our general partner the power to amend the agreement. If our general partner, with the advice of counsel, determines that our not being treated as an association taxable as a corporation or otherwise taxable as an entity for federal income
tax purposes, coupled with the tax status (or lack of proof thereof) of one or more of our limited partners, has, or is reasonably likely to have, a material adverse effect on the maximum applicable rates chargeable to customers by our subsidiaries,
then our general partner may adopt such amendments to our partnership agreement as it determines necessary or advisable to:
If our general partner, with the advice of counsel, determines we are subject to federal, state or local laws or regulations that, in the
reasonable determination of our general partner, create a substantial risk of cancellation or forfeiture of any property that we have an interest in because of the nationality, citizenship or other related status of any limited partner, then our
general partner may adopt such amendments to our partnership agreement as it determines necessary or advisable to:
Except as described below regarding a person or group owning 20% or more of any class of units then outstanding, record holders of units on the
record date will be entitled to notice of, and to vote at, meetings of our limited partners and to act upon matters for which approvals may be solicited.
Our general partner does not anticipate that any meeting of our unitholders will be called in the foreseeable future. Any action that is
required or permitted to be taken by the unitholders may be taken either at a meeting of the unitholders or without a meeting if consents in writing describing the action so taken are signed by holders of the number of units necessary to authorize
or take that action at a meeting. Meetings of the unitholders may be called by our general partner or by unitholders owning at least 20% of the outstanding units of the class for which a meeting is proposed. Unitholders may vote either in person or
by proxy at meetings. The holders of a majority of the outstanding units of the class or classes for which a meeting has been called, represented in person or by proxy, will constitute a quorum, unless any action by the unitholders requires approval
by holders of a greater percentage of the units, in which case the quorum will be the greater percentage.
Each record holder of a unit
has a vote according to his percentage interest in us, although additional limited partner interests having special voting rights could be issued. Please read Issuance of Additional Interests. However, if at any time any person or
group, other than our general partner and its affiliates, or a direct or subsequently approved transferee of our general partner or its affiliates and purchasers specifically approved by our general partner, acquires, in the aggregate, beneficial
ownership of 20% or more of any class of units then outstanding, that person or group will lose voting rights on all of its units and the units may not be voted on any matter and will not be considered to be outstanding when sending notices of a
meeting of unitholders, calculating required votes, determining the presence of a quorum or for other similar purposes. Common units held in nominee or street name account will be voted by the broker or other nominee in accordance with the
instruction of the beneficial owner unless the arrangement between the beneficial owner and his nominee provides otherwise.
Any notice,
demand, request, report or proxy material required or permitted to be given or made to record common unitholders under our partnership agreement will be delivered to the record holder by us or by the transfer agent.
If a majority of the incentive distribution rights are held by our general partner and its affiliates, the holders of the incentive
distribution rights will have no right to vote in respect of such rights on any matter, unless otherwise required by law, and the holders of the incentive distribution rights shall be deemed to have approved any matter approved by our general
partner.
If less than a majority of the incentive distribution rights are held by our general partner and its affiliates, the incentive
distribution rights will be entitled to vote on all matters submitted to a vote of unitholders, other than amendments and other matters that our general partner determines do not adversely affect the holders of the incentive distribution rights in
any material respect. On any matter in which the holders of incentive distribution rights are entitled to vote, such holders will vote together with the common units, in either case as a single class, and such incentive distribution rights shall be
treated in all respects as common units, when sending notices of a meeting of our limited partners to vote on any matter (unless otherwise required by law), calculating required votes, determining the presence of a quorum or for other similar
purposes under our partnership agreement. The relative voting power of the holders of the incentive distribution rights and common units, will be set in the same proportion as cumulative cash distributions, if any, in respect of the incentive
distribution rights for the four consecutive quarters prior to the record date for the vote bears to the cumulative cash distributions for such four quarters.
By transfer of common units in accordance with our partnership agreement, each transferee of common units shall be admitted as a limited
partner with respect to the common units transferred when such transfer and admission are reflected in our books and records. Except as described under Limited Liability, the common units will be fully paid, and unitholders will
not be required to make additional contributions.
Indemnification
Under our partnership agreement, in most circumstances, we will indemnify the following persons, to the fullest extent permitted by law, from
and against all losses, claims, damages or similar events:
|
|
|
any departing general partner;
|
|
|
|
any person who is or was an affiliate of our general partner or any departing general partner;
|
|
|
|
any person who is or was a manager, managing member, general partner, director, officer, fiduciary or trustee of our partnership, our subsidiaries, our general partner, any departing general partner or any of their
affiliates;
|
|
|
|
any person who is or was serving as a manager, managing member, general partners, director, officer, employee, agent, fiduciary or trustee of another person owing a fiduciary duty to us or our subsidiaries;
|
|
|
|
any person who controls our general partner or any departing general partner; and
|
|
|
|
any person designated by our general partner.
|
Any indemnification under these provisions will
only be out of our assets. Unless our general partner otherwise agrees, it will not be personally liable for, or have any obligation to contribute or lend funds or assets to us to enable us to effectuate, indemnification. We may purchase insurance
against liabilities asserted against and expenses incurred by persons for our activities, regardless of whether we would have the power to indemnify the person against liabilities under our partnership agreement.
Reimbursement of Expenses
Our
partnership agreement requires us to reimburse our general partner for all direct and indirect expenses it incurs or payments it makes on our behalf and all other expenses allocable to us or otherwise incurred by our general partner in connection
with operating our business. Our partnership agreement does not set a limit on the amount of expenses for which our general partner and its affiliates may be reimbursed. These expenses include salary, bonus, incentive compensation and other amounts
paid to persons who perform services for us or on our behalf and expenses allocated to our general partner by its affiliates. Our general partner is entitled to determine the expenses that are allocable to us. Our general partner does not receive a
management fee.
Books and Reports
Our general partner is required to keep appropriate books of our business at our principal offices. These books will be maintained for both tax
and financial reporting purposes on an accrual basis. For tax and fiscal reporting purposes, our fiscal year is the calendar year.
We
will furnish or make available to record holders of our common units, within 105 days after the close of each fiscal year, an annual report containing audited consolidated financial statements and a report on those consolidated financial statements
by our independent public accountants. Except for our fourth quarter, we will also furnish or make available summary financial information within 50 days after the close of each quarter. We will be deemed to have made any such report available if we
file such report with the SEC on EDGAR or make the report available on a publicly available website which we maintain.
33
We will furnish each record holder with information reasonably required for federal and state tax
reporting purposes within 90 days after the close of each calendar year. This information is expected to be furnished in summary form so that some complex calculations normally required of partners can be avoided. Our ability to furnish this summary
information to our unitholders will depend on their cooperation in supplying us with specific information. Every unitholder will receive information to assist him in determining his federal and state tax liability and in filing his federal and state
income tax returns, regardless of whether he supplies us with the necessary information.
