<p>&nbsp;In 2015, American heavy equipment companies will be subject to the many pressures associated with the purchase and use of Tier 4 equipment. Tier regulations require manufacturers to adhere to emissions regulations in the production of equipment engines. The EPA introduced Tier 4 in 2004 and designated a ramp-up period from 2008-2015 so that manufacturers could phase-in engine design changes that would meet the stringent standards. Well, 2015 is here, and manufacturers will not be the only ones impacted by the new requirements. Their burden is already being passed on to the companies that use heavy equipment in the form of higher acquisition costs.</p>

<h2>How Tier 4 Impacts &nbsp;Your Heavy Equipment Business</h2>

<p><strong>Selling Equipment With Remaining Utility</strong></p>

<p>Most businesses that utilize diesel driven equipment to conduct their business operations adhere to a predictable schedule of disposition and acquisition of their company’s equipment. Tier 4 mandates now require many companies to sell off used equipment far short of the end of its utility and useful life. This has cost ramifications.</p>

<p><strong>Sacrificing Government Contracts</strong></p>

<p>Many companies that depend on federal and state contracts will not be able to bid on or work jobs if their equipment is not Tier 4-compliant — once again imposing extra costs onto businesses who are forced to upgrade equipment if they want to&nbsp; work on government projects. These companies will have to upgrade to equipment that is Tier 4-compliant if they want this business.</p>

<p><strong>Increased Maintenance Cost</strong></p>

<p>If companies do not replace their fleets with Tier 4 approved equipment, they will not only find themselves at a competitive disadvantage; they will see their maintenance costs on non-compliant equipment rise as the use of that equipment is increasingly disincented.</p>

<h2>Consider a 1031 Like-Kind Exchange Strategy</h2>

<p>Given these challenges, companies may consider a 1031 like-kind exchange strategy as part of their equipment acquisition/disposition practice. Such a strategy could provide owners the cash flow boost necessary to mitigate the new equipment-replacement policies that come with Tier 4.</p>

<p>Section 1031 of the IRC Tax Code provides for the deferral of taxes on realized gains from the sale of business assets. This can result in an immediate cash benefit of 40% of the sale revenues generated when you dispose of your old or non-compliant equipment, money that would otherwise be paid in taxes.</p>

<p>If you bought a piece of construction equipment for $200,000, used it in your business for five years, and then sold it for $50,000, you would normally owe $20,000 in income taxes — leaving you with only $30,000 to buy <em>new</em> equipment. With a 1031 like-kind exchange, you would pay ZERO in taxes and have the entire $50,000 to use towards purchasing new equipment.</p>

<h2>Conclusion</h2>

<p>A company’s success is intrinsically linked to its ability to replace and replenish its business equipment in a timely and financially-viable manner. Embracing a personal property like-kind exchange strategy may be an advantageous means of generating extra cash for the purchase of new equipment to stay competitive in a Tier 4 environment.</p>

<p>In an effort increase awareness of current policy issues and to convey the voice of the equipment leasing and financing industry, members of the Equipment Leasing and Finance Association (ELFA) are on Capitol Hill May 13-May 14 for meetings with elected officials and legislative staff.</p>

<p>Accruit's Brent Abrahm joined top executives in the leasing industry to meet with members of Congress and the Joint Committee on Taxation on matters pertinent to like-kind exchanges.</p>

<p>_{Photo: (left to right) Dan McKew of Capital One Leasing, Representative Lynn Jenkins (R-KS), Accruit's Brent Abrahm}</p>

<p>In March, the Like-Kind Exchange Coalition, comprised of representatives from real estate, equipment rental, car rental, energy and QI organizations met in Washington D.C. with two purposes. The first was to announce the results of the comprehensive E&amp;Y <a href="/blog/1031-like-kind-exchange-impact-study-results-released">study examining the impact a repeal of 1031 like-kind exchanges would have on the economy</a>. The second was to schedule as many meetings possible with members of the Senate Finance and House Ways &amp; Means committees during the three days that we were in D.C. The number of meetings turned out to be 60 and included meetings the Chief of Staff of the <a href="https://www.jct.gov&quot; target="_blank">Joint Committee on Taxation</a>, senior staff of the Chairman of the Senate Finance Committee, and the senior tax policy writers for the House Ways &amp; Means Committee.</p>

