First, let’s consider eligibility. The revenue procedure applies to:

• Taxpayers who properly transferred relinquished property to a QI and
• have properly and timely identified replacement property,
  • unless QI default occurs during the identification period.
• Taxpayers who were unable to complete the exchange solely because of the QI default and the QI
  • then becomes subject to a federal bankruptcy, or
  • receivership proceedings under federal or state law.
• Taxpayers who have not had actual or constructive receipt of
  • the proceeds from the sale of the relinquished property, or
  • any other property of the QI prior to the date the QI enters bankruptcy or receivership proceedings.

As you can imagine, a number of taxpayers have been holding their collective breath hoping for some good news on this situation.

The second consideration is reporting. Once the exchanger has determined that they meet the applicability test of the revenue procedure, an analysis must be performed on how to report the failed exchange.  Thankfully, the revenue procedure also explains how this should be done. The application of the revenue procedure includes:

• Recognizing gain only as payments are received; this is good news, as the tax liability can be satisfied from payments received by the taxpayer, rather than from other sources.
  • This also allows the taxpayer to report the gain in the year the payment is received, rather than the year the relinquished property was disposed.
• Recognition of gain through the “gross profit ratio method.”
  • The portion of any payment related to the relinquished property is multiplied by,
    • a fraction composed of the taxpayer’s gross profit over the contract price.

Definitions for proper reporting are:

• Payments include: proceeds, damages, or other amounts related to the sale of the relinquished property.
• Gross Profit is defined as the selling price of the relinquished property, less the property’s basis.
  • Any selling expenses not paid by the QI out of proceeds should be added to this amount.
• Selling Price generally means the amount realized on the sale of the relinquished property.
• Contract Price is the selling price of the relinquished property less any assumed debt (by the buyer and not in excess of the adjusted basis of the relinquished property).
  • Assumption of debt in excess of basis is treated as payment, related to the relinquished property, in the year satisfied.

Finally, as always, consult your tax advisor. Like all issuances related to the I.R.S., the actual RevProc 2010-14 document is much more detailed than the above overview and a comprehensive analysis should be left to a competent tax advisor - preferably one familiar with your specific circumstances.  If you believe that you may qualify under this new revenue procedure, you should contact a tax professional immediately.

• Structuring the exchange
• Preparing the related documentation
• Safeguarding proceeds from the sale of the relinquished property(s)
• Continuous monitoring and advising to ensure compliance with federal and state 1031 and QI requirements

It’s important to note that there is currently no federal regulation of qualified intermediaries. However, with the help of the Federation of Exchange Accommodators (FEA), a number of states have begun taking the lead in assuring higher professional standards for QIs. Some of the newly enacted requirements (which can vary from state to state) include:

• Qualified escrow and/or trust accounts for client funds
• Minimum bond and insurance requirements
• Fund withdrawal authorization requirements
• Registration and licensing requirements for QIs
• Investment limitations on exchange proceeds

These are just some of the new state level regulatory requirements for QIs, and Accruit has taken a leadership role in making sure that legislators are fully informed in order to properly protect exchangers. However, our responsibility to inform doesn’t stop there. It also includes educating the marketplace to ensure the right due diligence is performed prior to choosing a QI. Items we advise businesses to research include:

• The QI’s technical expertise and experience
• Banking processes and guidelines
• Certified Exchange Specialist^® (CES^®) on staff
• Quality control
• Insurance and bonding coverage
• Employee recruitment (including background checks with continuous monitoring)
• Membership in the FEA
• Applicability and QI’s status related to relevant state regulatory requirements
• References

This article is merely intended to start a discussion regarding the importance of choosing the right QI. In practical terms, the process should be far more in-depth and you should include a trusted tax advisor as part of your decision team.

If you’d like more information on selecting a QI, please contact us. We can help you understand the entire process and we’re glad to connect you with helpful resources in the tax industry and at the FEA.

