In turn, we highly recommend EnergyNet to O&G enterprises seeking optimal efficiency and return in the auction marketplace. We’ve put together a suite of resources detailing EnergyNet, their services and value propositions, and what you need to get started working with them.

Accruit is proud of our unparalleled roster of strategic partners, and we encourage you to take a few minutes to get to know them. We think you’ll be as impressed as we are.

We’ll be at the Corpus Christi Town Club on September 15, and we’ll be at the Austin Club the following day. The Independent Producer Value Capture Workshop presents detailed case studies and real-world solutions that independent oil and gas producers can put into play the same day.

• Amber Morlan of Accruit will illustrate the value of 1031 exchanges for the independent producer
• Grant Farris, CIMA Energy’s VP of Producer Services will address best practices in oil and natural gas marketing
• Mike Corley, Principal of EnRisk, will discuss the ins and outs of hedging in the current environment

You can find more information, including schedules and registration information, by downloading the event flyers.

• Corpus Christi
• Austin

If you have further questions, please contact Leticia Espinoza at 866.397.1031 x139 or leticiae@accruit.com.

The new law amends prior law, which deprived taxpayers of Section 1031 tax deferral on a state level if they purchased replacement property in the name of a new entity, notwithstanding that the acquiring entity was a disregarded entity. The typical situation would be that in which a taxpayer was required by a lender or TIC sponsor to acquire a replacement property in the name of a new single member LLC. The State of New Hampshire began disallowing exchange treatment on those transactions in 2008 and began to audit previously closed transactions as far back as 2004, without notice either to taxpayers or to the professionals in the industry.

The new law makes it clear that exchange treatment will not be affected by taking title in the new entity as long as the entity is a single member LLC, revocable trust or other entity which is disregarded for federal income tax purposes. The amendment eliminates the “claw back” efforts to 2004.

Accruit President and CEO Brent Abrahm, who co-chairs the organization’s state legislative committee, says the new legislation is very good news for businesses in the state of New Hampshire and applauds the state’s lawmakers for working to put its companies on a level footing with those in neighboring states.

Abrahm encourages potentially affected businesses to consult with their tax advisors on how SB 483 might affect their tax strategies. Additionally, Accruit representatives are happy to assist in these discussions in any way that the tax advisor deems appropriate.

Text of New Hampshire SB 483 is available for download here.

It should be noted that this is not intended as tax advice - Accruit does not provide tax guidance. We do, however, encourage any business that thinks they may be affected to discuss the following information with their respective tax advisors. Accruit is glad to be involved, as appropriate, in those discussions.

The Ruling

On June 25, 2010 the Internal Revenue Service (IRS) National Office of the Chief Counsel released Chief Counsel Advisory (CCA) 201025049. In brief, this ruling reaffirms that depreciation deductions and like-kind exchange (LKE) treatment may not be allowed for equipment held primarily for sale. (Please see the attached copy of the original CCA.)

It is of the utmost importance to note that this CCA is heavily dependent on a very specific set of facts and circumstances surrounding a single taxpayer employing LKEs as part of their overall tax planning strategy. Furthermore, under Title 26, section 6110(k)(3), CCA determinations are not to be used or cited as precedent. This said, published determinations like this CCA can provide important insight and guidance regarding specific issues.

It’s also important to note that the phrase “property held primarily for sale” is not arbitrary. It appears throughout the Internal Revenue Code (IRC) and, as such, has undergone extensive litigation. Additionally, the Supreme Court has held under the definition of capital assets that “primarily” is defined as “of first importance” or “principally.”

Ultimately, and despite the taxpayer’s own designation of the equipment as primarily held for rental, the Chief Counsel determined the property was principally held for sale, with rental of secondary importance. (Note: the taxpayer in question is not an Accruit client.)

The following summarized facts serve to support the Chief Counsel’s position:

• The taxpayer structured the sales of designated rental equipment as LKE transactions.
• Taxpayer’s overall revenue structure consists of:
  • equipment sales making up 91% of total income, and
  • equipment rentals making up 9% of total income.
  • Information provided to the IRS indicated that a substantial portion of the equipment designated as rental was sold prior to generating any rental income.
• The IRS Examination Division sampled a number of replacement properties received in LKE transactions and determined that many were disposed of shortly after purchase and none of the replacement properties were rented prior to disposition.
  • Of all the replacement property purchased during Year 1, 40% was disposed of that same year.
  • Nearly half of these dispositions occurred within 90 days of the replacement property’s receipt by the taxpayer.