Right to Inspect Our Books and Records
Our partnership agreement provides that a limited partner can, for a purpose reasonably related to his interest as a limited partner, upon
reasonable written demand stating the purpose of such demand and at his own expense, have furnished to him:
|
|
|
a current list of the name and last known address of each record holder;
|
|
|
|
copies of our partnership agreement, our certificate of limited partnership, and all amendments thereto, together with copies of the executed copies of all powers of attorney pursuant to which our partnership agreement,
our certificate of limited partnership and all amendments thereto have been executed;
|
|
|
|
information regarding the status of our business and financial condition (provided that obligation shall be satisfied to the extent the limited partner is furnished our most recent annual report and any subsequent
quarterly or periodic reports required to be filed (or which would be required to be filed) with the SEC pursuant to Section 13(a) of the Exchange Act); and
|
|
|
|
any other information regarding our affairs that our general partner determines is just and reasonable.
|
Under our partnership agreement, however, each of our limited partners and other persons who acquire interests in our partnership interests,
do not have rights to receive information from us or any of the persons we indemnify as described above under Indemnification for the purpose of determining whether to pursue litigation or assist in pending litigation against us or
those indemnified persons relating to our affairs, except pursuant to the applicable rules of discovery relating to the litigation commenced by the person seeking information.
Our general partner may, and intends to, keep confidential from the limited partners trade secrets or other information the disclosure of
which our general partner believes in good faith is not in our best interests or that we are required by law or by agreements with third parties to keep confidential.
Registration Rights
Under our
partnership agreement, we have agreed to register for resale under the Securities Act and applicable state securities laws any common units or other limited partner interests proposed to be sold by our general partner or any of its affiliates or
their assignees if an exemption from the registration requirements is not otherwise available. These registration rights continue for two years following any withdrawal or removal of our general partner. We are obligated to pay all expenses
incidental to the registration, excluding underwriting discounts.
34
MATERIAL TAX CONSIDERATIONS
This section summarizes the material U.S. federal income tax consequences that may be relevant to prospective unitholders and is based upon
current provisions of the U.S. Internal Revenue Code of 1986, as amended (the Code), existing and proposed U.S. Treasury regulations thereunder (the Treasury Regulations), and current administrative rulings and court
decisions, all of which are subject to change. Changes in these authorities may cause the U.S. federal income tax consequences to a prospective unitholder to vary substantially from those described below. Unless the context otherwise requires,
references in this section to we or us are references to Hi-Crush Partners LP and its subsidiaries.
Legal
conclusions contained in this section, unless otherwise noted, are the opinion of Vinson & Elkins L.L.P. and are based on the accuracy of representations made by us to them for this purpose. However, this section does not address all U.S.
federal income tax matters that affect us or our unitholders and does not describe the application of the alternative minimum tax that may be applicable to certain unitholders. Furthermore, this section focuses on unitholders who are individual
citizens or residents of the United States (for U.S. federal income tax purposes), who have the U.S. dollar as their functional currency, who use the calendar year as their taxable year, and who hold units as capital assets (generally, property that
is held for investment). This section has limited applicability to corporations, partnerships (including entities treated as partnerships for U.S. federal income tax purposes), estates, trusts, non-resident aliens or other unitholders subject to
specialized tax treatment, such as tax-exempt institutions, non-U.S. persons, individual retirement accounts (IRAs), employee benefit plans, real estate investment trusts or mutual funds.
Accordingly, we encourage each unitholder
to consult the unitholders own tax advisor in analyzing the U.S. federal, state, local and non-U.S. tax consequences particular to that unitholder resulting from ownership or disposition of units and potential changes in applicable tax
laws
.
We are relying on opinions and advice of Vinson & Elkins L.L.P. with respect to the matters described herein. An
opinion of counsel represents only that counsels best legal judgment and does not bind the Internal Revenue Service (IRS) or a court. Accordingly, the opinions and statements made herein may not be sustained by a court if contested
by the IRS. Any such contest of the matters described herein may materially and adversely impact the market for our units and the prices at which our units trade. In addition, our costs of any contest with the IRS will be borne indirectly by our
unitholders and our general partner because the costs will reduce our cash available for distribution. Furthermore, the tax consequences of an investment in us, may be significantly modified by future legislative or administrative changes or court
decisions, which may be retroactively applied.
For the reasons described below, Vinson & Elkins L.L.P. has not rendered an opinion
with respect to the following U.S. federal income tax issues: (1) the treatment of a unitholder whose units are the subject of a securities loan (e.g., a loan to a short seller to cover a short sale of units) (please read Tax
Consequences of Unit OwnershipTreatment of Securities Loans); (2) whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations (please read Disposition of
UnitsAllocations Between Transferors and Transferees); and (3) whether our method for taking into account Section 743 adjustments is sustainable in certain cases (please read Tax Consequences of Unit OwnershipSection
754 Election and Uniformity of Units).
Taxation of Hi-Crush Partners LP
Partnership Status
We expect to be
treated as a partnership for U.S. federal income tax purposes and, therefore, generally will not be liable for entity-level U.S. federal income taxes. Instead, as described below, each of our unitholders will take into account its respective share
of our items of income, gain, loss and deduction in computing its U.S. federal income tax liability as if the unitholder had earned such income directly, even if we make no cash distributions to the unitholder. Distributions we make to a unitholder
generally will not give rise to income or gain taxable to such unitholder, unless the amount of cash distributed exceeds the unitholders adjusted tax basis in its units.
35
Section 7704 of the Code generally provides that publicly traded partnerships will be treated as
corporations for U.S. federal income tax purposes. However, if 90% or more of a partnerships gross income for every taxable year it is publicly traded consists of qualifying income, the partnership may continue to be treated as a
partnership for U.S. federal income tax purposes (the Qualifying Income Exception). Qualifying income includes (i) income and gains derived from the exploration, development, mining or production, processing, refining, transportation,
and marketing of any mineral or natural resource, including sand, (ii) interest (other than from a financial business), (iii) dividends, (iv) gains from the sale of real property and (v) gains from the sale or other disposition of capital assets
held for the production of qualifying income. We estimate that less than 2% of our current gross income is not qualifying income; however, this estimate could change from time to time.
Based upon factual representations made by us and our general partner regarding the composition of our income and the other representations
set forth below, Vinson & Elkins L.L.P. is of the opinion that we will be treated as a partnership for U.S. federal income tax purposes. In rendering its opinion, Vinson & Elkins L.L.P. has relied on factual representations made by us and
our general partner. The representations made by us and our general partner upon which Vinson & Elkins L.L.P. has relied include, without limitation:
(a) Neither we nor any of our partnership or limited liability company subsidiaries has elected to be treated as a corporation
for U.S. federal income tax purposes; and
(b) For each taxable year since and including the year of our initial public
offering, more than 90% of our gross income has been and will be income of a character that Vinson & Elkins L.L.P. has opined is qualifying income within the meaning of Section 7704(d) of the Code.
We believe that these representations are true and will be true in the future.
If we fail to meet the Qualifying Income Exception, other than a failure that is determined by the IRS to be inadvertent and that is cured
within a reasonable time after discovery (in which case the IRS may also require us to make adjustments with respect to our unitholders or pay other amounts), we will be treated as transferring all of our assets, subject to liabilities, to a newly
formed corporation, on the first day of the year in which we fail to meet the Qualifying Income Exception, in exchange for stock in that corporation and then as distributing that stock to our unitholders in liquidation. This deemed contribution and
liquidation should not result in the recognition of taxable income by our unitholders or us so long as our liabilities do not exceed the tax basis of our assets. Thereafter, we would be treated as an association taxable as a corporation for U.S.
federal income tax purposes.
