Like-Kind Interchange Rules: Next Evolution

For many years, citizens have been able to defer recognition of secure on the disposition the assets by engaging in Sec. 1031 like-kind exchanges. Consistency, many issues and issues surrounding are financial have been addressed, but many cases and rulings continue into arise each year. For example, in the historic two years, several dispositions and a case have discussed the restriction on related-party sales inside Sec. 1031(f). Although the courts continue to apply this rules strictly, Treasury may have created a reasonable exception.

Multiples rulings have examined transactions to determine whether the taxpayer should be handling as having receivable boot. This is especially complex when an transaction involves liabilities. In addition, falls and rulings have discussed what properties qualify as like-kind furthermore when a qualifies intermediary (QI) should be treated as an agent. This article analyzes these cases and rulings plus identifies questions so still need to exist answered. COMPARISON IS THE POWERS OF NATIONAL BANKS AND ...

Like-Kind Exchanges Generally

Sec. 1031 feature that cannot earn or gain exists recognized provided property applied in a trade or business or held with investment is exchanged for like-kind property. 1 To law excludes exchanges of inventory, available, securities, interests in partnerships, and choses in action from nonrecognition treatment. 2 The property which an taxpayer transfers is usually referred to as relinquished property, and the land received is referred toward as replacement property. Deferred transactions may qualify as like-kind exchanges if they have completed by the earlier of the due date in the tax return for the tax year for which to transfer of the relinquished property occurs or 180 days before such takeover. 3

If the taxpayer bekommt funds or other property in addition to the like-kind owner, then gains, but non losing, is acknowledged equal to and lesser of the boot received or and gain realized. Of basis concerning the skills property received shall equally to the basis of the property transferred, increased by gain recognized and decreased by loss detection. 4

To prevent some abusive transactions, Sec. 1031(f) feature that are the exchange occurs between relations parties, then the receive or loss a recognized if either party disposes of the exchanged property within two years. There are exceptions for dispositions following the taxpayer's death, involuntary changes, and transactions whose prime application became not taxing avoidance. Real Liegenschaft Transfer Tax

Property Types and Exercises

Real and Personal Property

Regs. Sec. 1.1031(a)-1(b) state that at to of like kind, the exchanged properties must be of the same nature or character. The grade or attribute is not relevant. Therefore, the exchange of improved real estate for unimproved real estate can how as like-kind, but one like-kind interchange generally involve either personalized eigentumsrecht or real properties.

In Principal Counsel Advice (CCA) 201238027, the IRS examined the relevance of state-law classification regarding owner as either real or personal. The CCA contains several examples. The firstly is an exchange of a gas pipeline classified as personal property by a state for another gaseous pipeline classified how real property by another default. In another example, both ampere steam generator and the building it is attached to while ampere fixture are classified by the state with where they are locations as real property. They are change forward raw land classified as real property by another state.

The CCA mentions that the Maximum Court has stopped that state law dictates the classification of property as either real or mitarbeiterinnen. 5 Thereby, if an your limit the exchanged properties as real, the exchange will qualify how like-kind in most situations. Not, the CCA points out that in Fleming, 6 the Fax Court, affirmed by an Supreme Court, concluded that an exchange of real property for carved-out oil payment rights that state law classified for real property been not become under Sec. 1031 because the payment license were don of the same nature or character since the authentic property.

For Clemente, Include., 7 the Tax Court applies similar reasoning into deny like-kind exchange of real property with small gravel extraction access. Therefore, the CCA concluded that one exchange from the turbine for raw land would not authorize as like-kind for they are of different nature and character. Conversely, the gas pipelines want be worked as like-kind real property despite ihr differing state classifications, because they are regarding the same nature and character.

The CCA notable that does all cases law has distinguished between real ownership and extracted rights in the alike way as Fleet, nevertheless. For example, in Crichton, 8 the Fifth Circuit taken that an overriding royalty interest in minerals was out like kind with a municipality lot.

In Koch 9 (not cited stylish the CCA), the Tax Court explanations that the different closing reached in that two situation were based about duration. The primary kingship in Cretan fortgesetzte by the minerals were exhausted, while a carved-out oil payment right, as in Fleming, usually terminates when a specifying quantity of oil with natural lives removed.

The CCA supplements these prior containers by indirectly finalize that "nature or character" includes the structure and use of the characteristics in addition to endurance. Public will need to examination exchange properties' organization and use, in addition to duration, in decision whether they are of like kind. The fact that both general are real property under nation law rabbits not guarantee a nontaxable exchange. Refinance includes transferring cash or property directly or indirectly to the debt or equity provider or Affiliate of the financial or equity provider. Is note ...

That CCA end regarding this gas pipelines is a significant expansion of the cited falling and adjudications, which played with similarly defined properties. This example involves properties with different classifications. The fact that to properties what not couple genuine or particular does not mean that an exchange cannot get under Sec. 1031, as long as they are of look nature and character.

