<p>We noted yesterday that <a href="/blog/california-reconsider-anti-1031-provisions" target="_blank">the California legislature was set to drop anti-1031 exchange provisions in AB 2640, a bill aimed at raising new revenues in the state</a>. This move is now official, according to the <a href="http://1031.org&quot; target="_blank">Federation of Exchange Accommodators (FEA)</a>. Here's the text of an alert they issued earlier today:</p>

<blockquote>
<p><strong>California Assembly Bill Provision 2640 Regarding Like-Kind Exchanges To Be Removed</strong></p>

<p>IMPORTANT UPDATE FOR FEA MEMBERS</p>

<p>We learned last night that California Assemblyman Juan Arambula has pledged to drop all provisions contained in AB 2640 relating to limitations on like-kind exchanges in California.</p>

<p>The importance of this victory for our members and our industry cannot be understated.</p>

<p>The FEA State and Federal Legislative committees, led by Brent Abrahm and Suzanne Baker, rallied quickly and effectively to articulate our resistance to the provision and to inform the Assemblyman of our position.</p>

<p>Brent and Suzanne deserve special commendation for their efforts. Suzanne drafted our position letter and her colleague in California delivered the letter directly to Mr. Arambula. Together Brent and Suzanne reached out to several other trade associations with whom their respective companies are involved and gathered support that was meaningful and effective.</p>

<p>Rob Egenolf and Phil Jelsma also contributed to our success by monitoring the situation in Sacramento and placing phone calls to the Assemblyman's office.<br />
The results of the volunteer efforts provided by Brent and Suzanne and Rob and Phil provide a benefit every FEA member. I for one am indebted to them for their service.</p>

<p>David M. Gorenberg, CES®<br />
President, FEA</p>
</blockquote>

<p>The <a href="http://1031.org&quot; target="_blank">FEA</a> has issued an important alert for businesses operating in areas of New Jersey and West Virginia affected by recent heavy storms.</p>

<blockquote>
<p>The IRS has issued extension Notices for the following disaster areas (the Covered Disaster Areas) for storms <strong>beginning on March 12^th</strong> (disaster dates are in bold) :</p>

<p>New Jersey: Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset, and Union</p>

<p>West Virginia: Fayette, Greenbrier, Kanawha, Mercer and Raleigh</p>

<p>[Note that the IRS may add additional areas later as FEMA adds them.&nbsp; 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.]</p>

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

<p>(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</p>

<p>(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 <strong>disaster date listed above</strong>.</p>

<p>IF the taxpayer meets these criteria, THEN any 45 day or 180 day deadline that falls on or after the <strong>disaster date</strong> 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)).</p>
</blockquote>

<p>The FEA advises potentially affected companies to see <a href="http://www.irs.gov/irb/2007-34_IRB/ar13.html#d0e2854&quot; target="_blank">Revenue Procedure 2007-56, Section 17</a>, as well as <a href="http://www.irs.gov/newsroom/article/0,,id=108362,00.html&quot; target="_blank">the IRS Disaster Tax Relief site</a> for further details.</p>

<p>We recently noted that a California legislator had introduced a new bill containing short-sighted measures which would essentially <a href="/blog/california-assembly-bill-2640-very-bad-idea-citizens-california-0" target="_blank">eliminate a company's ability to employ 1031 like-kind exchanges (LKEs)</a>.The law was intended to generate revenue for the financially strapped state, but was certain to have the precise opposite effect, especially in the long term.</p>

<p>In mid-March <a href="/blog/fea-industry-groups-appeal-sponsor-california-assembly-bill-2640-0" target="_blank">the Federation of Exchange Accommodators (FEA) sent a letter detailing its concerns to the bill's sponsor, Assemblyman Juan Arambula</a>. The letter was signed by Brent Abrahm (Accruit's President and CEO, acting in his official capacity as Director, President-elect &amp; Co-Chair of the FEA State Legislative Committee) and Suzanne Goldstein Baker (Director &amp; Chair, Federal Legislative Committee). In addition, the letter was co-signed by representatives of several important industry groups, including the Equipment Leasing and Finance Association, the National Association of Equipment Leasing Brokers, Associated Equipment Distributors and the National Equipment Finance Association.</p>

<p>It now appears that Assemblyman Arambula has reconsidered and is dropping these counterproductive provisions. 1031 exchanges enable hundreds of California companies employing thousands of workers to reinvest in their businesses - a critically important function in tight economic times. This reinvestment strengthens the economy and keeps people working so that they can contribute to the state's tax base instead of becoming a drain on it.</p>

<p>Accruit applauds the California Assembly on a thoughtful decision and we look forward to continuing our partnerships with many outstanding businesses across the state for years to come.</p>

