<p>Legislators in the State of California have introduced a new bill aimed at generating increased tax revenue, but unfortunately this short-sighted effort would sacrifice the state's long-term economic health for short-term, destabilizing gains.</p>

<p>The proposed law, <a href="http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_2601-2650/ab_2640_bill_…; target="_blank">California Assembly Bill 2640</a>, 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.</p>

<p>One of the primary reasons that 1031 exchanges have been so unanimously agreed-upon is that they're constructed to promote reinvestment. The <em>only</em> 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.</p>

<p>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).</p>

<p>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.</p>

<p>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.</p>

<p>IconX Energy* is one of the world's largest energy companies, providing customers around the globe with fuel for their automobiles, electricity for their homes and a wide range of petrochemical products for every phase of their lives. As with any large enterprise, IconX is constantly buying and selling large quantities of assets, and in the process, dealing with the complex tax implications of these activities.</p>

<p><strong>The Problem</strong></p>

<p>IconX had historically employed 1031 like-kind exchanges (LKEs) for real estate and leasehold transactions, but several years ago company executives learned that LKEs could also be used for non-real estate assets - vehicles, production/drilling equipment, even certain types of intangible assets (like mineral rights).</p>

<p>Suspecting that 1031 exchanges might support productive tax and cash flow strategies, the firm contacted Accruit, which it knew had strong roots in the Oil &amp; Gas industry.</p>

<p><strong>The Accruit Solution</strong></p>

<p>Accruit's Sales and Client Service groups immediately realized that IconX was, indeed, an ideal candidate for a robust corporate asset exchange program. The company was moving hundreds of millions of dollars worth of assets and leaving the deferral benefits to which they were legally entitled on the table. In addition to a significant number of real estate exchanges, IconX - like most O&amp;G businesses in its sector - was buying and selling massive numbers of tangible and intangible assets each year.</p>

<p>Accruit worked with IconX's tax, procurement and investment recovery groups to implement an ongoing Master Exchange program that would allow the company to keep its cash at work in the business.</p>

<p><strong>The Results</strong></p>

<p>Since launching, IconX has funneled more than $650 million worth of sales through its Accruit LKE program. The relinquished assets have run the gamut of Oil &amp; Gas industry asset types (see list below).</p>

<p>The average combined tax rates on these sales has been roughly 40%, meaning that <em><strong>Accruit has provided IconX with the opportunity to generate a tax benefit of roughly $260 million. That's better than a quarter of a billion dollars in operating cash flow</strong></em>.</p>

<p>IconX has also derived tremendous asset management value from the Accruit Exchange Manager^TM platform. Asset-level tracking capabilities allow IconX to keep tabs on a huge asset portfolio; audit-ready reporting supports a comprehensive range of internal and external financial requirements; and the combination of advanced, automated technology and one-to-one client service has allowed them to dramatically reduce risk and administrative burden across the entire program. <strong>These results testify to the IconX program's substantial value-added benefits</strong> - even in cases where the client doesn't replace relinquished assets, the Accruit platform (constructed on the only patented 1031 exchange process in the industry) still represents a powerful tool for managing the overall asset portfolio.</p>

<p><strong>Assets in IconX LKE Program</strong></p>

<ul>
<li>Large and small real estate holdings</li>
<li>Leaseholds</li>
<li>Mineral rights</li>
<li>Tubing, piping and casing</li>
<li>Scrap metal</li>
<li>Vehicles (trucks, trailers and SUVs)</li>
<li>Cranes</li>
<li>Valves</li>
<li>Pumping units</li>
<li>Separators</li>
<li>Compressors and skids</li>
<li>Tanks</li>
<li>Sucker rods</li>
<li>Coalescers</li>
<li>Catalytic heaters</li>
<li>Obsolete wellhead materials</li>
<li>Reboilers</li>
<li>Shipping containers</li>
<li>Articulating bridges</li>
<li>Fencing</li>
<li>Generators</li>
<li>Buildings / living quarter materials</li>
<li>Cantilever beams</li>
<li>Transformers</li>
<li>Tools</li>
<li>Flowlines</li>
<li>Satellite VSAT systems</li>
<li>Centrifuges</li>
<li>...and other assorted equipment</li>
</ul>