The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an
investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, from time to time, members of the U.S. Congress and the President propose and consider substantive changes to the
existing U.S. federal income tax laws that affect publicly traded partnerships, including the elimination of the Qualifying Income Exception upon which we rely for our treatment as a partnership for U.S. federal income tax purposes.
In addition, the IRS has issued proposed regulations regarding qualifying income under Section 7704(d)(1)(E) of the Code (the Proposed
Regulations). We do not believe the Proposed Regulations affect our ability to qualify as a publicly traded partnership. However, there are no assurances that final regulations will not include changes that interpret Section 7704(d)(1)(E) in a
manner that is contrary to the Proposed Regulations, which could modify the amount of our gross income that we are able to treat as qualifying income for the purposes of the Qualifying Income Exception. We are unable to predict whether any such
changes will ultimately be enacted. However, it is possible that a change in law could affect us and may be applied retroactively. Any such changes could negatively impact the value of an investment in our common units.
If for any reason we are taxable as a corporation in any taxable year, our items of income, gain, loss and deduction would be taken into
account by us in determining the amount of our liability for federal income tax,
36
rather than being passed through to our unitholders. Our taxation as a corporation would materially reduce the cash available for distribution to unitholders and thus would likely substantially
reduce the value of our units. Any distribution made to a unitholder at a time we are treated as a corporation would be (i) a taxable dividend to the extent of our current or accumulated earnings and profits, then (ii) a nontaxable return of capital
to the extent of the unitholders tax basis in its units, and thereafter (iii) taxable capital gain.
The remainder of this
discussion is based on the opinion of Vinson & Elkins L.L.P. that we will be treated as a partnership for U.S. federal income tax purposes.
Tax
Consequences of Unit Ownership
Limited Partner Status
Unitholders who are admitted as limited partners of the partnership, as well as unitholders whose units are held in street name or by a nominee
and who have the right to direct the nominee in the exercise of all substantive rights attendant to the ownership of units, will be treated as partners of the partnership for U.S. federal income tax purposes.
For a discussion related to the risks of losing partner status as a result of securities loans, please read Tax Consequences of
Unit OwnershipTreatment of Securities Loans. Unitholders who are not treated as partners in us as described above are urged to consult their own tax advisors with respect to the tax consequences applicable to them under the
circumstances.
Flow-Through of Taxable Income
Subject to the discussion below under Entity-Level Collections of Unitholder Taxes with respect to payments we may be
required to make on behalf of our unitholders, and aside from taxes, if any, paid by a corporate subsidiary, we will not pay any U.S. federal income tax. However, a portion of our operations and subsidiaries may also be subject to state and local
taxes. Each unitholder will be required to report on its U.S. federal income tax return each year its share of our income, gains, losses and deductions for our taxable year or years ending with or within its taxable year without regard to whether we
make cash distributions to such unitholder. Consequently, we may allocate income to a unitholder even if that unitholder has not received a cash distribution.
Basis of Units
A
unitholders tax basis in its units initially will be the amount paid for those units increased by the unitholders initial share of our liabilities. That basis generally will be (i) increased by the unitholders share of our income
and any increases in such unitholders share of our liabilities, and (ii) decreased, but not below zero, by the amount of all distributions to the unitholder, the unitholders share of our losses, and any decreases in the unitholders
share of our liabilities. The IRS has ruled that a partner who acquires interests in a partnership in separate transactions must combine those interests and maintain a single adjusted tax basis for all of those interests.
Treatment of Distributions
Distributions made by us to a unitholder generally will not be taxable to the unitholder, unless such distributions exceed the
unitholders tax basis in its units, in which case the unitholder generally will recognize gain taxable in the manner described below under Disposition of Units.
Any reduction in a unitholders share of our liabilities will be treated as a distribution by us of cash to that unitholder. A decrease
in a unitholders percentage interest in us because of our issuance of additional units may
37
decrease the unitholders share of our nonrecourse liabilities. For purposes of the foregoing, a unitholders share of our nonrecourse liabilities (liabilities for which no partner
bears the economic risk of loss) generally will be based upon that unitholders share of the unrealized appreciation (or depreciation) in our assets, to the extent thereof, with any excess liabilities allocated based on the unitholders
share of our profits. Please read Disposition of Units.
A non-pro rata distribution of money or property (including a
deemed distribution as a result of the reduction in a unitholders share of our liabilities as described above) may cause a unitholder to recognize ordinary income if the distribution reduces the unitholders share of our unrealized
receivables, including depreciation and depletion recapture and substantially appreciated inventory items, both as defined in Section 751 of the Code (Section 751 Assets). To the extent of such reduction, the unitholder
would be deemed to receive its proportionate share of the Section 751 Assets and exchange such assets with us in return for an allocable portion of the non-pro rata distribution. This latter deemed exchange generally will result in the
unitholders realization of ordinary income in an amount equal to the excess of (1) the non-pro rata portion of that distribution over (2) the unitholders tax basis (generally zero) in the Section 751 Assets deemed to be relinquished in
the exchange.
Limitations on Deductibility of Losses
A unitholder may not be entitled to deduct the full amount of loss we allocate to it because its share of our losses will be limited to the
lesser of (i) the unitholders tax basis in its units, and (ii) in the case of a unitholder that is an individual, estate, trust or certain types of closely-held corporations, the amount for which the unitholder is considered to be at
risk with respect to our activities. In general, a unitholder will be at risk to the extent of its tax basis in its units, reduced by (1) any portion of that basis attributable to the unitholders share of our liabilities, (2) any portion
of that basis representing amounts otherwise protected against loss because of a guarantee, stop loss agreement or similar arrangement and (3) any amount of money the unitholder borrows to acquire or hold its units, if the lender of those borrowed
funds owns an interest in us, is related to another unitholder or can look only to the units for repayment. A unitholder subject to the at risk limitation must recapture losses deducted in previous years to the extent that distributions (including
distributions deemed to result from a reduction in a unitholders share of nonrecourse liabilities) cause the unitholders at risk amount to be less than zero at the end of any taxable year.
Losses disallowed to a unitholder or recaptured as a result of basis or at risk limitations will carry forward and will be allowable as a
deduction in a later year to the extent that the unitholders tax basis or at risk amount, whichever is the limiting factor, is subsequently increased. Upon a taxable disposition of units, any gain recognized by a unitholder can be offset by
losses that were previously suspended by the at risk limitation but not losses suspended by the basis limitation. Any loss previously suspended by the at risk limitation in excess of that gain can no longer be used and will not be available to
offset a unitholders salary or active business income.
In addition to the basis and at risk limitations, a passive activity loss
limitation generally limits the deductibility of losses incurred by individuals, estates, trusts, some closely-held corporations and personal service corporations from passive activities (generally, trade or business activities in which
the taxpayer does not materially participate). The passive loss limitations are applied separately with respect to each publicly traded partnership.
Consequently, any passive losses we generate will be available to offset only passive income generated by us. Passive losses that exceed a
unitholders share of passive income we generate may be deducted in full when the unitholder disposes of all of its units in a fully taxable transaction with an unrelated party. The passive activity loss rules are generally applied after other
applicable limitations on deductions, including the at risk and basis limitations.