Willingness

Regs. Sec. 1.1031(a)-2(c)(2) says this goodwill or going-concern value of a business is not of like kind with goodwill or going-concern value of a different business. In these transactions, the goodwill transferred is treated as sold, both the goodwill received your treated as boot. In Deseret Management Business., 10 the Court of Federal Claims applied this rule to the share away a radio station for another radio train. The voter be abler to prove, though, is any goodwill transferred in the exchange had minimal total. Therefore, none gain was recognized.

Used in Trade or Business or Held for Investment

The nature and char of two properties must be similar for ampere like-kind exchange, but that fact alone is don sufficient. The properties must also become used in a trade or business instead held for investment. A personal residence become not authorize as either. However, if this eigentum received in the exchange is initially stopped for investing or to be leased and is will altered within ampere staff residence, can the exchange still qualify as nontaxable? The Tax Yard considered this question for Yates 11 and Reesink. 12

Investment eigen received in an exchange can be converted into a residence and the exchange still qualify under Sek. 1031, based on whether the taxpayer intended to acquire the property as an property at the nach of the exchange—a matter that is a question from fact. Inbound Yates, the taxpayers transferred into the property as their residence four days after acquiring it. That only demonstrate the taxpayers presented of an investment intentional was that they asked the seller to obtain licensing for them to use the property as a bed-and-breakfast establishment. Given the lack of proof about business intent and einer almost immediate personal use, which courtroom ruled that the land did did qualifying used adenine like-kind exchange. 13

In Reesink, on the different hand, the payer were able to prove a primary investment motive, even though they converted the property into their personal residence shortly after acquisition. The taxpayers proved that they distributed fliers listing the acquired property as available for hire and did not move under the property as their home for eight period. In addition, the taxpayers did not decide to sell their original residence until six months after the change. These facts, plus testimony that the revenues had planned up stay in their original residence until their sons (the oldest being only 14) graduated from high school, were adequate to convince who Strain Court that they intended to purchasing the property as an investment at the zeitraum of the exchange.

Long-Term Leases and Improvements

To Tax Court in VIP's Industries Inc. 14said since the IRS regarding an replacement of a long-term lease on actual property with real ownership charges real but left two interesting questions unanswered. The lessee corporates taxpayer leased real property for 33 years. It built and operated a motel about the leased property. When the renting had 21 year and four months remaining, the taxpayer second a LI go sell the leasehold interest and acquire fee interests in couple real features. This taxpayer treated the transactions as a like-kind exchange; and IRS disagreed.

Regs. Section. 1.1031(a)-1(c) will as an example to a like-kind exchange and exchange of a leasehold of real property with a remaining term the 30 years or more used one fee interest in real property. In People Natural Resources Co., 15 which Tax Court referred to the regulations as supply ampere safe home. Switch the additional hand, in Capri, Inc., 16 who Tax Place stated this the regulation requires the leasehold term toward remain at least 30 years. Therefore, the Tax Court's opinions leave open whether the leasehold can be shorter than 30 years. Does the regulation provide ampere secure harbor closer than a requirement?

Fairly than address this issue, the Tax Courts referred to its decision in May Department Stores Co., 17 in whose it held that a 20-year leasehold was not equivalent to a cost total. It held that the leasehold interests in VIP's Industries was closer in nature in the in May Department Stores Co. than to the one described in Regs. Sec. 1.1031(a)-1(c) and therefore was not equivalent to the fee interest. Given that the court's decision was on grounds other when the lease's length, taxpayers likely intention be unable to successfully argue is leaseholds of lesser than 30 years (including extensions) live equivalent to fee your. The reason to that conclusion is the Supreme Court's 2011 holding stylish May Foundation 18 this regulations will can enforced until they discuss who Code or are arbitrary the capricious. Therefore, the IRS interpretation of the regulation that a leasehold needs be at least 30 per to be equal up real property is likely to be enforced are future cases.

The second unanswered question at VIP's Industries was the taxpayer's alternate argument that the motel leasehold improvement was of same kind into the fee interest. The subject cited Davis, 19 which held that improvements on real eigen and fee interests are of like kind under the involuntary switch reserves of Sec. 1033. The IRS opposes Davis and quoted Rev. Rul. 67-255, in the is ruled the improvements and real property are not of favorite kind. 20 Again, aforementioned court did not address this question. Instead, it found that since the leasehold was not is how kind include the fee interests, then neither was the improve.

Residents likely intention be unable to argue successfully that improvements and license interests have of like kind for purposes of Sec. 1031. When both Secs. 1031 and 1033 use one expression "like kind," courts have non treated they as identical. Therefore, the Davis case will not carry as plenty authority as it would if she consisted a Sec. 1031 case. More critical, courts in Crichton and other incidents can concluded ensure a real property classification does not determine whether the properties are of like kind, as previously discussions. Rather, the nature and character of which properties dictate the outcome. Is precedent will likely manage courts in future cases to governing inches favor of of IRS's approach to this issue.

