Extractive Industries: A Potential Oil and Gas Liability Becomes a Tax Benefit for an Oil and Gas Company and its Employee

A publicly traded oil and gas Company with drilling operations on the Western Slope approached Bob Drury, Grand Junction tax partner, with a problem. Their main business was drilling but they also owned producing properties. The Company wanted to divest itself of the producing properties and concentrate on drilling. Coincidentally, a key employee and stockholder of the Company was planning to leave to start his own oil and gas business. The Company was required to buy out the employee's stock. This would have required a significant amount of the Company's available cash and would have necessitated borrowing funds. The employee would have a significant capital gains tax liability.

Bob restructured the deal as a tax-free divisive D re-organization that benefited both parties. A second corporation was formed as a subsidiary and the producing properties were transferred into this new entity. Stock from this new entity was transferred to the employee in exchange for his stock in the Company. This stock- for-stock exchange created a win-win situation for both parties. The Company was able to divest its producing properties tax-free and was not required to use its cash or borrow additional funds. The employee was able to acquire an operating business with pre-tax dollars.

Bob's extensive experience in oil and gas spans more than twenty years. In addition to assisting exploration, production and drilling companies with creative solutions, he also works closely with investors in structuring ownership in oil and gas properties.