38
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayers investment interest expense generally is limited to the amount of that
taxpayers net investment income. Investment interest expense includes:
|
|
|
interest on indebtedness allocable to property held for investment;
|
|
|
|
interest expense allocated against portfolio income; and
|
|
|
|
the portion of interest expense incurred to purchase or carry an interest in a passive activity to the extent allocable against portfolio income.
|
The computation of a unitholders investment interest expense will take into account interest on any margin account borrowing or other
loan incurred to purchase or carry a unit. Net investment income includes gross income from property held for investment and amounts treated as portfolio income under the passive loss rules, less deductible expenses other than interest directly
connected with the production of investment income. Net investment income generally does not include qualified dividend income (if applicable) or gains attributable to the disposition of property held for investment. A unitholders share of a
publicly traded partnerships portfolio income and, according to the IRS, net passive income will be treated as investment income for purposes of the investment interest expense limitation.
Entity-Level Collections of Unitholder Taxes
If we are required or elect under applicable law to pay any federal, state, local or non-U.S. tax on behalf of any current or former unitholder
or our general partner, we are authorized to pay those taxes and treat the payment as a distribution of cash to the relevant unitholder or general partner. If the payment is made on behalf of a unitholder whose identity cannot be determined, we are
authorized to treat the payment as a distribution to all current unitholders. We are authorized to amend our partnership agreement in the manner necessary to maintain uniformity of intrinsic tax characteristics of units and to adjust later
distributions, so that after giving effect to these distributions, the priority and characterization of distributions otherwise applicable under our partnership agreement is maintained as nearly as is practicable.
Payments by us as described above could give rise to an overpayment of tax on behalf of a unitholder, in which event the unitholder may be
entitled to claim a refund of the overpayment amount. Unitholders are urged to consult their tax advisors to determine the consequences to them of any tax payment we make on their behalf.
Allocation of Income, Gain, Loss and Deduction
Our items of income, gain, loss and deduction will generally be allocated among our unitholders in accordance with their percentage interests
in us. At any time that incentive distributions are made to the holder of an incentive distribution right, gross income will be allocated to that holder to the extent of such distributions.
Specified items of our income, gain, loss and deduction will be allocated under Section 704(c) of the Code (or the principles of Section
704(c) of the Code) to account for any difference between the tax basis and fair market value of our assets at the time such assets are contributed to us and at the time of any subsequent offering of our units (a Book-Tax Disparity). As
a result, the U.S. federal income tax burden associated with any Book-Tax Disparity immediately prior to an offering generally will be borne by our partners holding interests in us prior to such offering. In addition, items of recapture income
will be specially allocated to the extent possible to the unitholder who was allocated the deduction giving rise to that recapture income in order to minimize the recognition of ordinary income by other unitholders.
Treatment of Securities Loans
A
unitholder whose units are loaned (for example, to a short seller to cover a short sale of units) may be treated as having disposed of those units. If so, such unitholder would no longer be treated for U.S. federal
39
income tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition. As a result, during this period (i) any of our
income, gain, loss or deduction allocated to those units would not be reportable by the lending unitholder, and (ii) any cash distributions received by the unitholder as to those units may be treated as ordinary income.
Due to a lack of controlling authority, Vinson & Elkins L.L.P. has not rendered an opinion regarding the tax treatment of a unitholder
that enters into a securities loan with respect to its units. Unitholders desiring to assure their status as partners and avoid the risk of income recognition from a loan of their units are urged to modify any applicable brokerage account agreements
to prohibit their brokers from borrowing and lending their units. The IRS has announced that it is studying issues relating to the tax treatment of short sales of partnership interests. Please read Disposition of UnitsRecognition
of Gain or Loss.
Tax Rates
Under current law, the highest marginal U.S. federal income tax rates for individuals applicable to ordinary income and long-term capital gains
(generally, gains from the sale or exchange of certain investment assets held for more than one year) are 39.6% and 20%, respectively. These rates are subject to change by new legislation at any time.
In addition, a 3.8% net investment income tax applies to certain net investment income earned by individuals, estates and trusts. For these
purposes, net investment income generally includes a unitholders allocable share of our income and gain realized by a unitholder from a sale of units. In the case of an individual, the tax will be imposed on the lesser of (i) the
unitholders net investment income from all investments and (ii) the amount by which the unitholders modified adjusted gross income exceeds $250,000 (if the unitholder is married and filing jointly or a surviving spouse), $125,000 (if
married filing separately) or $200,000 (if the unitholder is unmarried or in any other case). In the case of an estate or trust, the tax will be imposed on the lesser of (i) undistributed net investment income and (ii) the excess adjusted gross
income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.
Section 754 Election
We have made the election permitted by Section 754 of the Code (Section 754 Election) that permits us to adjust the tax bases in
our assets as to specific purchasers of our units under Section 743(b) of the Code (Section 743(b) Adjustment). The Section 743(b) Adjustment separately applies to each purchaser of units based upon the values and bases of our assets at
the time of the relevant purchase, and the adjustment will reflect the purchase price paid. The Section 743(b) Adjustment does not apply to a person who purchases units directly from us.
Under our partnership agreement, we are authorized to take a position to preserve the uniformity of units even if that position is not
consistent with applicable Treasury Regulations. A literal application of the Treasury Regulations governing a Section 743(b) Adjustment attributable to properties depreciable under Section 167 of the Code may give rise to differences in the
taxation of unitholders purchasing units from us and unitholders purchasing from other unitholders. If we have any such properties, we intend to adopt methods employed by other publicly traded partnerships to preserve the uniformity of units, even
if inconsistent with existing Treasury Regulations, and Vinson & Elkins L.L.P. has not opined on the validity of this approach. Please read Uniformity of Units.
The IRS may challenge the positions we adopt with respect to depreciating or amortizing the Section 743(b) Adjustment we take to preserve the
uniformity of units due to lack of controlling authority. Because a unitholders tax basis for its units is reduced by its share of our items of deduction or loss, any position we take that understates deductions will overstate a
unitholders basis in its units, and may cause the unitholder to understate gain or overstate loss on any sale of such units. Please read Disposition of UnitsRecognition of
40
Gain or Loss. If a challenge to such treatment were sustained, the gain from the sale of units may be increased without the benefit of additional deductions.
The calculations involved in the Section 754 Election are complex and will be made on the basis of assumptions as to the value of our assets
and other matters. The IRS could seek to reallocate some or all of any Section 743(b) Adjustment we allocated to our assets subject to depreciation or depletion to goodwill or nondepreciable assets. Goodwill, as an intangible asset, is generally
nonamortizable; however, if amortizable, it is amortizable over a longer period of time or under a less accelerated method than our tangible assets. We cannot assure any unitholder that the determinations we make will not be successfully challenged
by the IRS or that the resulting deductions will not be reduced or disallowed altogether. Should the IRS require a different tax basis adjustment to be made, and should, in our opinion, the expense of compliance exceed the benefit of the election,
we may seek permission from the IRS to revoke our Section 754 Election. If permission is granted, a subsequent purchaser of units may be allocated more income than it would have been allocated had the Section 754 Election not been revoked.