<h2>How the Congressional Committees Work</h2>

<p>The <a href="https://www.govtrack.us/congress/committees/SSFI&quot; target="_blank">Senate Finance Committee</a>, chaired by Senator Orin Hatch, and the <a href="https://www.govtrack.us/congress/committees/HSWM&quot; target="_blank">House Ways &amp; Means Committee</a>, chaired by Representative Paul Ryan, are the two primary congressional commmittees involved in legislating tax policy. The retention or repeal of 1031 exchanges resides squarely on the shoulders of these committees. Members of these committees propose draft bills or draft committee notes with which to engage other members in an effort to support a final bill to be sent to both the House and the Senate for approval before being sent to the president.</p>

<h2><img alt="Meetings with senior House Ways &amp; Means Committee staff" src="/sites/default/files/files/house-ways-means-031715_0_0_0.jpg" style="width:300px; height:225px; margin-left:5px; margin-right:5px; float:right" /></h2>

<p>It's an arduous process, and the chances of moving tax reform forward by the end of the summer is slim, but possible. Our goal during our 60 meetings with these members was to speak to the economic value that 1031 exchanges represent to businesses in various sectors and to the nation's economy as a whole. It was also our goal to discourage members of the House and Senate from even considering 1031 repeal, which, in every modeled scenario in the <a href="http://www.1031taxreform.com/1031economics/&quot; target="_blank">E&amp;Y study</a>, shrinks GDP by $8 billion to $13 billion per year.</p>

<p>The <a href="http://1031.org/&quot; target="_blank">Federation of Exchange Accommodators</a> (FEA), with significant underwriting by Accruit, is now working "in-district," meeting with legislators in their own states, with key members of the Senate Finance and House Ways &amp; Means committees to ensure that they understand the impact that 1031 repeal would have in their districts.</p>

<h2>How You Can Help Preserve 1031 Exchanges</h2>

<p>Our meetings, funded studies and continual grassroots efforts are making a difference. The tax committees have received over 33,000 letters from businesses who use 1031 exchanges. If you have not already sent a letter to your congressmen or women, I encourage you to do so by visiting <a href="https://www.1031taxreform.com/join-campaign/&quot; target="_blank">1031taxreform.com/join-campaign</a>. The impact realized from this three-minute effort is exponential.</p>

<h2>Involve Your Industry Associations</h2>

<p>I also encourage you to contact your industry-specific associations and ask them what they are doing to help ensure that like-kind exchanges are retained. We're surprised to find several national associations downplaying or altogether ignoring the impact that 1031 repeal would have on their members, a stance that stems from corporate willingness to sacrifice anything, like-kind exchanges included, for a decrease in the corporate tax rate. What's missing from this notion however, is the understanding that 93% of American businesses are sole proprietorships that file at an individual tax rate and won't benefit from a corporate-only tax reform strategy that dismisses 1031s.</p>

<p>If 1031s are important to your business, and you believe your association should be involved in their preservation, let them know.</p>

<p><em>This interview is one in a series in which we've asked an industry leader questions on the topic of tax reform and the issues faced by Congress in addressing the tax code.</em></p>

<p>Michael Tuchman is a partner in <a href="http://www.lplegal.com/&quot; target="_blank">Levenfeld Pearlstein’s</a> Corporate &amp; Securities and Tax Planning &amp; Litigation groups. He structures and closes complex and tax sensitive transactions and builds organizational structures for U.S. and international operating, investment and real estate companies. Tuchman began his career in 1984 as a tax lawyer and is now a trusted advisor to numerous businesses and investors. He is an experienced and pragmatic negotiator.</p>

<h2>What are your thoughts on Congress allocating significant time and resources to tax reform in 2015?</h2>

<p>The goal is admirable but unlikely to be realized in this partisan environment. While there is some bipartisan support for a number of changes, nothing that is being contemplated rises to the level of what I would call reform. It is the usual tinkering with revenues, benefits and interests. Recall the president’s commission on tax reform in 2012? Few do.The president was as anxious to bury it as were his political opponents.</p>