<p><em>* Based on actual Accruit client</em></p>

<p>As we told you last week, <a href="/blog/federation-exchange-accommodators-praises-passage-new-exchange-facilitator-regulations-co">the FEA was successful once again in pushing regulations </a>through the Colorado House and Senate to provide consumer&nbsp;protection for those conducting 1031 like-kind exchanges in the state. <a href="/sites/default/files/Colorado_HB09-1254.pdf">The Governor signed HB09-1254 into law on 4/16/09</a>.&nbsp; <a href="/sites/default/files/WA_Senate_BIll_0.pdf">Washington's Governor signed a similar law on Monday, April 13</a>.&nbsp; Who next?&nbsp; Texas?&nbsp;Maine? Arizona? Oklahoma?&nbsp; The ideal goal is to maintain reciprocity between these states so that QIs can deliver consistent guidance and maintain reasonable standards for customers across the country.</p>

<p>Right now there are&nbsp;five states <a href="/blog/california-idaho-nevada-and-washington-qi-bills-now-available">(CA, NV, ID, WA&nbsp;&amp; CO) </a>that have some form of qualified intermediary regulations on the books.&nbsp; <a href="/sites/default/files/CA_QI_Law.pdf">California</a> took the lead by adopting regulations that provide exchangers certain levels of protection and requiring prudent investment standards ensuring liquidity and protection of principal.&nbsp; Colorado recognized the importance of achieving consistency; it also understood the importance of safeguarding consumers while simultaneously protecting an industry that facilitates growth for Colorado companies.&nbsp;&nbsp;Texas, Arizona, Oregon and Oklahoma are all leaning toward a model law that supports reasonable regulations, but&nbsp;Nevada and Idaho have passed regulations that are either very difficult to follow or aren't business friendly at all.&nbsp; It's been two years since Nevada enacted their law and they still don't have final guidance on how exchangers need to ensure compliance.&nbsp; Now it seems that Maine wants to follow Idaho's laborious, expensive and unrealistic standards, forcing QIs to complete reams of paperwork, provide background checks, register with the state and create very specific banking structures just to&nbsp; provide a well established federal tax service to businesses in their state - all at a tremendous cost.</p>

<p>There will be more states, more laws, more dollars spent to accomplish&nbsp; - in the end - the same result.&nbsp; Encouraging your state to adopt model law is a good idea for everybody.&nbsp; There's no reason to reinvent the wheel.</p>

<p>Multiple states have recently passed laws regulating Qualified Intermediaries, and we've now made the text of these bills available for download.</p>

<p>Below is the Federation of Exchange Accommodators statement on the California bill's passage:</p>

<blockquote>
<p><strong>CALIFORNIA QI BILL ENACTED INTO LAW</strong></p>

<p>October 2, 2008</p>

<p>The Governor of California signed SB 1007 into law and a copy of the new law is attached. We believe that this represents a victory for the FEA and the QI industry. Many FEA members worked hard to get the law into a form that would accomplish the goal of providing consumer protection to exchangers without unduly burdening the QI industry.</p>

<p>The provisions of the new law will be effective for all exchanges after January 1, 2009. Therefore, you should review the requirements to be sure that your company is in compliance if you do business in California.</p>

<p>What does the law provide? The California law does not provide for registration or licensing, but does provide for insurance and investment standards for exchange facilitators. The major provisions of California bill are as follows:</p>

<p>1. Application. The law applies to all exchange facilitators considered to be "doing business in California". "Doing business" means the relinquished property in the exchange is located in California, or the EAT holds title to property in California. It also applies to someone who maintains an office in California or advertises in California provided the relinquished property is in California.</p>

<p>2. Insurance, Bonding and/or Security Requirements. Exchange facilitators must:</p>

<p>(A) (1) maintain a fidelity bond of at least $1,000,000, OR (2) deposit cash, securities or a letter of credit for at least $1,000,000, OR (3) use a qualified escrow or trust; AND</p>

<p>(B) (1) maintain errors and omissions insurance of at least $250,000, OR (2) deposit cash, securities or a letter of credit letter in that amount.</p>

<p>3. Investment Standards. Exchange facilitators must act as a custodian of the exchange funds and meet the "prudent investor" standard in the investment of funds, and satisfy investment goals of liquidity and preservation of principal. The exchange facilitator cannot comingle exchange funds with operating accounts, or loan or transfer funds to an affiliate (other than to an affiliate financial institution or to an exchange accommodation titleholder pursuant to the exchange contract).</p>

<p>4. Prohibited Acts. Exchange facilitators must not engage in various bad acts, such as material misrepresentations, false advertising, failure to account for moneys or property, failure to return exchange funds to clients, fraud, criminal conduct, etc.</p>

<p>5. Notification of Change of Ownership. Exchange facilitators must notify clients in writing within 10 days after a change in ownership (more than a 50% change).</p>
</blockquote>