August 2013

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Industry Beat IRS Sides with Equipment Dealer in LKE Line-of-Credit Dispute Advice memo asserts that dealer's QI may apply proceeds from relinquished property to pay down debt on distributor's lines of credit. In a Chief Counsel's Advice (CCA) memo issued June 21, 2013, the head of the Internal Revenue Service's (IRS) Income Tax & Accounting Branch sided with an equipment distributor in a case involving lines of credit established as part of a like-kind exchange (LKE) program. The case involved a distributor who maintained two lines of credit with two creditors. Proceeds from the disposition of the relinquished property (RQ) were paid to the joint account controlled by the dealer and qualified intermediary (QI). The QI then disbursed the RQ proceeds to pay down the debt on the distributor's lines of credit, as required by the agreements with the dealer's lenders. The dealer then acquired replacement property (RP) by financing the acquisition with new debt in an amount that equaled or exceeded the debt that encumbered the RQ. An IRS field attorney challenged that practice, arguing it violated § 1.1031(k)-1(g)(6) of the IRS regulations, which generally prohibit a taxpayer from obtaining the benefits of the RQ proceeds before the end of the exchange period. The field attorney argued that the debt pay-down arrangement resulted in the dealer actually or constructively receiving the RQ proceeds before the end of the exchange period, and therefore should not be able to defer the gain realized on its transfers of RQ under § 1031(a). The IRS chief counsel disagreed, stating that "the fact that the RQ debt is used not only to purchase RQ but also for general business operations, and the fact that QI uses the RQ proceeds to pay down Taxpayer's lines of credit, does not result in Taxpayer being in actual or constructive receipt of the RQ proceeds for purposes of § 1.1031(k)-1." Thus the dealer's exchanges qualify as like-kind exchanges under § 1031, assuming the dealer conformed to the other regulatory requirements. "The CCA provides additional assurance to the AED members already running an LKE program that they are doing the right thing," said Ron Hodgeman, a tax partner at WTP Exchange. "After taking advantage of bonus depreciation the last few years, companies are now disposing of rental equipment with low-to-no tax basis. Equipment rental companies will pay substantially higher taxes this year and into the future unless an LKE program is in place." Although this Advice is only applicable to the specific taxpayer, it should give other dealers with similar circumstances an increased level of comfort to structure their LKE programs similarly. Annual Oil & Gas Industry Report Reveals New Requirements for Companies Impediments to U.S. Shale Boom Operating Canadian Pipelines The U.S. shale boom is running up against an increasingly stringent regulatory environment. An annual analysis of risk factors compiled by BDO reveals that regulatory and legislative changes remain the top concern for the third consecutive year, with 100 percent of companies citing it as a leading risk. This year, hydraulic fracturing regulation in particular entered the top 20 risks cited by oil and gas companies for the first time, with 85 percent of companies including it as a threat to operations. The third annual BDO Risk Factor Report for Oil and Gas Businesses examines the risk factors listed in the most recent SEC 10-K filings of the 100 largest (by revenue) publicly-traded U.S. E&P companies. BDO Natural Resources Practice Lead Charles Dewurst will present highlights of the report during a special event at the AED Summit in Houston on Jan. 17. Top 10 Risk Factors for Oil & Gas Industry 1. Regulatory & legislative changes and increased cost of compliance 2.Volatile oil and gas prices 3.Inability to expand reserves or find replacement reserves 4.Natural disasters and extreme weather conditions 5.Environmental and/or health regulations 6.Operational hazards including blowouts, spills and personal injury 7. Inaccurate reserve estimates 8.General national or global economic conditions 9.Inadequate liquidity or access to capital, indebtedness 10. Changes in demand for oil or natural gas Source: BDO Risk Factor Report for Oil and Gas Businesses The Honorable Joe Oliver, Canada's Minister of Natural Resources, recently announced new requirements for companies operating major pipelines to have the financial capability to respond to any incident and remedy damage. For major crude oil pipelines, the government will expect a minimum financial capability of $1 billion. Minister Oliver also announced new safety rules for pipelines and new financial penalties that will soon come into force for individuals and companies that violate environmental laws. The government is also increasing oil and gas pipeline inspections, doubling comprehensive audits of pipelines, and implementing new safety measures for oil tankers. The Canadian Energy Pipeline Association (CEPA) supports the proposed changes. 14 | www.cedmag.com | Construction Equipment Distribution | August 2013 14_industry beat_KP.indd 14 7/25/13 12:27 PM

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