<h2>How can Washington simplify the tax code?</h2>

<p>I reject the question “How?” as it is based on the premise that the president and Congress are capable of any serious-minded efforts at tax reform. My cynicism overwhelms my fear of being proved wrong on this one.</p>

<h2>Are there certain parts of the tax code today that would dramatically change your business should they be repealed?</h2>

<p>Many of my clients are real estate investment firms whose ability to conduct tax deferred exchanges under Tax Code Section 1031 is under threat. Some politicians see repeal of Section 1031 merely as taking away a tax benefit that is not afforded corporate equity investors. They do not appreciate the extent to which 1031 repeal would sap important liquidity from the real estate markets at precisely the wrong time in a slow recovery.</p>

<h2>The upper end of the tax rate for U.S. corporations is 35% and the individual rate is pushing 40% for just federal and state taxes. Should these rates be cut, and if so what tax incentives would you be willing to give up in order to facilitate that?</h2>

<p>The phrase “tax incentives” is a euphemism that obscures underlying problems with our taxing system. If such incentives were eliminated, even meaningfully lower rates would satisfy reasonable governmental needs. On the corporate side, our high tax rates (coupled with our antiquated view of multinational companies) makes us decidedly uncompetitive. Yet our administration would rather castigate businesses for being disloyal rather than address the perverse incentives that have diverted potential tax revenues abroad. And our Congress sees no need to reign in its own proclivity to make concessions to special interests</p>

<h2>Should Congress address corporate-only or comprehensive tax reform, and why?&nbsp;</h2>

<p>Putting my skepticism aside for the moment, corporate reform would be a good place to start because it is fairly self-contained. If Washington would adopt a commercial rather than a redistributionist’s view of corporate tax, it could find its way to a system of simplicity, lower rates and increased revenues. If washington accepts that we are competing globally for taxable revenues and are not merely entitled to them, very different drivers will be at play in the tax system’s design.</p>

<h2>Internal Revenue Code Section 1031</h2>

<p><a aria-label="IRC Section 1031" href="/resources/internal-revenue-code-section-1031" title="IRC Section 1031">Internal Revenue Code (IRC) Section 1031</a>, which pertains to tax deferral for like-kind exchanges of assets, has been a mainstay of the tax code since 1921.&nbsp; Originally is was thought that exchanges had to be simultaneous and that the taxpayer had to give up the existing property, the “relinquished property,” and receive the new “replacement property” from the buyer of the relinquished property.&nbsp; The landmark legal decision in Starker v. U.S. held that exchanges did not have to be simultaneous and <a aria-label="IRS Regulations section 1031" href="/resources/internal-revenue-service-regulations-irc-ss1031" title="IRS Regulations section 1031">Internal Revenue Service Regulations: IRC§1031</a> published in 1991 provided a technique whereby the taxpayer did not have to receive the replacement property from the buyer. In fact, neither the taxpayer’s buyer nor seller need to provide their cooperation in order for the taxpayer to execute an exchange.</p>

<h2>What assets are like-kind to one another?</h2>

<p>Determining that assets are like-kind is generally more broad when dealing with real estate than when dealing with personal property.&nbsp; A regular owning of real estate is known as a fee interest.&nbsp; Any type of real estate is like-kind to any other type of real estate.&nbsp; So a parcel of vacant land held for investment would be like-kind to a commercial building, a condominium held for rent is like-kind to an industrial building, and so on.&nbsp;</p>

<p>Some non-traditional asset holdings have also been found to be like-kind to a real estate fee interest such as options, timber and water rights, installment sale agreements, oil and gas rights, co-ops, improvements made upon real estate, and lessee’s interests under long term leases and easements.</p>

<h2>Is a landowner’s income stream from a cell phone tower lease exchangeable?</h2>

<p>A lessee’s interest in a long term lease (30 or more years) including options has been considered like-kind to real estate for a long time.&nbsp; The same cannot be said about a property owner’s interest, as lessor, in a lease or long term lease. The value of an ongoing stream of income from a lease, including a cell phone tower lease, is considered rent and not a real estate interest.&nbsp; However, a private letter ruling (PLR 201149003) put out by the IRS in 2011 suggested a way to effectively convert that stream of income to an interest in real estate that would become like-kind to any other fee interest in real estate.&nbsp;</p>