<p><a href="/blog/california-assembly-bill-2640-very-bad-idea-citizens-california-0" target="_blank">A couple of weeks ago, we commented on California Assembly Bill 2640</a>, noting that while the state's revenue generation goals are perfectly valid, this particular proposal would be counterproductive in a number of important ways. The Federation of Exchange Accommodators has now weighed in officially, sending a letter detailing its concerns to Assemblyman Juan Arambula, who sponsored the bill. The letter is signed by Brent Abrahm (Director, President-elect &amp; Co-Chair of the State Legislative Committee) and Suzanne Goldstein Baker (Director &amp; Chair, Federal Legislative Committee).</p>

<p>In addition, the letter is co-signed by representatives of several important industry groups, including the Equipment Leasing and Finance Association, the National Association of Equipment Leasing Brokers, Associated Equipment Distributors and the National Equipment Finance Association.</p>

<p>The text of the letter follows.</p>

<hr />
<p>March 10, 2010 Assemblymember Juan Arambula State Capitol P.O. Box 942849 Sacramento, CA 94249-0031 RE: AB 2640</p>

<p>&nbsp;</p>

<p>Dear Assemblymember Arambula:</p>

<p>We are writing to you on behalf of the Federation of Exchange Accommodators (“FEA”), the trade association for IRC §1031 exchange facilitators, to voice our opposition to AB 2640 and to specifically request that you drop Sec. 3 which would add new section 18036.7 to the Revenue and Taxation Code (“RTC”) and Sec. 15, which would amend RTC Section 24941. The Equipment Leasing &amp; Finance Association (“ELFA”), the National Association of Equipment Leasing Brokers (“NAELB”), the Associated Equipment Distributors (“AED”), and National Equipment Finance Association (“NEFA”) join this request as representatives of financial services companies, manufacturers and brokers in the $600 billion equipment finance sector. With many of the largest financial services companies and manufacturers, regional and community banks and finance companies, ELFA, NAELB, AED and NEFA lend support to the FEA in stressing that Sections 3 and 15 of the bill would deny existing tax incentives for like-kind exchanges which currently promote upgrades and replacement of machinery, equipment, railcars, aircraft and vehicles as well as real estate transactions.</p>

<p>Federal tax law under IRC §1031 permits a taxpayer to exchange business-use or investment assets for other like-kind business use or investment assets without recognizing taxable gain on the sale of the old assets. The taxes which would have otherwise been due from the sale are thus deferred. Most §1031 exchanges involve separate buyers and sellers. Under these circumstances, tax rules require the use of an exchange facilitator (called a Qualified Intermediary or Exchange Accommodation Titleholder). The exchange facilitator holds the sale proceeds (“exchange funds”) for the benefit of the taxpayer during the exchange, disbursing funds for purchase of replacement property, and returning any unused funds to the taxpayer at the end of the exchange. Taxpayers recognize gain and pay tax on any unused funds.</p>

<p>The FEA, whose members range from privately owned small businesses to affiliates of publicly traded title insurance companies and banks, actively worked with Senator Machado in 2008 to pass SB1007 which added Division 20.5, Sec. 51000 et seq to the Financial Code, to regulate exchange facilitators. This recent legislative activity indicates a belief on the part of the California legislature that IRC §1031 provides a valuable benefit to the California economy, and that exchange facilitators provide a necessary and valuable service to California taxpayers.</p>

<p>§1031 exchanges provide an important economic stimulus to taxpayers of modest means as well as the wealthy, from individuals to large corporations. Owners of real estate are encouraged by the tax benefits to reinvest in real estate, rather than place their money in other investments. Likewise, §1031 gives businesses a tax incentive to replace and upgrade machinery and equipment. If AB2640 is passed in its current form, it will most certainly have a chilling effect upon California real estate transactions and other business transactions, including exchanges of machinery, equipment and leased assets. These tax exemptions serve to stimulate the economy, encouraging purchases and sales, encouraging companies to upgrade and replace machinery, equipment, railcars, aircraft, trucks and other vehicles sooner, because tax on the gain can be deferred. Without the exemptions, many transactions will be put off, and real estate values in California will be further eroded. Fewer transactions also translate into fewer jobs in the §1031 exchange industry, and in the real estate, title insurance, equipment lease financing, mortgage and other related industries, including manufacturing. The effect of the bill will also discourage business activity in California and result in fewer deposits in California banks.</p>

<p>Notwithstanding California’s desperate need for revenue, the overall effect of HB2640 bill will be an unintended, unwanted economic de-stimulant to the California economy, at a time when it can least afford more job losses and economic stagnation.</p>

<p>We would be pleased to answer any questions you may have. Our contact information appears below.</p>