The IRS ruling says that if the taxpayer meets the requirements of the revenue procedure, it will not be treated as being in actual or constructive receipt of exchange proceeds due to a QI default (becoming subject to a bankruptcy or receivership proceeding).

A PDF of the full IRS ruling can be downloaded here: Revenue Procedure 2010-14.

THE PROBLEM
Hartson faced a complex exchange scenario. The company planned to purchase multiple strings of tubing and casing over a period of several months and they intended to sell scrap tubing and casing sometime between the first set of purchases and the last. The exchanged equipment was to be carved out of a much larger sale and about 25% of the equipment sold wasn’t going to be replaced. The replacement property was to be purchased and aggregated in four states: North Dakota, Oklahoma, Pennsylvania and Texas, with the majority of the replacement property to be parked in Texas and Oklahoma, where the bulk of the deferral was to be concentrated.

THE ACCRUIT SOLUTION
To address the specific requirements of the proposed transaction, Accruit’s Exchange Operations group crafted a “Personal Property Straddle Exchange” and formed Exchange Accommodation Titleholders (EATs) in Texas and Oklahoma to manage the reverse exchange portion of the transaction. Hartson was then able to conduct the entire exchange within clearly defined Safe Harbor guidelines.

THE RESULTS
Proceeds from the sale of relinquished assets were slightly in excess of $6 million . Since the combined tax rate was approximately 40%, the Accruit single exchange allowed Hartson to defer $2.4 million in tax liability - funds that were reinvested in the company’s operations.

THE PROBLEM
In 2009 JBEC decided to move several older cranes and to purchase a new model from a local dealership. The existing cranes were fully depreciated for tax purposes, and the company anticipated a hefty tax bill upon sale.

THE ACCRUIT SOLUTION
JBEC, which had conducted several single exchanges in the past, consulted with its Accruit Client Service Manager and learned that its plans represented a very simple straightforward 1031 exchange. The CSM helped them structure the exchange, at which time they sold the relinquished assets (four Grove RT series and one Grove TMS series) at a Ritchie Bros. auction.

THE RESULTS

The net sales price at auction approached $400,000 and the combined tax rate was approximately 35%, allowing Janssen Brothers to defer recognition of a $140,000 gain. Shortly thereafter the firm applied these funds to the purchase of a new Terex RT series, which is in service today.

Janssen Brothers is based on an actual Accruit client.

We have historically made a name for ourselves by providing robust repetitive programs for tangible corporate assets (especially in the heavy equipment and oil & gas industries), but the truth is that a majority of our clients don’t need large programs. They may not buy and sell regularly and they may own smaller portfolios. For these businesses, the smartest approach to 1031 exchanges involves the single exchange; these one-off transactions are the most common form of LKE in the US today.

In response to questions from potential clients who, like most companies, are better served by the scale and flexibility of the forward delayed exchange, we’ve developed a resource sheet that explains more about how your business can benefit from a single 1031 like-kind exchange. This brief provides some basic information about singles, tells you more about why Accruit’s offerings and includes two new case studies, one detailing a straightforward single and the other outlining a more complex exchange.

We encourage you review these resources and call Steve Chacon, Director of Exchange Operations (866.397.1031 x116, stevec@accruit.com) if you have questions.

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The proposed law, California Assembly Bill 2640, would essentially eliminate a company’s ability to use 1031 like-kind exchanges (LKEs). However, Section 1031 of the tax code exists to promote healthy business activity, and is an especially powerful tool for small and medium-sized companies. LKEs have been a part of the tax code since 1921 and the provisions have been strengthened and expanded on multiple occasions. As such, they have been acknowledged and validated as a fair and productive practice by both major political parties and have been used to promote stronger business activity during both boom and bust cycles.

One of the primary reasons that 1031 exchanges have been so unanimously agreed-upon is that they’re constructed to promote reinvestment. The only way a company can employ LKEs is if they are plowing sales proceeds back into their businesses, a process that boosts employment and thereby strengthens the tax base.