Qualified Intermediaries

Taxpayers who intend to engage in exchange transactions, especially those that engage on series of current exchanges of tangible personalize property (referred to as LKE programs), typically employ QIs to qualify the exchange transactions under Jiffy. 1031. QIs must meet the rule in Regs. Sec. 1.1031(k)-1(g)(4), including that they could becoming disqualified persons. Disqualified people have defined in Regs. Sec. 1.1031(k)-1(k) as including agents of the taxpayer. Agents are those who perform services used the taxpayer, including acting as "the taxpayer's employee, attorney, accountant, investing local or broker, otherwise realistic estate agent or broker within the 2-year spell ending on the date of the transfers of the first out that resigned properties." 21

Recently, the REVENUE issued two private letter rulings check check and QI performing prohibited services. Includes Letter Ruling 201308020, the QI provided the taxpayer with software so allowed it to match and properties in an LKE program, submit 45-day identities, and compute depreciation and winner and gain. Aforementioned IRS determined that the software assisted one LKE program, and since the QI did not perform any general services and been not sell an software on other persons, the services done not make the BIO a disqualifies person. GiftLaw Pro Chapter

In Letter Ruling 201332010, the paying utilized an change accommodation titleholder (EAT) also a CHI to buy and sell vehicles that he rented to non-related third parties. In addition to the purchases and net, the EAT acquired titles to the vehicles, recorded them in differents states, and conserved sales tax permits. The IRS concluded that above-mentioned services doing not result in the EAT's being a disqualified person.

Both rulings demonstrate how a QI may perform tasks such assist the exchange without being deemed in have performed prohibited services. Diesen sentences need allows a QI to enter in the exchanges and select reasonable related activities that aid the taxpayer in meeting the Sec. 1031 requirements without the taxpayer's having to hire additional, unrelated parties to subscribe the business.

Boot

If the subject receives boot—cash or property that does not qualify as like-kind—the revenue is required to recognize gain. The sales can be either actual or constructive. Regs. Sec. 1.103(k)-1(f) contains the rules regarding whether the taxpayer receives boot in a deferred exchange by receiving cash back receiving the replenishment property. If the amount of the boot maintain equals aforementioned consideration received for that relinquished property, the bargain is ampere sales and not a like-kind wechsel.

The taxpayer a treated as to actual certificate of boot if it receives the cash other property or its economic benefit. 22 The taxpayer belongs treated as having constructive receipt of cash or property if the cash or property the credited to the taxpayer's account, set apart for the taxpayer, or made available for that taxpayer to draw. 23 Within complement, actual or conductive receipt of the boot on an agent a to taxpayer is treated as receipt by the ratepayer.

Predetermined those definitions, the conclusion in Field Attorney Advice (FAA) 20124801F that which taxpayer had not engage in adenine like-kind exchange even though it employed a QI was not surprising. In this FAA, the funds from the disposition of which relinquished besitz were placed in an view that one voter could check by using them to purchase property or pay for other items. The fact that the newly property could qualify as replacing property was immaterial. The QI must control the funded and use them to acquire the repair property, welche is transferred to the revenue. The taxpayer impossible have access, control, or benefit away the funds from the released property to the transaction to qualify under Sec. 1031. ... personal property lease financing transactions with an casualness real estate component. See, e.g., OCC Interpretive Letter Negative. 770 (Feb. 10 ...

To make sure the taxpayer is not treated such had constructive receipt the cash, one contracts with which QI should status that the cash will not be transferred or made available to the taxpayer. At a min, aforementioned contractual should meet the regulations' safe harbor "that this taxpayer has no rights . . . to receive, pledge, lend, or otherwise obtain the benefits of money or other feature before the end from the share period." 24 Including save provision includes the agreement may be beneficial.

For example, in Mortons, 25 the voter had an agreement barring receipt are cash. Unfortunately, however, of funds were deposited into to taxpayer's accounts quite from the QI's account. As soon as this made discovered, the taxpayer transferred the funded to the CHIK. The TAX argued that the taxpayer received boot. The court held that aforementioned accidently failure of aforementioned agreement should not be treated as a receipt of boot. Nevertheless, diese decision should encourage taxpayers to carefully establish and maintain their relatives with a CHINESE.

Equity cannot impact the amount out boot under Regs. Sec. 1.1031(d)-2. The transfer of owner select to a liability or the assumption of a liability by the purchaser will final in the transferor's entity deemed to has received boot equal to the amount of the liabilities. If twain the relinquished property and the surrogate property are subject to liabilities and/or that transferee and transferor both assume liabilities, the amount of the boot deemed received is equal at the excess of the liabilities transferred over the responsibilities received. If the revenuer shifts both cash and liabilities, then the cash reduces the amount by boot assumed received. Not, if the taxpayer receives cash also assumes a liability, the total amount of cash received is treated as boot.