Implications

Under IRC section 1031(a), Qualified LKE sales are disposals of relinquished property defined as “held for productive use in a trade or business or for investment.” Property that is held primarily for sale (inventory) is specifically disqualified from LKE treatment.

Does this ruling mean that companies with 1031 exchange programs should conduct a review? Perhaps. This depends on the details of the particular program. The CCA does highlight the importance of properly classifying and qualifying both relinquished and replacement property with respect to LKE eligibility, and it’s always a good idea to make sure that a program remains in compliance with the guidelines established during implementation.

Accruit advises any company that believes it may be implicated by the Chief Counsel’s reasoning to discuss with their tax advisor what steps should be taken (and documented) to help ensure that relinquished property is truly separate and distinct from those assets that are held exclusively or primarily for sale.

Those who work with us probably encounter the same challenge from time to time. Maybe you’re a client explaining your program to a new employee, or perhaps you’re a partner trying to articulate the value of LKEs to one of your customers. In any case, how can you get the message across clearly?

I’d like to point you to a couple of resources that may help the next time the subject comes up. First, you might review our 1031 101 podcast. This introductory explanation of the LKE process is led by President and CEO Brent Abrahm and is a great tool for helping you grasp the basics. Second, Steve Chacon, our Director of Exchange Operations, has just produced a 1031 exchange webinar/video designed expressly for our partners. This refresher delves into a bit more detail and by the end you’re going to be far better equipped to explain the whats, hows and whys of LKEs to your own customers and colleagues.

Give these a few minutes of your time, and if you need clarification or have specific questions about the material, contact Steve at 866.397.1031 x 116 or stevec@accruit.com. In addition, if you feel that there would be some value in doing a presentation to a customer group, let us know - we can either help you do it yourself, or perhaps we can run a webinar or do an on-site presentation on your behalf.

- Industry’s only trade association supports strong regulation, looks forward to working with Consumer Financial Protection Bureau to craft consumer protection measures

President Obama is slated to sign the Consumer Financial Protection Act of 2010 (CFPA) into law in the coming days, and the Federation of Exchange Accommodators (FEA) believes the move is an important first step toward assuring comprehensive protection for all consumers. The FEA, the trade association representing the exchange facilitator industry, says it looks forward to working with the Consumer Financial Protection Bureau to develop regulations governing exchange facilitators, also known as Qualified Intermediaries, who facilitate tax-deferred exchange transactions under Internal Revenue Code §1031.  Regulations are needed especially with respect to the security of client funds.

The CFPA will include a provision requiring the Director of the Consumer Financial Protection Bureau to conduct a study and propose legislation and/or regulations to protect consumers using exchange facilitators.  The study and recommendations must be completed with one year after the new law takes effect, and a program or proposed regulations must be implemented within two years after the Director’s report.

“This is a great beginning.  However, there is much more work to be done to achieve our goal of comprehensive federal regulation that will cover all exchange clients and transactions,” stated FEA President David Gorenberg.  “The FEA has previously communicated to legislators our support for this bill along with our technical concerns that many transactions will not fit the definitional scope of the CFPA.  We are looking forward to working with the Director and the legislative sponsors to identify and suggest regulations or legislation that will not be limited to transactions solely involving individuals engaged in exchanges for ‘personal, family or household use,’” echoed Suzanne Goldstein Baker, chairperson of the FEA’s Federal Legislative Committee.  “The FEA intends to work with the Director to ensure that all taxpayers, regardless of whether they are individuals or business entities, benefit from mandatory protections,” added Mr. Gorenberg.

The FEA has been a strong supporter of federal regulation of its industry to require prudent funds management standards and other protections for its clients.  In 2007 the FEA petitioned the FTC for regulatory oversight and submitted to it a comprehensive draft regulation.  The FTC denied the petition, concluding that there was no evidence of pervasive fraud throughout the industry and thus, the burdens of regulation would outweigh the potential benefits. The FEA has since been actively involved in passing state legislation to regulate exchange facilitators.  The FEA drafted a “model law” which the states of California, Colorado, Maine, Nevada, Oregon, Virginia and Washington have adopted with slight variations. The FEA has also submitted to the Secretary of the Treasury and the Internal Revenue Service a proposed amendment to Treasury Regulations which would impose reasonable, understandable standards of prudent funds management requiring that funds held by Qualified Intermediaries be invested in a manner that maintains liquidity and preserves principal.