Tax Treatment of Operations
Accounting Method and
Taxable Year
We use the year ending December 31 as our taxable year and the accrual method of accounting for U.S. federal
income tax purposes. Each unitholder will be required to include in income its share of our income, gain, loss and deduction for each taxable year ending within or with its taxable year. In addition, a unitholder who has a taxable year ending on a
date other than December 31 and who disposes of all of its units following the close of our taxable year but before the close of its taxable year must include its share of our income, gain, loss and deduction in income for its taxable year,
with the result that it will be required to include in income for its taxable year its share of more than one year of our income, gain, loss and deduction. Please read Disposition of UnitsAllocations Between Transferors and
Transferees.
Tax Basis, Depreciation and Amortization
The tax basis of our assets will be used for purposes of computing depreciation and cost recovery deductions and, ultimately, gain or loss on
the disposition of these assets. If we dispose of depreciable property by sale, foreclosure or otherwise, all or a portion of any gain, determined by reference to the amount of depreciation and depletion deductions previously taken, may be
subject to the recapture rules and taxed as ordinary income rather than capital gain. Similarly, a unitholder who has taken cost recovery or depreciation deductions with respect to property we own will likely be required to recapture some or all of
those deductions as ordinary income upon a sale of its interest in us. Please read Tax Consequences of Unit OwnershipAllocation of Income, Gain, Loss and Deduction and Disposition of UnitsRecognition of Gain
or Loss.
The costs we incur in offering and selling our units (called syndication expenses) must be capitalized and
cannot be deducted currently, ratably or upon our termination. While there are uncertainties regarding the classification of costs as organization expenses, which may be amortized by us, and as syndication expenses, which may not be amortized by us,
the underwriting discounts and commissions we incur will be treated as syndication expenses.
Valuation and Tax Basis of Our Properties
The U.S. federal income tax consequences of the ownership and disposition of units will depend in part on our estimates of the relative fair
market values and the initial tax basis of our assets. Although we may from time to time consult with professional appraisers regarding valuation matters, we will make many of the relative fair market value and tax basis estimates and determinations
ourselves. These estimates and determinations of tax basis are subject to challenge and will not be binding on the IRS or the courts. If the estimates of fair market
41
value or basis are later found to be incorrect, the character and amount of items of income, gain, loss or deduction previously reported by unitholders could change, and unitholders could be
required to adjust their tax liability for prior years and incur interest and penalties with respect to those adjustments.
Sand Depletion
In general, we are entitled to depletion deductions with respect to silica (sand) mined from the underlying mineral property. We
generally are entitled to the greater of cost depletion limited to the basis of the property or percentage depletion. The percentage depletion rate for sand is 5%.
Depletion deductions we claim generally will reduce the tax basis of the underlying mineral property. Percentage depletion deductions can,
however, exceed the total tax basis of the mineral property. Upon the disposition of the mineral property, a portion of the gain, if any, equal to the lesser of the deductions for depletion which reduce the adjusted tax basis of the mineral property
plus deductible development and mining exploration expenses, or the amount of gain recognized on the disposition, will be treated as ordinary income to us.
Sales of Sand Reserves
If any
silica reserves are sold or otherwise disposed of in a taxable transaction, we will recognize gain or loss measured by the difference between the amount realized (including the amount of any indebtedness assumed by the purchaser upon such
disposition or to which such property is subject) and the adjusted tax basis of the property sold. Generally, the character of any gain or loss recognized upon that disposition will depend upon whether our silica reserves sold are held by us:
|
|
|
for sale to customers in the ordinary course of business (i.e., we are a dealer with respect to that property);
|
|
|
|
for use in a trade or business within the meaning of Section 1231 of the Code; or
|
|
|
|
as a capital asset within the meaning of Section 1221 of the Code.
|
In determining dealer
status with respect to silica reserves and other types of real estate, courts have identified a number of factors for distinguishing between a particular property held for sale in the ordinary course of business and one held for investment. Any
determination must be based on all facts and circumstances surrounding the particular property for sale in question.
We intend to hold
our silica reserves for use in a trade or business and to achieve long-term capital appreciation. Although our general partner may consider strategic sales of silica reserves consistent with achieving long-term capital appreciation, our general
partner does not anticipate frequent sales of silica reserves. Thus, we do not believe we will be viewed as a dealer. Nonetheless, our purposes for holding our properties may change and our future activities could cause us to be a dealer
in silica reserves.
If we are not a dealer with respect to our silica reserves and we have held the disposed reserves for more than a
one-year period primarily for use in our trade or business, subject to the recapture rules discussed below, the character of any gain or loss realized from a disposition of the property will be determined under Section 1231 of the Code. If we have
not held the property for more than one year at the time of the sale, gain or loss from the sale will be taxable as ordinary income.
A
unitholders distributive share of any Section 1231 gain or loss generated by us will be aggregated with any other gains or losses realized by that unitholder from the disposition of property used in a trade or business, as defined in Section
1231(b) of the Code. If a net gain results, all such gains and losses will be long-term capital gains and losses. If a net loss results, all such gains and losses will be ordinary income and losses. Net Section
42
1231 gains will be treated as ordinary income to the extent of prior Section 1231 losses of the taxpayer or predecessor taxpayer for the five most recent prior taxable years to the extent such
losses have not previously been offset against Section 1231 gains. Losses are deemed recaptured in the chronological order in which they arose.
If we are not a dealer with respect to our silica reserves and that property is not used in a trade or business, the property will be a
capital asset within the meaning of Section 1221 of the Code. Subject to the recapture rules discussed below, gain or loss recognized from the disposition of that property will be taxable as long term capital gain or loss if we have held
such reserves for more than one year and short term gain or loss if we have not satisfied that holding period.
Upon a disposition of
silica reserves, a portion of the gain, if any, equal to the lesser of (i) the depletion deductions that reduced the tax basis of the disposed mineral property, plus deductible mining and exploration and development expenses, or (ii) the amount of
gain recognized on the disposition, will be treated as ordinary income to us (the recapture rules).
Disposition of Units
Recognition of Gain or Loss
A
unitholder will be required to recognize gain or loss on a sale of units equal to the difference between the unitholders amount realized and tax basis in the units sold. A unitholders amount realized generally will equal the sum of the
cash or the fair market value of other property it receives plus its share of our liabilities with respect to such units. Because the amount realized includes a unitholders share of our liabilities, the gain recognized on the sale of units
could result in a tax liability in excess of any cash received from the sale.
Except as noted below, gain or loss recognized by a
unitholder on the sale or exchange of a unit held for more than one year generally will be taxable as long-term capital gain or loss. However, gain or loss recognized on the disposition of units will be separately computed and taxed as ordinary
income or loss under Section 751 of the Code to the extent attributable to Section 751 Assets, such as depreciation or depletion recapture. Ordinary income attributable to Section 751 Assets may exceed net taxable gain realized on the sale of a unit
and may be recognized even if there is a net taxable loss realized on the sale of a unit. Thus, a unitholder may recognize both ordinary income and capital gain or loss upon a sale of units. Net capital loss may offset capital gains and, in the case
of individuals, up to $3,000 of ordinary income per year.
For purposes of calculating gain or loss on the sale of units, the
unitholders adjusted tax basis will be adjusted by its allocable share of our income or loss in respect of its units for the year of the sale. Furthermore, as described above, the IRS has ruled that a partner who acquires interests in a
partnership in separate transactions must combine those interests and maintain a single adjusted tax basis for all of those interests. Upon a sale or other disposition of less than all of those interests, a portion of that tax basis must be
allocated to the interests sold using an equitable apportionment method, which generally means that the tax basis allocated to the interest sold equals an amount that bears the same relation to the partners tax basis in its entire
interest in the partnership as the value of the interest sold bears to the value of the partners entire interest in the partnership.