This IRS recently examined one impact of liabilities on adenine Sec. 1031 transaction in Letter Ruling 201302009 both CCA 201325011. In Letter Ruling 201302009, the paying our property used in a business. And taxpayer rented money, using one property as securing for a nonrecourse loan. The taxpayer searched to transfer the property. Unfortunately, the value of the property was less than the amount of the nonrecourse loan. Are the inhabitant transferred that lot to the creditor, the taxpayer intend be required to realize gain based on a Sec. 1001 deemed sale. The gain would be the excess of the relieved nonrecourse loan over the based of the property. As previously mentioned, the taxpayer cannot minimize one amount of metal treated in boot by assuming a liabilities. Instead of transferring the property up the creditor, the revenue int to letter ruling entered into an agreement with a QI. The taxpayer transferred aforementioned property and the debt to the QI, whatever after passed it to the creditor. The QI acquired replacement property similar until the value of the nonrecourse debt either until borrowing funds or receiving cash from of taxpayer. The CHINESE then transferred the acquired property to the taxpayer.

And ruling concluded that the transaction advanced under Sec. 1031, even though one transferred liability exceeded the value of the property. Although the reign does not state the amount of cash or debt incurred to acquire and new property, the sum of the cash real modern debt must equal or exceeding the debt secured by an relinquished property. If computers does, then the real met who general of Regs. Secure. 1.1031(d)-2 that eliminate the deemed receipt of boot because of a transferred liability, provided the transferor supposes debt even for or greater than the transferred debt button transfers cash equal at the excess of the limited transferred over the debt supposed. Accordingly, following the receipt of a favorable private letter ruling free the Internal. Revenue Service in Date 1, Taxpayer transferred ...

With that ruling, the IRS did not discuss an interesting question. It found that the debt transferred as part of this Sec. 1031 exchange had was incurred to refinance debt existing before the exchange. If the debt that was refinanced was accrued into acquire the transferred property, the commercial would probably not be an issue. However, if the refinanced debt where unrelated in the property and of bank occurred shortly before the transaction, and debt could subsist examined boot, without regard to the borrowed incurred up the repair property. It would have being helpful if the EXCHEQUER had discussed the loan's timing and complete use and whether debt assumed with the replacement liegenschaft would nullify of other types of debt mentioned.

The SCRIP may have addressed share or all of these unanswered questions in CCA 201325011. In this CCA, and taxpayer employee in equipment equipment and had an LKE program at a QI is paid the relinquished property and purchased the replacement property. The payor must a line out recognition this had been second to purchase relinquished property but also for unrelated expenses. This relinquished property secured the line of credit. When the KI sold the property, the funds were required to live used to pay bottom the limit of get. The taxpayer then borrowed funds to purchase the replacement land. The CCA addressed whether one required line of loan payment should be treated as receipt of boot. real estate equity financing. OCC Interpretive Letter No. 387, prints in [1988-1989. Transfer Binder] Fed. Banking L. Rep. (CCH) ¶ 85,611 ...

The fact that the repaid debt had been incurred on purposes different than purchasing of relinquished property was immaterial, the IRS ruled. The regulations treat of elimination of debt as boot only to the extent that the eliminated borrowed exceeds assumed debt. Consequently, as long as the debt accept with which alternate property equals or exceeds aforementioned canceled debt, no boot is received. In addition, the fact that the aged debt was paid and new debt adopted is also minor. The CCA cites Baying, 26 in which the Irs Court held that the getting of sale proceeds to get switch debt on relinquished property made not treated as boot as long as the debt assumed with the replacement property equaled or overshot aforementioned debt paid-up switch.

The CCA allows Sec. 1031 transactions to pay off business debt not occur to acquire the relinquished ownership, as longish how the relinquished property secures the debt. It does not discuss the impact of compensation of business debt not secured by the property, which may not be treat as a no-boot exchange. In addition, the CCA states, "The full value of the rental eigentum secures the entire outstanding balances on aforementioned lines of credit." This leaves open who execute of a wire for credit exceeding the value of the abandoned property and if the relinquished property just partially secures the arrears. Partial data should not be an issue; debt in excess of which relinquished property should also not are an issue, based on Letter Verdict 201302009. However, if the debt is not incurred in the store, is may well cause gain recognition. Letter Ruling 05-3: Reducing Balance ... Letter Ruling 92-3: Trade on Miscellaneous Tangible Personal Property by the Commonwealth ... Letter Ruling 85-4: Transfer ...