About the FEA

The Federation of Exchange Accommodators (FEA) is the industry association for exchange facilitators.  FEA member companies facilitate tax-deferred exchanges of investment and business use properties under IRC §1031 for taxpayers of all sizes, from individuals of modest means to high net worth taxpayers and business entities.  Members range from small, privately held businesses to large, publicly traded companies and banks.  Transactions range from less than $100,000 to hundreds of millions of dollars involving commercial and residential real estate, aircraft, trucks, trailers, containers, railcars, heavy equipment and other assets.  To comply with tax rules, exchange facilitators typically hold proceeds from the sale of relinquished assets until they can be reinvested in replacement assets to complete the exchange.  Section 1031 exchanges must be completed within 180 days.  More information is available on the FEA’s website, 1031.org.

CONTACT

Caitlin Middleton, Executive Director
Federation of Exchange Accommodators
100 N. 20^th St., 4^th FL
Philadelphia, PA 19103
(215) 564-3484
cmiddleton@fernley.com
www.1031.org

The oldest form of exchange, the simultaneous LKE can take on three basic forms:

• Two-party swap format, without the use of a Qualified Intermediary (QI)
• Three-party format, without the use of a QI
• Two or three-party format, with a QI

For the purposes of this article, I’ll stick to the two-party swap format.

Three-party LKEs can be structured without the use of a QI, but the accommodating party is potentially exposed to liability issues related to property they have little information about. This potential exposure makes three-party LKEs without the use of a QI, a rare (and risky) occurrence.

On the other hand, the two-party swap format represents an exchange in its most understandable and unadulterated form. Structured as a true trade, the ownership transfers must occur simultaneously with care taken in order to account for each property’s respective fair market values to ensure tax liabilities are fully deferred. Furthermore, since the two properties don’t usually share the same fair market values, cash or other property used as part of the purchase / sale price must be carefully delivered directly to the other party.

The two-party swap is illustrated as follows:

Two-party swaps can be a great way to keep an LKE simple and cost effective. However, what may begin as a simple swap can quickly evolve to suit the circumstances of the seller (exchanger) and / or buyer. It’s these variable circumstances that can move the transaction beyond the requirements for a successful LKE. The old saying goes that the devil’s in the details, and LKEs are heavily dependent on the proper transaction form. Any deviations from that form can be fatal to the exchange.

Assuming the properties qualify for LKE treatment, the primary threat to the exchange lies in delays. Delays in ownership transfers (or the delivery of cash or other considerations) can have a profoundly negative impact on the integrity of the two-party swap, so proper planning is vital. This planning is especially important if you’re involved in a dealer trade-in or a pass-through transaction. In some instances, pass-throughs and trade-ins can fall outside the prescribed format, requiring the use of a QI. In other cases, where the two-party swap format doesn’t require the use of a QI, exchangers may choose to involve one in the transaction. In doing so, they add some very important elements to the LKE:

• An experienced, knowledgeable professional.
• An approved “Safe Harbor” component.
  • Exchangers should be very careful regarding transactions that position the dealer as the QI. There are very specific rules within the tax code prohibiting the use of an individual / entity that has a recent agency relationship with the exchanger.
• A safety net against LKE-destroying occurrences, such as:
  • Actual receipt or constructive receipt of funds (this is especially important if the values of the traded properties are not equal).
  • Delays in the sequential transfer of the properties.

In other words, simultaneous exchanges are legal and valid, but they can expose you to significant liability if they’re conducted improperly. The best way to assure that your swap complies with Section 1031 is to begin the planning process by calling a QI. At Accruit, we don’t charge any fees to discuss the proposed transaction, and our Exchange Operations team can provide you with an honest appraisal of the transaction’s integrity, including whether or not you should use a QI.

Short version: make a call with your QI a prerequisite step in your due diligence process. You won’t regret it.

Strong, smart, strategically minded producers have weathered the storm, but even the best independent O&G businesses remain focused on the cash flow and tax liability issues that directly weigh on their future success.

The good news: amidst the chaos and uncertainty, there are proven value-generation solutions that the independent producer can put into play today.

This was the message last Thursday at the Independent Producer Value Capture Workshop, which was held at the Petroleum Club of San Antonio. This focused 2½-hour seminar was led by three O&G industry-leading services firms with deep roots in the O&G business and will address strategies with powerful, demonstrated benefit for the independent producer.