Treasury Regulations under Section 1223 of the Code allow a selling unitholder who can identify units transferred with an ascertainable
holding period to elect to use the actual holding period of the units transferred. Thus, according to the ruling discussed above, a unitholder will be unable to select high or low basis units to sell as would be the case with corporate stock, but,
according to the Treasury Regulations, it may designate specific units sold for purposes of determining the holding period of units transferred. A unitholder electing to use the actual holding period of units transferred must consistently use that
identification method for all subsequent sales or exchanges of our units. A unitholder considering the purchase of additional units or a sale of units purchased in separate transactions is urged to consult its tax advisor as to the possible
consequences of this ruling and application of the Treasury Regulations.
43
Specific provisions of the Code affect the taxation of some financial products and securities,
including partnership interests, by treating a taxpayer as having sold an appreciated financial position, including a partnership interest with respect to which gain would be recognized if it were sold, assigned or terminated at its fair
market value, in the event the taxpayer or a related person enters into:
|
|
|
an offsetting notional principal contract; or
|
|
|
|
a futures or forward contract with respect to the partnership interest or substantially identical property.
|
Moreover, if a taxpayer has previously entered into a short sale, an offsetting notional principal contract or a futures or forward contract
with respect to the partnership interest, the taxpayer will be treated as having sold that position if the taxpayer or a related person then acquires the partnership interest or substantially identical property. The Secretary of the Treasury is
authorized to issue regulations that treat a taxpayer that enters into transactions or positions that have substantially the same effect as the preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees
In general, our taxable income or loss will be determined annually, will be prorated on a monthly basis and will be subsequently apportioned
among the unitholders in proportion to the number of units owned by each of them as of the opening of the applicable exchange on the first business day of the month (the Allocation Date). However, gain or loss realized on a sale or other
disposition of our assets or, in the discretion of the general partner, any other extraordinary item of income, gain, loss or deduction will be allocated among the unitholders on the Allocation Date in the month in which such income, gain, loss or
deduction is recognized. As a result, a unitholder transferring units may be allocated income, gain, loss and deduction realized after the date of transfer.
Although simplifying conventions are contemplated by the Code and most publicly traded partnerships use similar simplifying conventions, the
use of this method may not be permitted under existing Treasury Regulations. Recently, however, the Department of the Treasury and the IRS issued final Treasury Regulations pursuant to which a publicly traded partnership may use a similar monthly
simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the regulations do not specifically authorize the use of the proration method we have adopted. Accordingly, Vinson & Elkins L.L.P. is unable
to opine on the validity of this method of allocating income and deductions between transferee and transferor unitholders. If this method is not allowed under the final Treasury Regulations, or only applies to transfers of less than all of the
unitholders interest, our taxable income or losses could be reallocated among our unitholders. We are authorized to revise our method of allocation between transferee and transferor unitholders, as well as among unitholders whose interests
vary during a taxable year, to conform to a method permitted under the Treasury Regulations.
A unitholder who disposes of units prior to
the record date set for a cash distribution for that quarter will be allocated items of our income, gain, loss and deduction attributable to the month of disposition but will not be entitled to receive a cash distribution for that period.
Notification Requirements
A
unitholder who sells or purchases any of its units is generally required to notify us in writing of that transaction within 30 days after the transaction (or, if earlier, January 15 of the year following the transaction). Upon receiving such
notifications, we are required to notify the IRS of that transaction and to furnish specified information to the transferor and transferee. Failure to notify us of a transfer of units may, in some cases, lead to the imposition of penalties. However,
these reporting requirements do not apply to a sale by an individual who is a citizen of the United States and who effects the sale through a broker who will satisfy such requirements.
44
Constructive Termination
We will be considered to have constructively terminated as a partnership for U.S. federal income tax purposes upon the sale or
exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For such purposes, multiple sales of the same unit are counted only once. A constructive termination results in the closing of our taxable year
for all unitholders. In the case of a unitholder reporting on a taxable year other than the calendar year, the closing of our taxable year may result in more than twelve months of our taxable income or loss being includable in such unitholders
taxable income for the year of termination.
A constructive termination occurring on a date other than December 31 generally would
require that we file two tax returns for one fiscal year, and the cost of the preparation of these returns will be borne by all unitholders. However, pursuant to an IRS relief procedure the IRS may allow a constructively terminated partnership to
provide a single Schedule K-1 for the calendar year in which a termination occurs. Following a constructive termination, we would be required to make new tax elections, including a new Section 754 Election, and the termination would result in a
deferral of our deductions for depreciation. A termination could also result in penalties if we were unable to determine that the termination had occurred.
Moreover, a termination may either accelerate the application of, or subject us to, any tax legislation enacted before the termination that
would not otherwise have been applied to us as a continuing, as opposed to a terminating, partnership.
Uniformity of Units
Because we cannot match transferors and transferees of units and for other reasons, we must maintain uniformity of the economic and tax
characteristics of the units to a purchaser of these units. In the absence of uniformity, we may be unable to completely comply with a number of U.S. federal income tax requirements. Any non-uniformity could have a negative impact on the value of
the units. Please read Tax Consequences of Unit OwnershipSection 754 Election.
Our partnership agreement permits
our general partner to take positions in filing our tax returns that preserve the uniformity of our units. These positions may include reducing the depreciation, amortization or loss deductions to which a unitholder would otherwise be entitled or
reporting a slower amortization of Section 743(b) adjustments for some unitholders than that to which they would otherwise be entitled. Vinson & Elkins L.L.P. is unable to opine as to the validity of such filing positions.
A unitholders basis in units is reduced by its share of our deductions (whether or not such deductions were claimed on an individual
income tax return) so that any position that we take that understates deductions will overstate the unitholders basis in its units, and may cause the unitholder to understate gain or overstate loss on any sale of such units. Please read
Disposition of UnitsRecognition of Gain or Loss above and Tax Consequences of Unit OwnershipSection 754 Election above. The IRS may challenge one or more of any positions we take to preserve the
uniformity of units. If such a challenge were sustained, the uniformity of units might be affected, and, under some circumstances, the gain from the sale of units might be increased without the benefit of additional deductions.
Tax-Exempt Organizations and Other Investors
Ownership of units by employee benefit plans and other tax-exempt organizations as well as by non-resident alien individuals, non-U.S.
corporations and other non-U.S. persons (collectively, Non-U.S. Unitholders) raises issues unique to those investors and, as described below, may have substantially adverse tax consequences to them. Prospective unitholders that are
tax-exempt entities or Non-U.S. Unitholders should consult their tax advisors before investing in our units. Employee benefit plans and most other tax-exempt organizations, including IRAs and other retirement plans, are subject to U.S. federal
income tax on unrelated business taxable income. Virtually all of our income will be unrelated business taxable income and will be taxable to a tax-exempt unitholder.
