By Wallace Edward BrandWallace Edward Brand practices law in his own firm in Washington, DC, where he represents small electric systems.
Business & Money
the size of the available benefits will be determined by several elements. The personal property portion of any element of property will not give rise to the same tax benefits unless there is very closely comparable personal property included in the exchange property. This means that allocation and appraisal issues are important to obtain maximum benefits.
Happily, buyers and sellers can choose different allocations-agree to disagree-if their tax postures are different. The issue is then left to when the respective tax returns are audited, but no one party can bind another in terms of tax results relating specifically to that other party. In addition, it is important to identify, with the help of the company's accounting firm, whether any portion of the acquired property is represented by good will in some form or another. Appraisal experts in the utility field can be extremely helpful in this area. An example of this relates to property that is subject to favorable contracts for output, transportation or the like. In some cases, accountants will require an allocation of a portion of the purchase price to the value represented by those contracts, which will reduce the total benefit.
Finally, to the extent the property being purchased is encumbered by debt, that debt must be deducted in determining the amount of tax deferral that is permitted, unless the property being sold is also encumbered. If this were not so, the game would be too easy, especially in the pure real estate area, where so many properties are heavily mortgaged.
For example, in the Southern Union situation the LDC properties were sold for $420 million, and the purchase price for the panhandle properties was $1.8 billion, including $1.166 billion in debt. Southern Union had 75 percent of the partnership that acquired Panhandle, with a unit of AIG taking the rest. Thus, of the $475.5 million net purchase price to Southern Union, $420 million represented a tax deferral.
This issue is relatively straightforward. But it should be remembered, if there is such debt on the property to be acquired, that the cooperation language mentioned above with respect to the acquisition agreement should include the exchange party agreeing to pay off the debt, if desired, before the transfer and thus increasing the purchase price and the tax benefits. This can occur on the same day, at the same closing, but the correct sequence is important.
Working With the Fed and States
Because some of the steps in the process may involve the use of single-member LLCs, which are disregarded entities for tax purposes but are useful in some circumstances that are too technical for the purposes of this article, regulatory issues and some state law issues may arise with respect to acquisitions or sales of jurisdictional assets. We have found that so long as the regulators are in sympathy with the basic purposes and goals (i.e., the benefits or lack of detriment to the company and its customers), those questions tend to be solvable on a case-by-case basis.
Typically, regulators will accept the analogy between the exchange accommodation titleholder (EAT)