T&K Attorneys Publish Article on Section 1031 Exchanges in Oil and Gas Sector in Real Estate Taxation

Posted by Todd Keator, Todd Lowther and Nancy Allred                   Tax Partner Todd Keator and Tax Associates Todd Lowther and Nancy Allred authored the article “Section 1031 Exchanges in Oil and Gas Sector” for the Second Quarter 2014 issue of Real Estate Taxation.According to the article, “domestic oil and gas exploration and production is on the rise.” The authors state, “this past October 2013, for the first time in nearly 20 years, the U.S. extracted more oil from the ground than it imported from abroad” and cite a recent Harvard study that forecasts “shale-oil production in the U.S. could more than triple by 2017, raising total U.S. oil production to approximately 10.4 million barrels per day.” The attorneys continue, “add to this the prolific shale gas boom that has occurred over the last ten years” and conclude that it is “obvious that domestic ‘E&P’ activity is very hot right now.” The article says, “the increase in E&P activity has been accompanied by a corresponding increase in oil and gas acquisitions and divestitures” and “in many cases, these transactions are structured (or intended to be structured) as tax deferred exchanges under Code Section 1031 (a ‘1031 Exchange’).” The authors submit that there are several key issues that can impact a transaction in which an investor decides to use “a 1031 Exchange as a means to dispose of or acquire oil and gas properties.” The issues are explored in-depth in the article and include: “the types of oil and gas interests that qualify for use in a 1031 Exchange, including special issues regarding pipelines; whether the transaction will be respected as an ‘exchange’ or recast as a leasing transaction (and ineligible for 1031 Exchange treatment); the impact of IDC and depletion recapture in the exchange; the presence of a ‘tax partnership’ and the need to elect out of subchapter K in order to utilize a 1031 Exchange; and the effect of oil and gas unitizations under Section 1031.”   To read the full article, please see here.  For more information on these topics, please contact one of the undersigned attorneys or any other tax attorney at Thompson & Knight.