• Grant Farris, VP of Producer Services for CIMA Energy, detailed current best practices in O&G marketing for independent producers. His illustrated case study demonstrating how a nine-mile pipeline could be significantly more cost-effective than a three-mile line made clear the importance of involving marketing experts in the strategic planning process.
• Mike Corley, Principal and Founder of EnRisk Partners, walked the audience through some of the nuances of hedging, discussing the tools that are of the greatest value for independent producers.
• Dan Belger, Accruit’s VP of Sales, explained the value of 1031 like-kind exchanges in transforming tax liability into working cash flow, with significant attention to the what’s and how-to’s associated with conducting like-kind exchanges in the O&G industry.

The event was attended by representatives from some of the region’s finest independent producers, and the response was enthusiastic, with one attendee asking “are there going to be more of these? I know some other companies that need to hear what you guys are saying.”

The better news: there are going to be more. San Antonio was the first stop in a road show series that’s going to make stops in several markets around Texas and Louisiana in the coming months. If you’d like to know more, or to ask questions in advance, please contact me at 866.397.1031 x112 or sams@accruit.com and I’ll see to it that you get the answers and resources you need. I can also get you on our mailing list so you’re informed when we’re coming to your town.

Thanks to those who braved the heavy weather in San Antonio, and we look forward to seeing the rest of you at an upcoming workshop.

The IRS has issued extension Notices for the following disaster areas (the Covered Disaster Areas) for storms beginning on the disaster date in bold:

Mississippi (April 23): Attala, Choctaw, Holmes, Monroe, Oktibbeha, Union, Warren and Yazoo West Virginia: Fayette, Greenbrier, Kanawha, Mercer and Raleigh

Alabama (April 24): DeKalb, Marshall and Walker

Tennessee (April 30): Benton, Carroll, Cheatham, Chester, Clay, Crockett, Davidson, Decatur, DeKalb, Dickson, Dyer, Fayette, Gibson, Hardeman, Hardin, Haywood, Henderson, Hickman, Houston, Humphreys, Jackson, Lauderdale, Lawrence, Lewis, Macon, Madison, Maury, Montgomery, Obion, Robertson, Rutherford, Smith, Stewart, Sumner, Trousdale, Wayne, Williamson and Wilson

[Note that the IRS may add additional areas later as FEMA adds them.  If you are near the Covered Disaster Area, you should check the disaster announcement website for updates. The FEA will not issue announcements if more areas are added.]

Both of the following criteria must be met to get the extension under Revenue Procedure 2007-56, section 17:

(1) The taxpayer is located in the Covered Disaster Area or is otherwise an affected taxpayer as defined in the Notice, regardless of where the relinquished property or replacement property is located, or otherwise has difficulty meeting the exchange deadlines under the conditions in Revenue Procedure 2007-56, section 17; AND

(2) The relinquished property was transferred (or the parked property was acquired by the EAT in a reverse exchange under Revenue Procedure 2000-37) on or before the disaster date listed above.

IF the taxpayer meets these criteria, THEN any 45 day or 180 day deadline that falls on or after the disaster date is extended to 120 days from such deadline. Note the date may not be extended beyond one year or the due date (including extensions) of the tax return for the year of the disposition of the relinquished property (typically, if an extension was filed, 9/15 for corporations and 10/15 for other taxpayers).

Please see Revenue Procedure 2007-56, Section 17, and this notice at the IRS site for further details.

Accruit clients in potentially affected areas are encouraged to contact their Client Service Managers. Other parties with questions can e-mail us at info@accruit.com or call us toll-free at 866.397.1031.

Megan and Emily Shaver (whose dad, George, is Accruit’s Chief Operations Officer), Brandon and Kirsten Salazar (mom Melissa is our Controller) and Owen Abrahm, son of CEO Brent Abrahm, heard presentations from representatives of each Accruit department, and by the end of the day they were pitching in and helping out with a variety of tasks. The adults were all duly impressed with how bright and perceptive our visitors were.

We hope your company celebrated this annual holiday, as well. If so, and if your experience was like ours, it’s safe to say that American business is going to be in pretty good hands here in another 20 years or so.

Accruit Junior Internship Seminar Participants

• Front row, L-R: Kirsten Salazar, Brandon Salazar, Megan Shaver, Emily Shaver, Owen Abrahm
• Back row, L-R: Aron Hook, Max Draco, Melissa Salazar, Amber Morlan, Dan Belger, Leticia Espinoza, Casie Cook, Sam Smith