Income Taxes

The Company is a limited liability company treated as a disregarded entity for federal and state income tax purposes, with the exception of the state of Texas. As such, with the exception of the state of Texas, the Company is not a taxable entity, it does not directly pay federal and state income taxes and recognition has not been given to federal and state income taxes for the operations of the Company, except as set forth in the tables below. Prior to the LINN Energy transaction, the Company was a Subchapter C-corporation subject to federal and state income taxes. Amounts recognized for income taxes are reported in “income tax expense” on the statements of operations.

Income tax expense consisted of the following:



	Successor				Predecessor
	Year Ended December 31, 2014		December 17, 2013 through December 31, 2013		January 1, 2013 through December 16, 2013			Year Ended December 31, 2012
(in thousands)
Current taxes:
Federal	$	—	$	—	$	(225	)	$	286
State	—		—		(11,043		)	4,954
Deferred taxes:
Federal	—		—		56,620			80,083
State	69		—		19,928			2,798
	$	69	$	—	$	65,280		$	88,121

A reconciliation of the federal statutory tax rate to the effective tax rate is as follows:



	Successor				Predecessor
	Year Ended December 31, 2014		December 17, 2013 through December 31, 2013		January 1, 2013 through December 16, 2013		Year Ended December 31, 2012

Federal statutory rate	35	%	35	%	35	%	35	%
State, net of federal tax benefit	—		—		3		3
Income excluded from nontaxable entities	(35	)	(35	)	—		—
Deferred state rate impact	—		—		—		(1	)
Research and development credits	—		—		—		(3	)
Net impact to uncertain income tax positions	—		—		(2	)	—
Transaction costs	—		—		4		—
Other	—		—		1		—
Effective rate	—	%	—	%	41	%	34	%

The effective tax rate was zero for the year ended December 31, 2014, and for the successor period from December 17, 2013 through December 31, 2013, as the Company is a limited liability company treated as a disregarded entity for federal and state income tax purposes, with the exception of the state of Texas.

Significant components of the deferred tax assets and liabilities are as follows:



	Successor		Predecessor
	December 31, 2014		December 31, 2013
(in thousands)
Deferred tax assets:
Net operating loss carryforwards	$	—	$	—
Other	—		—
	—		—
Deferred tax liabilities:
Property and equipment principally due to differences in depreciation	—		—
Other	69		—
	69		—
Net deferred tax liabilities	$	69	$	—

On December 16, 2013, the Company was formed as a limited liability company and ceased to be subject to federal and state income taxes, with the exception of the state of Texas. Therefore, the Company’s net deferred income tax liabilities of approximately $256 million at December 31, 2012, decreased to zero at December 31, 2013. The Company’s net deferred income tax liabilities were assumed by LinnCo in the merger and were not transferred to LINN Energy in the contribution.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. At December 31, 2014, the Company is in a net deferred tax liability position and has no deferred tax assets.

Changes in the balance of unrecognized tax benefits, excluding interest and penalties on uncertain tax positions, were as follows:



	Successor				Predecessor
	Year Ended December 31, 2014		December 17, 2013 through December 31, 2013		January 1, 2013 through December 16, 2013			Year Ended December 31, 2012
(in thousands)
Unrecognized tax benefits at beginning of period	$	—	$	—	$	22,553		$	2,864
Increases for positions taken in current year	—		—		50			21
Increases (decreases) for positions taken in a prior year	—		—		(635		)	20,458
Decreases for settlements with taxing authorities	—		—		—			—
Decreases for lapses in the applicable statute of limitations	—		—		(1,862		)	(790		)
Unrecognized tax benefits at end of period	$	—	$	—	$	20,106		$	22,553

In accordance with the applicable accounting standards, the Company recognizes only the impact of income tax positions that, based on their merits, are more likely than not to be sustained upon audit by a taxing authority. To evaluate its current tax positions in order to identify any material uncertain tax positions, the Company developed a policy of identifying and evaluating uncertain tax positions that considers support for each tax position, industry standards, tax return disclosures and schedules, and the significance of each position. It is the Company’s policy to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. The Company had no material uncertain tax positions at December 31, 2014, and December 31, 2013.

On December 16, 2013, the date of the LINN Energy transaction, all unrecognized tax benefits of the predecessor were assumed by LinnCo. The tax years 2011 – 2013 remain open to examination for income tax purposes in the state of Texas.

During the predecessor period from January 1, 2013 through December 16, 2013, the Company decreased the unrecognized tax benefits by approximately $2 million due to the closing of certain federal and state income tax years, which resulted in a reduction of the effective income tax rate. As of December 16, 2013, the Company had a gross liability for uncertain income tax benefits of approximately $20 million. The Company had accrued approximately $19,000 and $426,000 of interest related to its uncertain income tax positions as of December 16, 2013, and December 31, 2012, respectively.