The UP-C structure — which offers tax benefits to pre-IPO investors and sponsors — likely will expand among energy companies.

In 2013, several energy companies went public using a so-called UP-C structure. In using this structure, the public company (IPOCo) typically owns a substantial equity interest in a subsidiary holding company (Holdings), which owns the operating assets and is a tax passthrough entity (e.g., a limited partnership or limited liability company). The equity interests in Holdings not held by IPOCo are typically owned by the pre-IPO owners, which may consist of individual investors, private equity funds or others. The pre-IPO owners in Holdings have the right to exchange their Holdings equity interests for shares in IPOCo, at which point IPOCo gets a stepped-up tax basis in the Holdings equity interests (which results in tax savings to IPOCo through additional depreciation and amortization). The pre-IPO owners are taxed on any gain recognized as a result of the exchange. The pre-IPO owners and IPOCo may enter into a tax receivable agreement pursuant to which IPOCo would pay the pre-IPO owners a portion (typically 75 to 85 percent) of the tax benefits realized from the basis step-up resulting from the exchanges.