<h2>How may cell towers be included in a 1031 exchange?</h2>

<p><img alt="cell tower disguised as a pine tree" src="/sites/default/files/files/private/cell-tower-pine-tree-cropped.jpg" style="width:300px; height:450px; margin:5px; float:right" />As noted above, there is a lot of authority that easements are like-kind to real estate.&nbsp; Under the PLR, if a cell tower is part of a permanent easement and the value of the easement is based upon the value of the cell tower lease, then a sale of the easement can be exchanged for other fee interests in real estate. Even if the cell phone tower is not located on an easement, the taxpayer may create the easement prior to the sale of the cell tower and effectively sell the cell tower by selling that easement.&nbsp;</p>

<p>Easements generally can be of a limited term or a perpetual term.&nbsp; The private letter ruling referred to above was based upon a perpetual term easement.&nbsp; Easements can be used for various purposes, such as granting access to property or granting possessory rights in property.&nbsp; It is possible that the IRS would look at the nature of a particular easement to determine whether, if it were long term, it would be like-kind to a fee interest in real estate.&nbsp; It may be that a possessory-type, long-term easement would receive the same tax treatment as a permanent easement, but this was not dealt with in the PLR (See also <em><a href="https://law.justia.com/cases/federal/district-courts/FSupp2/228/1080/24…; target="_blank">Wiechens vs. US, 228 F. Supp. 2d 1080</a></em>). Also, it must be kept in mind that, technically, only taxpayers to whom the PLR is provided may rely upon it, though it is very common for other taxpayers to feel a sense of comfort in reading a favorable PLR on a subject with which they are involved.</p>

<h2>Retaining the Services of a Qualified Intermediary</h2>

<p>A qualified intermediary (QI) is necessary for non-simultaneous exchanges, and the use of one provides a safe harbor for structuring the transaction.&nbsp; The regulations are purposely liberal on the mechanics of transferring the relinquished property to the QI and receiving title to the replacement property back from the QI.&nbsp; One such permitted method, which is the industry standard, is to assign rights in the sale and purchase agreements to the QI.&nbsp; <em>For tax purposes</em>, the QI’s right to receive the property resulting from the assignment of rights is the same as if the QI took title from the taxpayer on the relinquished property and transferred title to the taxpayer on the replacement property.&nbsp; The taxpayer can still “direct deed” the property to the buyer and receive a deed from the seller.&nbsp; There are a few other requirements as well to meet this safe harbor.</p>

<p>Prior to the 1991 regulations, if the taxpayer received and held the sale proceeds, the taxpayer was deemed to have made a taxable sale, regardless of whether replacement property was purchased within the 180 day time period.&nbsp; For a variety of reasons, the other option — allowing the buyer to hold the proceeds until the taxpayer needed to have them applied to the purchase of the replacement property — was a risky proposition.&nbsp; So the regulations provided an additional safe harbor by allowing the QI to hold the funds or for the funds to be placed into an escrow or trust account.&nbsp;</p>

<h2>Current Requirements of a 1031 Exchange</h2>

<p>The 1991 regulations still cover how to complete an exchange to this day.&nbsp; The following documents are common to exchanges in which a Qualified Intermediary is used:</p>

<ul>
<li>Tax Deferred Exchange Agreement</li>
<li>W-9</li>
<li>Assignment of Contract Rights to Sell Relinquished Property</li>
<li>Designation Notice from taxpayer to QI within 45 days of the sale of the Relinquished Property identifying up to three properties the taxpayer may elect to acquire (additional designation rules may be applicable)</li>
<li>Assignment of Contract Rights to Acquire the Replacement Property</li>
</ul>

<h2>Summary</h2>

<p>Not only have tax deferred exchanges been permissible by the IRS since 1921, the ability to effect an exchange has been made much easier as a result of the decision in the Starker case and the regulations that followed.&nbsp; Those regulations, among other things, provide safe harbors for engaging the services of a QI, with whom the taxpayer completes the exchange and who arranges for the funds to be held securely outside the control of the taxpayer.&nbsp;</p>

