Embed Size (px)
Citation preview
OIL AND GAS TAX A LOOK AT THIS YEAR’S HOT CONCEPTS
August 20-21, 2009
Brian DethrowJackson Walker, L.L.P.
901 Main Street, Suite 6000Dallas, Texas [email protected]
214-953-5794
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 fundsregardless 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
Examples:
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 partnership
"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 conclusionsAccelerate income - if you can stand it (low present values, low present tax
rate)
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 todayTimes were great; now a crash in values
Same issue with taxable equity grants to executives (stock or partnership interest)
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 documents
Tex-Penn
Taxable stock deal
Speculative
Lock-up
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!
Non-competes???
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
Make lemonade: use today's low values to . . .
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 IssuesOpt 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 "passive":
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 strategies. Mr. Dethrow is admitted to practice in Texas.
EDUCATION Mr. Dethrow received his B.A. degree, with high honors, from the University of Texas, where he was a member of Phi Beta Kappa. He received his J.D. degree from Harvard Law School.
Brian DethrowPartner – Tax, International