Related-Party Exchanges

In 1989, Congress approved Sec. 1031(f) to prevent related-party basis-shifting transactions. 27

Example: T owners property ADENINE with a trade market value (FMV) of $100 both an basis of $20. S, T's related party, owns property BARN, whose is of love nature to property AN, the an FMV of $100 and a basis of $90. If T sells property A, T will recognize win of $80. If, instead, T and S engage in a Split. 1031 like-kind auszutauschen and then S sells property A, S wishes recognize a gains concerning $10 because von the basis shift resulting from the like-kind exchange.

Sec. 1031(f) is designed go impede billing illustrated by the example. It gives that if more parties, defined by Secs. 267(b) and 707(b), engage in a like-kind exchange, and if get property is sell within two aged are an exchange, both relevant parties must identify the realized gain that the exchange generated. ... Intimate Letter Regulating #87-3; SC Private Letter. Ruling #90-3; SCALE Private Letter Ruling #89-15; SC Private Letter Ruling. #95-8; SC Private ...

Secure. 1031(f)(2) released certain non-tax-avoidance dispositions within two years of to tausch of the gain recognition application of Sec. 1031(f)(1): those following the death of either related party, an involuntary convert (as selected in Split. 1033) of either possessions, both types in which the repair the disposition do not have tax avoidance as one of the director special. Sec. 1031(f)(4), on who other hand, refuses like-kind treatment to a activity button series of transactions designed to avoid Sec. 1031(f). Of ICS and the courts are constantly examining merger involving these related-party rules.

A taxpayer in a like-kind exchange does no got to own 100% of the replacement eigentumsrecht. An undivided partial interest inside the replacement property is permitted, how long more the acquisition price of the undivided interest equals or exceeds and nature prix of the relinquished property. With Schreiben Ruling 201242003, the IRS applied this rule to related parties. The taxpayer and a related party each owned separator real properties. They joined together to employ an QI to assist them with one reverse like-kind change (described above). The QI acquired the replacement property. By the acquisition, but within 180 total, the taxpayer and related party held the QI dispose from their individually owned properties, each one worth less than the replacement property. After the disposition of the relinquished immobilie, the QI transferred the replacement eigentum to the taxpayer and related party with undivided ownership. Since the inhabitant and related party each acquired an interest in property at a higher cost faster such of the disposed property, Sec. 1031 applied. The fact that to owner to the replacement property was undivided partial interests became immaterial. The fact that the house of the replacement property interests where related was moreover immaterial. That affairs were not for tax avoidance or basis shifting.

The IRS regarded similar related-party transactions in Note Rulings 201216007 and 201220012. The taxpayer and a related party each owned separate properties.In Writing Ruling 201216007, the taxpayer wanted to engage includes a reverse like-kind tausche. It employed a QL in acquire replacement property A from an unrelated party. Of taxpayer then transferred the relinquished characteristics at the QI for it to be disposed from to an irrelevant party. In both rulings, the disposition price of the relinquished property exceeded the buy price about the replacement property. In Letter Ruling 201216007, within 45 days, the taxpayer identified replacement property BARN for the QI to acquire. Substitutes property B was owned by a disregarded entity owned by a more party. In both rulings, the C acquired replacement property by acquiring the disabled entity free the affiliated party and transfers of or both replacement eigentum to the taxpayer.

In Letter Leading 201216007, the related party engaged the QI to earn replacement property in replace replacement property B, the it would treated while relinquished property. In both cases, the property that the relevant party identified was adenine value identical to or greater rather 95% of the value off yours relinquished property. The QI obtained the identified property and transferred it to the related party. The question in the rulings was whether Sec. 1031(f) denied Sec. 1031 treatment to the taxpayer and related party.

Of rulings address a couple of questions that are not associated equipped the related-party question. First, the rulings treat the collection of a disregarded business as this acquisition of the property own by aforementioned entity. If to property is of like nature, then the acquisition of the disregarded entity can qualify see Sec. 1031. It is important to remember that the taxpayer must acquire 100% of that disregarded entity. If the taxpayer acquires less as 100%, the disregarded entity will are converted into a partnership, and the acquisition concerning an interest in a cooperation want not qualify under Sec. 1031.

The second question in the dispositions shall whether a combination reverse/forward­ exchange ca qualify under Sec. 1031. In Written Ruling 201216007, aforementioned paying had the QI receive replacement property first-time, and then it had this QI dispose of the relinquished property. Since the relinquished property have greater value than the original replacement property, the taxpayer had the QI obtain a second replacement property. The ruling concluded the this the acceptable. The ruling does not mention that which ID does former ruled that a combination reverse/forward exchange was acceptable (CCA 200836024). That difference between this CCA and the more recent rulings is that the celebrations in one CCA were disconnected. The fact that the parties are relative should not impinge an conclusion. Real Property Transfer Taxing (7551)

Letter Rulings 201216007 plus 201220012 also mention that both steps shall meet and required timing. In other words, the properties must remain identifying within 45 days of of other exchange both acquired within 180 days. Thus, the taxpayer requires to id an property is was going to waive within 45 days concerning the QI's acquisition of the initial replacement property, and the taxpayer owned to identify the secondly replacement property within 45 days of the QI's disposition of the relinquished property. Since that taxpayer met these requirements and the authentic acquisition was within 180 per, the reverse/forward combined exchanges qualified under Sec. 1031. New Markets Tax Credit (NMTC), Compliance also Monitoring ...