45
Non-U.S. Unitholders are taxed by the United States on income effectively connected with the
conduct of a U.S. trade or business (effectively connected income) and on certain types of U.S.-source non-effectively connected income (such as dividends) and, unless exempted or further limited by an income tax treaty, will be
considered to be engaged in business in the United States because of their ownership of our units. Furthermore, is it probable that they will be deemed to conduct such activities through permanent establishments in the United States within the
meaning of applicable tax treaties. Consequently, they will be required to file federal tax returns to report their share of our income, gain, loss or deduction and pay U.S. federal income tax on their share of our net income or gain. Moreover,
under rules applicable to publicly traded partnerships, distributions to Non-U.S. Unitholders are subject to withholding at the highest applicable effective tax rate. Each Non-U.S. Unitholder must obtain a taxpayer identification number from the IRS
and submit that number to our transfer agent on a Form W-8BEN, W-8BEN-E, or applicable substitute form in order to obtain credit for these withholding taxes.
In addition, because a Non-U.S. Unitholder classified as a corporation will be treated as engaged in a United States trade or business, that
corporation may be subject to the U.S. branch profits tax at a rate of 30%, in addition to regular federal income tax, on its share of our income and gain as adjusted for changes in the foreign corporations U.S. net equity to the
extent reflected in the corporations effectively connected earnings and profits. That tax may be reduced or eliminated by an income tax treaty between the United States and the country in which the foreign corporate unitholder is a
qualified resident. In addition, this type of unitholder is subject to special information reporting requirements under Section 6038C of the Code.
A Non-U.S. Unitholder who sells or otherwise disposes of a unit will be subject to U.S. federal income tax on gain realized from the sale or
disposition of that unit to the extent the gain is effectively connected with a U.S. trade or business of the Non-U.S. Unitholder. Under a ruling published by the IRS interpreting the scope of effectively connected income, gain
recognized by a non-U.S. person from the sale of its interest in a partnership that is engaged in a trade or business in the United States will be considered to be effectively connected with a U.S. trade or business. Thus, part or all of a Non-U.S.
Unitholders gain from the sale or other disposition of its units may be treated as effectively connected with a unitholders indirect U.S. trade or business constituted by its investment in us. Moreover, under the Foreign Investment in
Real Property Tax Act, a Non-U.S. Unitholder generally will be subject to U.S. federal income tax upon the sale or disposition of a unit if (i) it owned (directly or indirectly constructively applying certain attribution rules) more than 5% of our
units at any time during the five-year period ending on the date of such disposition and (ii) 50% or more of the fair market value of our worldwide real property interests and our other assets used or held for use in a trade or business consisted of
U.S. real property interests (which include U.S. real estate, including land, improvements, certain associated personal property, and interests in certain entities holding U.S. real estate) at any time during the shorter of the period during which
such unitholder held the units or the 5-year period ending on the date of disposition. More than 50% of our assets may consist of U.S. real property interests. Therefore, Non-U.S. Unitholders may be subject to U.S. federal income tax on gain from
the sale or disposition of their units.
Administrative Matters
Information Returns and Audit Procedures
We intend to furnish to each unitholder, within 90 days after the close of each taxable year, specific tax information, including a Schedule
K-1, which describes its share of our income, gain, loss and deduction for our preceding taxable year. In preparing this information, which will not be reviewed by counsel, we will take various accounting and reporting positions, some of which have
been mentioned earlier, to determine each unitholders share of income, gain, loss and deduction. We cannot assure our unitholders that those positions will yield a result that conforms to all of the requirements of the Code, Treasury
Regulations or administrative interpretations of the IRS.
The IRS may audit our U.S. federal income tax information returns. Neither we
nor Vinson & Elkins L.L.P. can assure prospective unitholders that the IRS will not successfully challenge the positions we adopt, and such a
46
challenge could adversely affect the value of the units. Adjustments resulting from an IRS audit may require each unitholder to adjust a prior years tax liability and may result in an audit
of the unitholders own return. Any audit of a unitholders return could result in adjustments unrelated to our returns.
Publicly traded partnerships generally are treated as entities separate from their owners for purposes of U.S. federal income tax audits,
judicial review of administrative adjustments by the IRS and tax settlement proceedings. The tax treatment of partnership items of income, gain, loss and deduction are determined in a partnership proceeding rather than in separate proceedings of the
partners. The Code requires that one partner be designated as the Tax Matters Partner for these purposes, and our partnership agreement designates our general partner.
The Tax Matters Partner has made and will make elections on our behalf and on behalf of unitholders. In addition, the Tax Matters Partner can
extend the statute of limitations for assessment of tax deficiencies against unitholders for items in our returns. The Tax Matters Partner may bind a unitholder with less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial review, by which all the unitholders are bound, of a final partnership administrative adjustment
and, if the Tax Matters Partner fails to seek judicial review, judicial review may be sought by any unitholder having at least a 1% interest in profits or by any group of unitholders having in the aggregate at least a 5% interest in profits.
However, only one action for judicial review will go forward, and each unitholder with an interest in the outcome may participate in that action.
A unitholder must file a statement with the IRS identifying the treatment of any item on its U.S. federal income tax return that is not
consistent with the treatment of the item on our return. Intentional or negligent disregard of this consistency requirement may subject a unitholder to substantial penalties.
Partnership Audit Rules for Tax Years Beginning After December 31, 2017
Recently enacted legislation, for taxable years beginning after December 31, 2017, changes the audit procedures for large partnerships and in
certain circumstances would permit the IRS to assess and collect taxes (including any applicable penalties and interest) resulting from partnership level U.S. federal income tax audits directly from us in the year in which the audit is completed. If
we are required to make payments of taxes, penalties and interest resulting from audit adjustments, our cash available for distribution to our unitholders might be substantially reduced. Pursuant to this new legislation, we are required to designate
an eligible person to act as the Partnership Representative with exclusive authority to act on our behalf in connection with U.S. federal income tax audits, requests by us for administrative adjustments, and any judicial proceedings
arising in connection with those matters. Actions taken by the Partnership Representative will be binding on us and all of our unitholders. We anticipate that our general partner or its designee will act as the Partnership Representative.
Nominee Reporting
Persons who
hold an interest in us as a nominee for another person are required to furnish to us:
(1) the name, address and taxpayer
identification number of the beneficial owner and the nominee;
(2) a statement regarding whether the beneficial owner is:
(a) a non-U.S. person;
(b) a non-U.S. government, an international organization or any wholly owned agency or instrumentality of either of the
foregoing; or
(c) a tax-exempt entity;
(3) the amount and description of units held, acquired or transferred for the beneficial owner; and
47
(4) specific information including the dates of acquisitions and transfers, means
of acquisitions and transfers, and acquisition cost for purchases, as well as the amount of net proceeds from sales.
Brokers and
financial institutions are required to furnish additional information, including whether they are U.S. persons and specific information on units they acquire, hold or transfer for their own account. A penalty of $250 per failure, up to a maximum of
$3 million per calendar year, is imposed by the Code for failure to report that information to us. The nominee is required to supply the beneficial owner of the units with the information furnished to us.
Accuracy-Related Penalties
Certain penalties may be imposed as a result of an underpayment of tax that is attributable to one or more specified causes, including
negligence or disregard of rules or regulations, substantial understatements of income tax and substantial valuation misstatements. No penalty will be imposed, however, for any portion of an underpayment if it is shown that there was a reasonable
cause for the underpayment of that portion and that the taxpayer acted in good faith regarding the underpayment of that portion. We do not anticipate that any accuracy-related penalties will be assessed against us.
