MrThickRopes
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LSDefine
Simple English definitions for legal terms
ABC transaction
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A quick definition of ABC transaction:
An ABC transaction is a type of sale in the oil and gas industry. It involves an owner (A) selling a working interest to an operator (B) for cash and the promise of a larger payment when the well produces. A then sells the right to the production payment to a corporation (C) for cash borrowed from a lender. This allows A to receive cash taxed at lower rates and B to pay part of the purchase price with non-taxable production income. However, the tax benefits of this transaction were eliminated in 1969 by the Tax Reform Act.
A more thorough explanation:
An ABC transaction in the oil and gas industry is when:
- Owner A sells a working interest to Operator B for a cash payment and the right to a larger payment when the well produces.
- Owner A then sells the right to the production payment to Corporation C.
- Corporation C pays Owner A in cash borrowed from a lender, using the production payment as collateral.
The purpose of this transaction is to provide tax advantages for Owner A. They receive cash taxed at capital-gains rates, while Operator B pays part of the purchase price with nontaxable production income.
For example, let's say Owner A sells a working interest to Operator B for $100,000 and the right to a production payment of $500,000. Owner A then sells the production payment to Corporation C for $400,000. Corporation C borrows $400,000 from a lender and uses the production payment as collateral. Owner A receives $400,000 in cash and pays taxes at the lower capital-gains rate.
This type of transaction was popular in the past but was eliminated by the Tax Reform Act of 1969.