Federal Income Tax Write Offs by cii15704


Federal Income Tax Write Offs document sample

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									        OIL AND GAS TAX
               August 20-21, 2009

                 Brian Dethrow
              Jackson Walker, L.L.P.
           901 Main Street, Suite 6000
               Dallas, Texas 75202
Change is coming . . . or “proposals floated for
sinking you”
Hodge podge of new tax plans mentioned
No percentage depletion, only “cost” remains

No current expensing of IDC, really big as IDCs account for up to 80%

No “working interest exception” from the passive activity loss rules
applies to investors looking for current tax deductions (but the deductions . . .
  and maybe the investors . . . are gone anyway)

Carried interest rules for "investment services partnership interest" -- aimed at
  hedge funds and private equity funds
  regardless of underlying character of net partnership income (e.g., capital gain),
    service provider will book ordinary income
  subject to self-employment tax
  applies to a person who provides a substantial quantity of services (picking,
    managing, arranging financing)
applies to real estate and commodities (oil and gas is traded)
may hit oil and gas deals
     consulting geologist gets a working interest in a prospect (if no opt-out from
     Subchapter K)
     consulting geologist is granted a partnership profits interest in investment
     "promoter" brings in outside investors on similar basis
Higher tax rates--both capital and ordinary rates; really serious for oil patch given
  loss of depletion/IDC
Crystal ball conclusions
Accelerate income - if you can stand it (low present values, low present tax

Be thoughtful making the election to "opt-in" to Subchapter K in your JOAs

Explore overseas…..but check-a-box is under attack, too

Drill now to get your IDC (drill baby, drill)
Key oil and gas issues we've seen lately
Net operating losses -- Section 382
Corporate and individual

Huge now, especially with the potential loss of current oil and gas tax write-offs

It could be your only "appreciating" asset, with tax rates rising

Generate some gains before NOLs expire or get suspended

  use taxable exchanges (do NOT elect 1031 for like-kind exchanges)

  generate depletable basis

  BUT run pro formas on AMT and Texas margin tax (no free lunch)
Corporate NOLs

  get help to retain

  lose on 50% change in ownership over 3-year period

  new investors can essentially kill NOLs

Individual NOLs

  don't die
Closed deals -- second thoughts!

Things looked good; closed deal; going to pay tax; now not so hot
  (consideration now not too valuable)

Key date for valuation: closing--not today
  Times were great; now a crash in values
  Same issue with taxable equity grants to executives (stock or partnership
Ideas to consider:

Un-wind transaction

  Rescind -- if SAME TAX YEAR; not otherwise

  By December '09, be looking at "closed" deals to see if un-wind is feasible
Squeeze into installment sale reporting (Section 453)

  But what if a demand note? No 453

  Bad basis recovery may be a toll charge
See if closing actually occurred

  European deal requiring "notorial seal" -- none obtained

  Taxable roll-up with IPO planned (you know the rest of the story)…..
Maybe it was a partnership interest

  Income partner stake not taxable upon receipt

  Perfect "partnership agreement" not required but clean facts and industry

 Taxable stock deal


Discount consideration received

  Discount consideration received

          Discount consideration received

          Amend return

  Won't work on promissory notes

  On equity, hire valuation firm

          Lock-up creates discount

          Thin (or no) trading creates discount
When all else fails

  Generate losses to offset gains

  Use NOLs
Bad Investor Partnership Deals - Hotel California

IRRs from hell

  Looked good at the time

  Now deeply underwater

  Never going to see daylight?

Never going to see daylight?

  Go-forward changes in partnership allocations/distributions not a tax problem

  Tough negotiations!

Make lemonade: use today's low values to . . .

 Corporations -- make the S election to be a pass-through entity

   C corp double tax is expensive

   C corp double tax avoided on FUTURE growth in value

   10-year hold (7-year if made S election ’02 or ’03)

   Low value for double tax on current built-in gain

   each shareholder gets to handle his own depletion (like partnerships),
   choose cost/percentage
Incentivize the heck out of management at low
values --
huge future upside; less cash cost today

low current tax cost, but low current deduction to company, too

income partner interests -- IRS certainty in safe harbor under section 83(b)

  liquidate today, management gets nothing

  must be held for two years (make protective 83(b) election - just in case)

  re-allocate income at liquidation to make proportionate (to extent possible)
capital interest

  current taxation to executive but nominal amount?

         facts and circumstances test

         minority and marketability discounts

         risky--no safe harbor; return preparer issues?
Make family gifts

outright gift of (current) low value property

outright gift of deep strata in Haynesville (retain shallow producing piece for
  current income and to diminish gift value)

keep the current value -- gift the upside

  acronym techniques -- GRAT, IDGT

Appalachian oil family with

  younger generation E&P company
community property agreement for old marriage

  community property basis step-up on death of first spouse

  8-10 years of virtually tax-free income

Get solid valuations – of industry interest and entity interest

gift early, gift often
Housekeeping Issues
Opt into tax partnership in your Joint Operating Agreements

  give money partner full tax write-offs for money invested (IDCs--on money invested)

  avoid Rev. Rul. 7.176 for multiple operating interests in exchange for drilling services (unrelated
  property taxation)

  specially allocate tax items

  separately make depletion decisions (percentage vs cost)

  bring in workers using profits interests – see above

  BUT partnership tax returns annually, maintain capital accounts, etc. and potentially carried
  interest rules may apply
Be mindful of Texas margin tax -- 1% of gross receipts less COGs

  depletion may NOT be allowable as a COGs deduction

  passive entities are non-taxable entities

        LPs, GPs, trusts…..but NOT LLCs
       at least 90% of federal gross income must be passive sourced; this is

      net capital gain from sale of real property (working interests)

      royalties, bonuses and delay rental income

        income from non-operating mineral interests (even working interests,
if not the operator, including affiliates)

       if GP owns more than 50% of a partnership (including post-flip) and
GP/affiliate is operator, partnership NOT passive
                 Brian Dethrow focuses his practice on tax and business planning for complex
                 corporate, family, and inter-generational transactions.
                 Mr. Dethrow has broad experience with innovative tax and corporate planning,
                 including in the oil and gas arena. He has worked extensively with large business
                 owners on business succession, asset protection, and gift and estate tax reduction
                 Mr. Dethrow is admitted to practice in Texas.

                 Mr. Dethrow received his B.A. degree, with high honors, from the University of Texas,
Brian Dethrow
                 where he was a member of Phi Beta Kappa. He received his J.D. degree from
Partner – Tax,
 International   Harvard Law School.
Brian Dethrow

Jackson Walker L.L.P.
901 Main Street, Suite 6000
Dallas, Texas 75202

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