Business & Money

In a "like kind exchange" transaction, the IRS permits a seller to defer taxes on its inherent gain on assets being sold.

The utility community is starting to experiment with a "like kind exchange" (LKE)-a type of tax-advantaged asset acquisition and disposition transaction used extensively in connection with commercial real estate and various types of personal property, but which heretofore has not achieved widespread acceptance in the utility industry.

The principal benefit of this type of transaction, specifically authorized in Section 1031 of the Internal Revenue Code and related regulations, is that it can permit a seller redeploying its asset base (e.g., a seller that is disposing of non-core assets and increasing investment in core assets) to defer taxes on the inherent gain on the assets being sold, thereby allowing the full pre-tax value of those assets to be used to finance the acquisition of the desired core assets and dramatically improving the economics of those transactions.

The LKE transaction has matured into a pure financing transaction. An actual exchange between the same two parties is not necessary. A company can buy from Seller A and sell another piece of property to Buyer B and, if the proper formalities specified in the tax law are observed, the transaction will be respected and no tax will be payable in connection with the sale to Buyer B. In fact, many of the major financial institutions have subsidiaries that do nothing but facilitate such trades by acting as intermediaries, essentially in the nature of escrow agents, and charging relatively nominal fees.