State, Local and Other Tax Considerations
In addition to U.S. federal income taxes, unitholders may be subject to other taxes, including state and local income taxes, unincorporated
business taxes, and estate, inheritance or intangibles taxes that may be imposed by the various jurisdictions in which we conduct business or own property now or in the future or in which the unitholder is a resident. We currently conduct business
or own property in a number of states in the United States. Most of these states impose a personal income tax and an income tax on corporations and other entities. Moreover, we may also own property or do business in other states in the future that
impose income or similar taxes on nonresident individuals. Although an analysis of those various taxes is not presented here, each prospective unitholder should consider their potential impact on its investment in us.
Although you may not be required to file a return and pay taxes in some jurisdictions because your income from that jurisdiction falls below
the filing and payment requirement, you will be required to file income tax returns and to pay income taxes in many of these jurisdictions in which we do business or own property and may be subject to penalties for failure to comply with those
requirements, even if you do not live in those jurisdictions. In some jurisdictions, tax losses may not produce a tax benefit in the year incurred and also may not be available to offset income in subsequent taxable years. Some of the jurisdictions
may require us, or we may elect, to withhold a percentage of income from amounts to be distributed to a unitholder who is not a resident of the jurisdiction. Withholding, the amount of which may be greater or less than a particular unitholders
income tax liability to the jurisdiction, generally does not relieve a nonresident unitholder from the obligation to file an income tax return. Amounts withheld will be treated as if distributed to unitholders for purposes of determining the amounts
distributed by us. Please read Tax Consequences of Unit OwnershipEntity-Level Collections of Unitholder Taxes. Based on current law and our estimate of our future operations, our general partner anticipates that any amounts
required to be withheld will not be material.
It is the responsibility of each unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities, of its investment in us. Vinson & Elkins L.L.P. has not rendered an opinion on the state, local, or non-U.S. tax consequences of an investment in us. We strongly recommend that
each prospective unitholder consult, and depend on, its own tax counsel or other advisor with regard to those matters. It is the responsibility of each unitholder to file all tax returns that may be required of it.
48
PLAN OF DISTRIBUTION
We or the selling unitholder may sell securities described in this prospectus and any accompanying prospectus supplement through underwriters,
through broker-dealers, through agents or directly to one or more investors.
We will prepare a prospectus supplement for each offering
that will disclose the terms of the offering, including the name or names of any underwriters, dealers or agents, the purchase price of the securities and the proceeds to us from the sale, any underwriting discounts and other items constituting
compensation to underwriters, dealers or agents.
Because the selling unitholder, Hi-Crush Proppants LLC, is deemed to be an
underwriter within the meaning of the Securities Act, each time the common units owned by Hi-Crush Proppants LLC are sold pursuant to this prospectus, Hi-Crush Proppants LLC is required to provide you with this prospectus and the related
prospectus supplement containing specific information about Hi-Crush Proppants LLC and the terms of the common units being offered in the manner required by the Securities Act.
We will fix a price or prices of our securities at:
|
|
|
market prices prevailing at the time of any sale under the registration statement of which this prospectus forms a part;
|
|
|
|
prices related to market prices; or
|
We may change the price of the securities offered from time to time.
The selling unitholder may act independently of us in making decisions with respect to the timing, manner and size of each of its sales. The
selling unitholder may make sales of the common units on the NYSE or otherwise at prices and under terms prevailing at the time of the sale, or at prices related to the then-current market price, at fixed prices, or in privately negotiated
transactions.
If we or the selling unitholder use underwriters or dealers in the sale, they will acquire the securities for their own
account, and they may resell these securities from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The securities may be offered to
the public either through underwriting syndicates represented by one or more managing underwriters or directly by one or more of such firms. Unless otherwise disclosed in the prospectus supplement, the obligations of the underwriters to purchase
securities will be subject to certain conditions precedent, and the underwriters will be obligated to purchase all of the securities offered by the prospectus supplement if any of the securities are purchased. Any public offering price and any
discounts or concessions allowed or re-allowed or paid to dealers may be changed from time to time.
We may sell the securities through
agents designated by us from time to time. We will name any agent involved in the offering and sale of the securities for which this prospectus is delivered, and disclose any commissions payable by us to the agent or the method by which the
commissions can be determined, in the prospectus supplement. Unless otherwise indicated in the prospectus supplement, any agent will be acting on a best efforts basis for the period of its appointment.
Offers to purchase securities may be solicited directly by us and the sale thereof may be made by us directly to institutional investors or
others, who may be deemed to be underwriters within the meaning of the Securities Act, with respect to any resale thereof. The terms of any such sales will be described in the prospectus supplement relating thereto. We may use electronic media,
including the internet, to sell offered securities directly.
49
We or the selling unitholder may offer our common units into an existing trading market on the
terms described in the prospectus supplement relating thereto. Underwriters, dealers and agents who participate in any at-the-market offerings will be described in the prospectus supplement relating thereto.
We or the selling unitholder may agree to indemnify underwriters, dealers and agents who participate in the distribution of securities against
certain liabilities to which they may become subject in connection with the sale of the securities, including liabilities arising under the Securities Act.
Certain of the underwriters and their affiliates may be customers of, may engage in transactions with and may perform services for us or our
affiliates in the ordinary course of business.
A prospectus and accompanying prospectus supplement in electronic form may be made
available on the websites maintained by the underwriters. The underwriters may agree to allocate a number of securities for sale to their online brokerage account holders. Such allocations of securities for internet distributions will be made on the
same basis as other allocations. In addition, securities may be sold by the underwriters to securities dealers who resell securities to online brokerage account holders.
The aggregate maximum compensation the underwriters will receive in connection with the sale of any securities under this prospectus and the
registration statement of which it forms a part will not exceed 10% of the gross proceeds from the sale.
Because the Financial Industry
Regulatory Authority, or FINRA, views our common units as interests in a direct participation program, any offering of common units under the registration statement of which this prospectus forms a part will be made in compliance with FINRA Rule
2310.
To the extent required, this prospectus may be amended or supplemented from time to time to describe a specific plan of
distribution. The place and time of delivery for the securities in respect of which this prospectus is delivered will be set forth in the accompanying prospectus supplement.
In connection with offerings of securities under the registration statement of which this prospectus forms a part and in compliance with
applicable law, underwriters, brokers or dealers may engage in transactions that stabilize or maintain the market price of the securities at levels above those that might otherwise prevail in the open market. Specifically, underwriters, brokers or
dealers may over-allot in connection with offerings, creating a short position in the securities for their own accounts. For the purpose of covering a syndicate short position or stabilizing the price of the securities, the underwriters, brokers or
dealers may place bids for the securities or effect purchases of the securities in the open market. Finally, the underwriters may impose a penalty whereby selling concessions allowed to syndicate members or other brokers or dealers for distribution
of the securities in offerings may be reclaimed by the syndicate if the syndicate repurchases previously distributed securities in transactions to cover short positions, in stabilization transactions or otherwise. These activities may stabilize,
maintain or otherwise affect the market price of the securities, which may be higher than the price that might otherwise prevail in the open market, and, if commenced, may be discontinued at any time.
50