We fear that this bill, if passed, will signal the death of many California businesses. This would mean lost jobs, lost tax revenues and an increase in the demand for costly state services (such as unemployment expenditures).

At Accruit, we’ve been fortunate to work closely with a number of California companies and have seen first-hand the ways in which 1031 exchanges have boosted the state’s economic vitality. After much study, it’s our belief that California Assembly Bill 2640 would inflict significant long-term damage to the state’s economy and the well-being of many of its workers. It’s also not clear that this new law would even accomplish its intended goals in the near-term, as defunct businesses and out-of-work citizens don’t pay taxes.

We strongly encourage California’s legislators to reject this ill-conceived measure. It’s rare for a tax law to remain on the books for 89 years, and when it does, it’s probably because it’s a very good idea.

His review considered four key criteria, and awarded the Exchange Manager™ 18 out of a possible 20 stars, concluding that “[t]he Accruit service furnishes an efficient way to handle the details of like-kind exchanges and all the associated document preparation and record keeping.”

We’ve always touted the efficiency and effectiveness of Accruit technology, and it’s rewarding to see independent analysts reaching the same conclusions.

• Read the article at Trusts & Estates.com
• Download PDF

To begin, let’s look beyond the definitions we typically use to describe our businesses. By examining what type of property is specifically excluded from exchange treatment and then defining qualifying property, we can take a case-by-case approach to determine if a particular item, or group of items, can meet the requirements for 1031 exchange treatment.

Section 1031 of the Internal Revenue Code specifically excludes property from 1031 exchange treatment if it is considered stock in trade, or other property held primarily for sale. Stock in trade is further defined as property that “would be properly included in the inventory of the taxpayer, if on hand, at the close of the taxable year, or property primarily held for sale to customers in the ordinary course of the taxpayer’s trade or business.” As a general rule, if the property is held for resale then you can forget about LKE treatment upon disposition.

However, just because you may carry inventory, or other property held for resale, doesn’t mean you cannot take advantage of 1031 exchange treatment for other assets that might be segregated from your sales fleet. Section 1031 also provides this definition for property that qualifies for exchange treatment: “No gain or loss shall be recognized on the exchange of property held for the productive use in a trade or business, or for investment.” So, start by taking a careful look at the principal motivations related to the other property in determining whether it may qualify. Some questions to ask include:

• What was the purpose for initially acquiring the property?
• Subsequent to the original purchase, how was the property held?
• How was the property held at the time of the sale?

It’s important to note that these are just a few of the questions to ask and a careful analysis should be taken prior to the sale of the relinquished property. That analysis should always involve an experienced tax advisor and a knowledgeable qualified intermediary.

The bottom line is, your classification as a dealer, distributor, or even a manufacturer alone will not disqualify you from considering 1031 exchanges as a tax strategy.

Steve Chacon is Accruit’s Director of Exchange Operations. He can be reached at stevec@accruit.com or 866.397.1031 x116.

American Value Automotive* (AVA) is a large licensee serving the western United States. Their portfolio includes light trucks and automobiles (cars comprise roughly 95% of their assets).

The Problem

AVA sells 3,000 vehicles per year, generating $72MM in revenue. The assets have a five-year MACRS life, but the average hold time is just six months. The company’s combined state and federal tax rate is approximately 40%.

The Accruit Solution

Accruit developed a powerful repetitive program for the company that keeps track of depreciation, including complex layers of step-in-the-shoes depreciation calculations. Accruit’s service model provided the client with a dedicated client services manager assisting with the sale and purchase data feed each month. By optimizing the data before tax filing, Accruit was able to help AVA defer additional taxes.

The Results

After four years in an Accruit LKE program, AVA was able to reduce its taxable gain by $3.3 million per year, allowing them to transform $1.32MM in tax liability into working cash flow. This benefit has been used to bolster the AVA fleet, helping them remain competitive in a difficult economic environment.

* Based on actual client.

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- CEO of Hertz System Licensee RES Enterprises, Inc.