<p>Sincerely,</p>

<p>Brent Abrahm Director, President-elect &amp; Co-Chair State Legislative Committee Federation of Exchange Accommodators Phone: (303) 865-7301 Email: brenta@accruit.com</p>

<p>Suzanne Goldstein Baker Director &amp; Chair, Federal Legislative Committee Federation of Exchange Accommodators Phone: (312) 223-3003 Email: suzanne.baker@ipx1031.com</p>

<p>WE SUPPORT THE ABOVE COMMENTS OF THE FEA:</p>

<p>Dennis Brown Vice President State Government Relations Equipment Leasing and Finance Association 1825 K Street NW, Suite 900 Washington, DC 20006 (202) 238-3411 Email: dbrown@elfaonline.org www.elfaonline.org</p&gt;

<p>Sonia v.M. Stoddard Vice President, President-elect National Association of Equipment Leasing Brokers 455 S. 4th Street, Suite 650 Louisville, KY 40202 Phone: (310) 290-2009 Email: lease@StoddardAssociates.com www.naelb.org</p&gt;

<p>Christian A. Klein Vice President of Government Affairs and Washington Counsel Associated Equipment Distributors 121 North Henry Street Alexandria, VA 22314 Phone: (703) 739-9513 Email: caklein@aednet.org www.aednet.org</p&gt;

<p>Randy Haug President-elect National Equipment Finance Association 3525 Piedmont Rd NE, Bldg 5, Ste 300 Atlanta, GA 30305 Phone: (800)531-5086 x 1014 Email: randy@leaseteam.com <a href="https://www.nefassociation.org">www.nefassociation.org</a></p&gt;

<p><strong>First, let's consider eligibility. </strong>The revenue procedure applies to:</p>

<ul>
<li>Taxpayers who properly transferred relinquished property to a QI and</li>
<li>have properly and timely identified replacement property,
<ul>
<li>unless QI default occurs during the identification period.</li>
</ul>
</li>
<li>Taxpayers who were unable to complete the exchange solely because of the QI default and the QI
<ul>
<li>then becomes subject to a federal bankruptcy, or</li>
<li>receivership proceedings under federal or state law.</li>
</ul>
</li>
<li>Taxpayers who have not had actual or constructive receipt of
<ul>
<li>the proceeds from the sale of the relinquished property, or</li>
<li>any other property of the QI prior to the date the QI enters bankruptcy or receivership proceedings.</li>
</ul>
</li>
</ul>

<p>As you can imagine, a number of taxpayers have been holding their collective breath hoping for some good news on this situation.</p>

<p><strong>The second consideration is reporting. </strong>Once the exchanger has determined that they meet the applicability test of the revenue procedure, an analysis must be performed on how to report the failed exchange.&nbsp; Thankfully, the revenue procedure also explains how this should be done. The application of the revenue procedure includes:</p>

<ul>
<li>Recognizing gain only as <u>payments</u> are received; this is good news, as the tax liability can be satisfied from payments received by the taxpayer, rather than from other sources.

<ul>
<li>This also allows the taxpayer to report the gain in the year the payment is received, rather than the year the relinquished property was disposed.</li>
</ul>
</li>
<li>Recognition of gain through the "gross profit ratio method."
<ul>
<li>The portion of any payment related to the relinquished property is multiplied by,
<ul>
<li>a fraction composed of the taxpayer's <u>gross profit</u> over the <u>contract price</u>.</li>
</ul>
</li>
</ul>
</li>
</ul>

<p>Definitions for proper reporting are:</p>

<ul>
<li><u>Payments</u> include: proceeds, damages, or other amounts related to the sale of the relinquished property.</li>
<li><u>Gross Profit</u> is defined as the <u>selling price</u> of the relinquished property, less the property's basis.
<ul>
<li>Any selling expenses not paid by the QI out of proceeds should be added to this amount.</li>
</ul>
</li>
<li><u>Selling Price</u> generally means the amount realized on the sale of the relinquished property.</li>
<li><u>Contract Price</u> is the selling price of the relinquished property less any assumed debt (by the buyer and not in excess of the adjusted basis of the relinquished property).
<ul>
<li>Assumption of debt in excess of basis is treated as payment, related to the relinquished property, in the year satisfied.</li>
</ul>
</li>
</ul>

<p><strong>Finally, as always, <em>consult your tax advisor</em>.</strong> Like all issuances related to the I.R.S., the actual <a href="/sites/default/files/Rev%20Proc%202010-14.pdf" target="_blank">RevProc 2010-14</a> document is much more detailed than the above overview and a comprehensive analysis should be left to a competent tax advisor - preferably one familiar with your specific circumstances.&nbsp; If you believe that you may qualify under this new revenue procedure, you should contact a tax professional immediately.</p>

<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>