Final and reproposed tangible property regs. broadly affect taxpayers in oil and gas industry.

• Author: Grais, Susan M.

The final and reproposed tangible property regulations (T.D. 9636 and REG-110732-13), will significantly affect the oil and gas industry. Specifically, the unit-of-property determination has different implications for oil and gas companies, depending on which segment the companies operate in, as summarized in Exhibit 1.

Exhibit 1: Tangible property components: Companies in oil and gas sectors Upstream Upstream companies with onshore exploration and development should consider the unit of property for a well and its components, which includes property such as field assets, gathering systems, CO? And water systems, tanks, gas processing plants, and compressors, among others. Midstream The unit-of-property determination is also important for midstream companies, which typically have property such as pipelines, transportation, storage, and other assets used for processing of hydrocarbons or refined products. Companies should analyze gathering lines connecting infield pipelines that connect the oil and gas production assets (wells or offshore production platforms) to the next point of transportation. Additionally, gas processing plants, terminals, and storage assets can include stand-alone facilities that function as a separate business or act as part of an integrated midstream operation. Downstream Downstream companies must also determine the unit of property for equipment used in their activities, including refining, chemical processing, marketing, related storage and transfer, as well as the sale and distribution of natural gas, natural gas liquids, and products derived from crude oil. Such equipment includes pipes, pumps, catalysts, and certain other parts, hydrocrackers, reformers, separators, etc. to which turnaround costs are attributed. Oilfield Oil field service companies will want to determine services the unit of property for hydraulic fracturing equipment, which may include various components such as manifolds, compressors, radiators, and fluid-ends. In addition, trailers and their tires should be analyzed for the appropriate unit-of-property determination. Offshore Companies with offshore activities should consider the unit of property for production platforms that have certain power and compression equipment, as well as short-term storage and separation assets. A determination should be made as to whether subsea equipment (assets or groups of assets that are used in the drilling and production phase located below the sea) must be split into separate units of property. The unit-of-property determination will also be key for drilling vessels and rigs, which may carry a variety of equipment, including specialized cranes for heavy lifting, generators, self-propulsion equipment, and crew/employee quarters. Background

The final and reproposed regulations are effective for tax years beginning on or after Jan. 1, 2014. There are special rules, however, for amounts paid or incurred in tax years beginning in 2014. Taxpayers may rely on the rules and are permitted to apply them to tax years beginning in 2012 and 2013 for amounts paid or incurred in those years. The final provisions and the reproposed regulations include rules to facilitate implementing the new rules. Forthcoming transition rules will require filing Form(s) 3115, Application for Change in Accounting Method, for accounting method changes to comply with the regulations and require Sec. 481(a) adjustments for some, but not all, of those changes. Certain provisions in the regulations must be implemented by making elections on tax returns.

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