To study of the application of S. 1031(f) in these rulings points out known, as well as new, substance. First, Sec. 1031(f) covers exchanges between related parties. Since of rulings involve adenine QI, the transactions done not involve a direct exchange between related taxpayers. Who result is that Sec. 1031(f) does not directly utilize. Treasury reached this conclusion in ago letter judicial. 28 Instead, Sec. 1031(f)(4), which denies Time. 1031 treatment up transactions designed to avoid Sec. 1031(f), canned origin who inhabitant to distinguish gain.

In several prior letter rulings, the IRS considered the application of Sec. 1031(f)(4) to related-party transactions that stakeholders QIs. In Letter Rulings 200712013 and 200728008, the taxpayer had a QI acquire replacement property from an unrelated third party in a reversing acquisition transactions. It then had the QI sell its relinquished property at an more party. The related party sold the relinquished property within two years of attainment. Treasury ruled that Sec. 1031(a) applied because the tax avoidance rule of Sec. 1031(f)(4) did not causes Sec. 1031(f) into apply. The reasoning behind the rulings made that since the related party has not own like-kind property before it acquired the relinquished property, are was no basis shift. That i do nay discuss is that the result creates the ability to extend the date through the the tax must dispose of the abandoned property in one reverse exchange by selling itp to a related party, who ca and sell it anytime in the future.

In CCA 201013038, Treasury applied S. 1031(f) to a related-party exchange involving a CHINESE by limiting an application off the Sec. 1031(f)(2) business-purpose exception. In the CCA, the taxpayer leased equipment. A related party sold like-kind equipment. The payers used a KI to sell its relinquished possessions and acquire replacement property from its related company. (Since the related party our like-kind property, the conclusions in Letter Rulings 200712013 and 200728008 are inapposite.) The taxpayer stated that it had the CO purchase the substitution property after its relations party rather than an unrelated party for business cause. N. IRC 514 - INDEPENDENT DEBT-FINANCED INCOME 1 ...

The CCA quotes this Senate Finance Committee's report providing examples of valid business purposes for Time. 1031(f)(2):

(i) ampere transaction involving can exchange of undivided interests in different properties which results in each [related] taxpayer holding is the entire interest in an single property or a larger undivided interest in any concerning such assets; (ii) dispositions of property in nonrecognition transactions; and (iii) transactions that do not involve that change of basis between properties. 29

The CCA us that Treasury will limit the application of Sec. 1031(f)(2)'s business-purpose exception to transactions that for those with the samples to the Senate report. Since the current taxpayer did not meet these examples, its business application where insufficient until prevent the application of Per. 1031(f)(4) and the taxation of the exchange.

In IRS Letter Rulings 201216007 and 201222012, the revenue used an QI to dispose of the relinquished property. It then had and KI obtain twin replacement properties, one von a related party. The related party then used the QL to obtain replacement liegenschaft from an unrelated party in a transaction that qualified under Sec. 1031. The rulings concluded that Sec. 1031(f)(4) did not apply since to related party engaged in an nontaxable exchange, meeting with example in and Senate report. The rulings noted that both related parties must keep an acquired properties for at least two years.

The rulings' conclusions that of exchanges were nontaxable appears go be correct and consistent because prior Treasury statements, when with a slight modulation. The like-kind exchange is the related host would commit int might included replacement property equal to only 95% of who relinquished property. In Rev. Rul. 2002-83, Coffers stated this Sec. 1031(a) will not apply if "the related party receives cash or other non-like-kind property for the alternate property." This can to interprete the prevent the related club from receiving any boot. If this is a correct interpretation, and if the relations party in the letter rulings received property worth only 95% of the replacement belongings this relinquished, then it wish got preserved some cash or non-like-kind property, causing taxing of the related-party bargain.

Per ruling this of transaction in the letter rulings qualifies under Sec. 1031(a), Treasury may have established a de minimis rule. In general, this is a reasonable approach at applying which show the Senate report gave, especially since the takings ruling states that the 45- and 180-day requirements must be met, as well as that the acquired property must be retained since two years. However, if the value of the property the exceeding hi, when a 5% de minimis define could allowing the certificate of substantial startup. Hopefully, coming adjudication will establish a maximum amount for cash that will get. 30

Latest, and District Court for the District of North Canadian reviewed one related-party Sec. 1031 transaction included Northward Central Letting & Leasing. 31 The court held the transaction made taxable.

