FEA, industry groups appeal to sponsor of California Assembly Bill 2640

A couple of weeks ago, we commented on California Assembly Bill 2640, 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 Same as intermediary, facilitator, or Qualified Intermediary. The party who facilitates a tax-deferred exchange by acquiring and selling property in an exchange to aid the taxpayer in complying with Section 1031 and all applicable rules. Accommodator s 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 & Co-Chair of the State Legislative Committee) and Suzanne Goldstein Baker (Director & Chair, Federal Legislative Committee).

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.

The text of the letter follows.

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

Dear Assemblymember Arambula:

We are writing to you on behalf of the Federation of Exchange Same as intermediary, facilitator, or Qualified Intermediary. The party who facilitates a tax-deferred exchange by acquiring and selling property in an exchange to aid the taxpayer in complying with Section 1031 and all applicable rules. Accommodator s (“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 & 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.

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 The transfer of the relinquished property to the Qualified Intermediary, and the receipt of the replacement property from the Qualified Intermediary is considered an exchange. To be compliant with IRC Section 1031, the transaction must be properly structured, rather than being a sale to one party followed by a purchase from another party. 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.

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.

§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.

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.

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

Sincerely,

Brent Abrahm Director, President-elect & Co-Chair State Legislative Committee Federation of Exchange Same as intermediary, facilitator, or Qualified Intermediary. The party who facilitates a tax-deferred exchange by acquiring and selling property in an exchange to aid the taxpayer in complying with Section 1031 and all applicable rules. Accommodator s Phone: (303) 865-7301 Email: brenta@accruit.com

Suzanne Goldstein Baker Director & Chair, Federal Legislative Committee Federation of Exchange Same as intermediary, facilitator, or Qualified Intermediary. The party who facilitates a tax-deferred exchange by acquiring and selling property in an exchange to aid the taxpayer in complying with Section 1031 and all applicable rules. Accommodator s Phone: (312) 223-3003 Email: suzanne.baker@ipx1031.com

WE SUPPORT THE ABOVE COMMENTS OF THE FEA:

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

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

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

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 www.nefassociation.org