<p>There is an active market in the buying and selling of cell phone towers, and the ability to sell a cell phone tower and receive total tax deferral by trading into a fee interest in real estate is a valuable tool to prospective sellers.&nbsp; Although the value of the cell phone tower may be the stream of income under the cell phone tower lease, one cannot exchange that income for a direct interest in real estate.&nbsp; However, if the cell phone tower is situated on a permanent easement, the seller may trade an interest in real estate for a new interest in real estate.&nbsp; Even if there is no preexisting easement, the taxpayer may create one prior to the intended sale of the cell tower lease.&nbsp; The 1031 exchange procedures are very form-oriented, and as long as the taxpayer, with the help of a QI, strictly follows the procedures, tax deferral upon the sale of the easement can be realized.</p>

<p>On Tuesday, March 17, the Section 1031 Like-Kind Exchange Coalition released the <a href="http://www.1031taxreform.com/1031economics/">results of a study that examines the impact of the repeal of 1031 like-kind exchanges (LKEs)</a>. The study, which was conducted by Ernst &amp; Young, concluded that the impact of 1031 repeal would be a slowing of economic growth and a reduction in GDP.</p>

<p>In an event that took place at the House of Representatives' Longworth House Office Building, eight speakers from diverse industries spoke about their experiences with like-kind exchanges. <a href="http://www.1031taxreform.com/1031bios/#TThompson">Tracy Thompson</a>, CFO of Yellowhouse Machinery Company discussed the economic benefits of like-kind exchanges and the detrimental impact their repeal would have on family-owned businesses. Jesco's <a href="http://www.1031taxreform.com/1031bios/#GBlaszka">Greg Blaszka</a> similarly spoke about growth attributable to like-kind exchanges. Other speakers included <a href="http://www.1031taxreform.com/1031bios/#DWagner">Dan Wagner</a>, Senior Vice President of Government Relations at the Inland Real Estate Group, and <a href="http://www.1031taxreform.com/1031bios/#CRoider">Carrie Roider</a>, CEO of Erb Equipment Company.</p>

<p><img alt="Bob Carroll- National Director of Ernst and Young's Quantitative Economics and Statistics " src="/sites/default/files/files/bob-carroll_0.jpg" style="margin:5px; width:180px; height:240px; float:right" />Robert Carroll, National Director of Ernst and Young's Quantitative Economics and Statistics (QUEST) practice and former Deputy Assistant Secretary of the Treasury for Tax Analysis, detailed the macroeconomic analysis the impacts a potential LKE repeal would have on GDP, including an increase to the cost of capital, labor productivity drop-off, and an increase in holding periods of business assets by roughly 40%.</p>

<p>"The key source of these estimated impacts is the finding that the repeal of the like-kind exchange provisions, even when paired with a revenue neutral reduction in the corporate income tax rate, increases the cost of capital for business investment," the study states. "The higher cost of capital not only discourages investment, but also reduces the velocity of investment through longer holding periods, whereby business investment is locked into specific investment for a longer period of time, and greater reliance on debt financing."</p>

<p>Also in attendance were David Fowler, who Leads PwC’s LKE Practice, Accruit CEO, Brent Abrahm, and President of the Federation of Exchange Accommodators, Mary Cunningham, as well as Brian McGuire, President of the Associated Equipment Distributors (AED), Bob Henderson, the AED's EVP and COO, and Christian Klein, Vice President of Government Affairs of the AED.</p>

<p>"Like-kind exchanges allow domestic businesses to efficiently expand and prosper, timulating economic growth. Most importantly, it is used by a wide array of businesses including farmers, commercial real estate investors, construction companies, trucking and transporation companies as well as small family owned businesses that invest in real estate and vehicles," said Ms. Cunningham.</p>

<p>The <a href="http://www.1031taxreform.com/1031economics/">findings of the Ernst &amp; Young Section 1031 Economic Study</a> and the <a href="http://www.1031taxreform.com/1031press-release/">press release</a> are both available at <a href="http://www.1031taxreform.com/1031economics/">1031taxreform.com/1031econ…;

<p><img alt="Like Kind Exchange Coalition members" src="/sites/default/files/files/1031-lke-repeal-impact-study-2.jpg" style="margin-top: 5px; margin-bottom: 5px;" /></p>

<p>^{From Left to Right: Brent Abrahm, Tracy Thompson, Christian Klein, David Fowler, Greg Blaszka, Carrie Roider}</p>