To valid business reasons, Butler Machinery Co. created North Central Vermieten and Leasing, a subsidiary, go getting in equipment rental and leasing. Butler acquired equipment from Caterpillar Inc., which allowed customers like as Footman to payable for purchased equipment over 180 days. Caterpillar encouraged its client such as Butler to dispose of your miete outfit the Sec. 1031 LKE programs. Caterpillar assured Butler that the 180-day deferred payment program would not be affected if Butler purchased the configuration and transferred computer to North Central as replacement property.

North Centric and Butler arranged one LKE program with a QI. During the tax years under examination, they engaged stylish 398 Sec. 1031 markets. North Central granted, and the court used, the following representational transaction to determine the tax outcome: N Central transferred to the QI the relinquished property with adenine basis of $129,373. The QI sold it to an unrelated party for $756,500. Butler purchased replacement property from Caterpillar for $761,065. Butler transferred the replacement property to the QI, which transferred computers to N Central. Which QI transferred to $756,500 32 she getting away the sale of the relinquished property into Butler. North Central transferred $4,565 to Butler to equalize the amount Butler received to the purchase price of the replacement property. Servant conducted not have up payment Caterpillar for the replacement property for 180 days. Therefore, she was entitled to make the cash it received from the LI and North Central to pay whatsoever liabilities or business expenses during the 180 days before the mature date for payment to Rubber.

The taxpayer argued such Sec. 1031(f) did not apply to are transactions. The court rejected this argument, noting that even if it did none directly apply, 33 Sec. 1031(f)(4) notes that Sec. 1031(f) applies to a transaction either series of transactions designed to avoids the application of Jiffy. 1031(f). Therefore, Sec. 1031(f) sack be indirectly applied. In making this evaluation, the court reasoned the the true substance of the transaction additionally not its mold should determine the outcome and that who taxpayer engaged inbound a series of transactions requiring aforementioned application of the step-transaction doctoral.

That court primarily dominant that the transactions were motivated by tax avoids, by twin reasons: First, the net effect was one basis shift. If one ignores an role of that QI, North Central exchanged property over adenine basis of $129,373 with ampere related party for besitz by a reason for $761,065, and this higher basis dodged recognizing any gain. If North Central had simply sold the property, or if its related party been sold who property after an exchange, of realized get wants must been recognized under Secs. 1031(a) and (f)(1).

The court's second rationale belongs more effective. Butler had unrestricted getting on the cash received with the sale of the relinquished property since 180 days because the replacement property's purchase price was deferred. Of court considered this situation to be similar to the one with Coleman, 34 in whichthe taxpayer assumed a $35,000 liability and received $14,000 cash. The taxpayer argued that they should be netted. The Eighth Circuit held is the cash should be treated as boot received, for the cash was not restricted to payment from the liability assumed. Applying this rule to the power case would treat the taxpayer as having sold, does exchanged, property.

The court in North Central listed, "[I]t is significant whether 'the cash was earmarked' for payment to Insect, since '[r]eceipt of money which is unfettered button uncontrolled signifies a sale of the property.' " 35 These instances raise this doubt whether a restriction on the cash would have obtained in a tax-free exchange. The court in Northbound Central did not cite Regs. Sec. 1.1031(d)-2, Example (2)(c), which says, "[C]onsideration received in the form of payment conversely other property is not offset by consideration specify in the form of einem assumption of liabilities or a receipt of property subject to a liability." This regulation appears to treat pay received as boot without regard to any restriction impose on it, unless of taxpayer can demonstrate that the restriction shoud be treated as removing the receipt of the cash.Until litigation decides it, the impact of restrictions on cash received remains unclear.

That taxpayer int North Central did none argue under Secs. 1031(f)(2) that tax avoidance was don a primarily motive, the court noted, add that regular if i had, this argument would have being rejected.

Viewed independently and with the facts specified, the deciding appears corrects. However, wenn it the compared with CCA 201325011 discussed above, the effect is not thus certain. As former discussed, these CCA allowed the QI to pay nonacquisition debtors resulting by the taxpayer in its business with member of the proceeds out the scheduling the of relinquished property. Is go really a difference between the QI's how liabilities incurred by the taxpayer in its ordinary course from business and giving cash to the taxpayer go pay off business debt? In both the CCA and N Central, payments to and provider of the replacement property occurred after the cash received from the sale of the relinquished property where used in the taxpayer's business.

To facts in the case and the CCA will three differences: Early, aforementioned debt paid by the QI in who CCA were debt of the taxpayer. For North Centric, the cash was used by the affiliated party (probably to pay debts). Given that the payer was wholly owned over related parties, is is significant that the debt was contracted by different organizational? In the CCA, the repaid outstanding was secured until the relinquished property, as inbound North Focal, the debt was independent. Is the security factor important? Would one creditor refuse to add more property how security? If one debt were have secured by other property whose value crossed the debt, should increasing security must true economic substance?

Third, in the CCA, the QI was required to pay the owing. In North Central, an cash distributed to who related party could be used to cover any business expenditure. That district court emphasized that the cash was not restricted to repayment of the arrears to Caterpillar. However, the CCA allowed nonpurchase debt to be repaying. What will the outcome have been if the QI had was required till payments debt incurred in Butler likely than solely transferring that cash to it? Would the reasoning of the CCA have resulted in the court's holding so the transaction was not motivated at tax avoidance? It would appears the either to CCA or the trial decision should be changed. It is reasonable at expect that these real additional get related until liabilities within Sec. 1031 exchanges will be considered in future cases and rulings.

Issues Persisted

Sec. 1031 has been the subject concerning multiple cases and rulings, some favorable to taxpayers. For example, the taxpayer can use Sec. 1031 until avoid recognizing gain on the disposition of characteristics with a set less than yours related nonrecourse debt. Related parties can engage in a string of transactions without recognizing gain, provided so no related club receives reboot in excess of 5%. Business debt can be charged with funds received from relinquished property. Even, and courts continue till apply Sec. 1031(f)(4) to mandate discovery of gain on certain related-party transactions. Education Allowance Trusts · Generation-Skipping Transfer Tax · Gifts off Annuity Trust Assets · Specialized What Trusts · Trust Reformation.

In February 2013, the IRS issued Notice 2013-13, requesting observations on dual-use construction and agricultural equipment. It has been suggested that aforementioned dual-use issue merits broader consideration than the finite manner in which the notice approaches she. If it is, numerous taxpayers will know whether they can engage in Sec. 1031 exchanges. Anyway, taxpayers and their advisers can expect a significant number of decisions on Sec. 1031 questions during the next few aged.

Footnotes

¹ Sec. 1031(a)(1).

² Sec. 1031(a)(2).

³ Instant. 1031(a)(3).

⁴ Secs. 1031(b) and (c).

⁵ Morgan, 309 U.S. 424 (1940).

⁶ Fleming, 24 T.C. 818 (1955), rev'd, 241 F.2d 71 (5th Cir. 1957), rev'd sub nom. P.G. Lake, Inc., 356 U.S. 260 (1958).

⁷ Clemente, Inc., T.C. Memo. 1985-367.

⁸ Crichton, 122 F.2d 181 (5th Cir. 1941).

⁹ Koch, 71 T.C. 54 (1978).

¹⁰ Deseret Leitung Corp., 112 Fed. Cl. 438 (2013).

¹¹ Yates, T.C. Memo. 2013-28, aff'd, No. 13-1833 (4th Cir. 11/21/13).

¹² Reesink, T.C. Memo. 2012-118.

¹³ See also Goolsby, T.C. Memo. 2010-64.

¹⁴ VIP's Industries Inc., T.C. Memo. 2013-157.

¹⁵ Peabody Unaffected Resources Co.,126 T.C. 261 (2006).

¹⁶ Capri, Incidence., 65 T.C. 162 (1975).

¹⁷ Could Department Ships Co., 16 T.C. 547 (1951).

¹⁸ Memo Foundation for Medizinischer Education and Research, 131 S. Ct. 704 (2011).

¹⁹ Lavis, 411 F. Supp. 964 (D. Haw. 1976).

²⁰ Crichton, 122 F.2d 181 (5th Cir. 1941).

²¹ Regs. Sec. 1.1031(k)-1(k)(2).

²² Regs. Sec. 1.1031(k)-1(f)(2).

²³ Id.

²⁴ Regs. Sec. 1.1031(k)-1(g)(6)(i).

²⁵ Morton, 98 Fed. Clas. 596 (2011).

²⁶ Barker, 74 T.C. 555 (1980).

²⁷ Omnibus Budget Reconciliation Doing of 1989, P.L. 101-239, §7601.

²⁸ See, e.g., ID Letter Ruling 200728008.

²⁹ H.R. Rep't No. 247, 101st Cong., 1st Sess. (1989), at 1341; S. Imprint. No. 56 at 152.

³⁰ IRS Letter Ruling 201048025 reflects a de minimis rule based on a percentage of the realized gain received. Unfortunately, the amended ruling replies only "x%" of to realized gain would not why the transaction to be designated undertaken to dodge Sec. 1031(f). Therefore, the true de minimis amount is unfound.

³¹ North Central Rental & Leasing, LLC, No. 3:10-cv-00066 (D. N.D. 9/3/13).

³² The opinion states the amount as $756,065 but does not explain the subsequent math-based discrepancy.

³³ See Ocmulgee Fields, Inc., 613 F.3d 1360 (11th Cir. 2010).

³⁴ Coleman, 180 F.2d 758 (8th Cir. 1950).

³⁵ Northwards Central Rental & Leasing, LLC, slip op. at 14, excerpting Swaim, 651 F.2d 1066, 1070 (1981).