The 'state of the art' in like-kind exchanges

Journal of Taxation

Volumn 91, Issue 2, 1999, Pages 78-84

  Lipton, Richard M ^a  

^a Sonnenschein Nath and Rosenthal ^*  (United States)

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EID: 33749091324     PISSN: 00224863     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (30)

1. See Levine, 567-2nd T.M. (BNA), Taxfree Exchanges Under Section 1031;
2. Cuff, "Real Estate and the Deferred Exchange Regulations," ALI-ABA Course of Study: Creative Tax Planning for Real Estate Transactions (1997);
3. Egerton and Sowell, "Like Kind Exchanges of Real Properties," 11 Tax Mgt. Real Est J. 189 (1995).
4. Under Section 1031(a)(2), the properties involved in a like-kind exchange may not be stock in trade or other property held for sale, stocks, bonds or notes, other securities or evidences of indebtedness or interest, interests in a partnership, certificates of trust, or beneficial interests or choses in action.
5. If a loss is realized on a like-kind exchange in which boot is received, the loss is not recognized.
6. Reg. 1.1031(d)-2. In contrast, if the taxpayer receives cash or nonqualifying property to compensate for differences in net value as a result of liabilities, the cash or nonqualifying property is taxable boot.
7. For purposes of this rule, Sections 267(b) and 707(b) apply to determine if two persons are related.
8. Barker, 74 TC 555 (1980).
9. Reg. 1.1031(k)(c)(4).
10. This rule does open questions, however, as to what constitutes a "property" for purposes of Section 1031. See Shop Talk, "Identification of Replacement Property - What Is a 'Property'?," 88 JTAX 190 (March 1998),
11. and "More on Identification of Replacement Property Under Section 1031," 89 JTAX 62 (July 1998).
12. Reg. 1.1031(k)-1. See Handler, "Final Regs. on Deferred Like-Kind Exchanges Provide Additional Clarification," 75 JTAX 10 (July 1991);
13. Bengal and Dasaro, "Deferred Real Estate Exchanges Under Section 1031: New Regulations Create Guidelines for Starker Exchanges," 9 J. Tax'n Inv. 91 (Winter 1992);
14. Fellows and Yuhas, "Deferred Like-Kind Exchanges: An Analysis of the Final Regulations," 16 Rev. Tax'n Indiv. 124 (Spring 1992).
15. Ltr. Ruls. 9814019 and 9823045.
16. Comments by Kelly Alton, Special Counsel to the IRS Assistant Chief Counsel (Income Tax and Accounting), at the May Meeting of the ABA Tax Section, to the Committee on Sales, Exchanges and Basis, 5/1/99, in Washington, D.C.
17. For example, the taxpayer should not be entitled to receive the income from the replacement property during the time that it is owned by the FP, although such income could be used to service any loan from the taxpayer to the FP.
18. On the other hand, under Temp. Reg. 15A.453-1(b)(2)(iv), indebtedness placed on property in contemplation of a disposition is not qualifying indebtedness for purposes of the installment sale rules. The IRS could refer to this rule by analogy as support for its position that indebtedness placed on property prior to a like-kind exchange results in boot.
19. Generally, with certain limited exceptions, a nonqualified liability is a liability not incurred to acquire property and which was incurred within two years of the date of transfer of property to the partnership. Reg. 1.707-5(a)(6).
20. Sections 761(a), 7701(a)(2).
21. Culbertson, 337 U.S. 733, 37 AFTR 1391 (1949).
22. See also McShain, 68 TC 154 (1977).
23. See TAM 199907029; see also FSA 199923017 and TAM 9504001.
24. For other issues related to this scenario, see generally Crnkovich and Lowy, "Planning for UPREIT Transactions When Selling Partners Want to Go Their Separate Ways," 90 JTAX 238 (April 1999).
25. See also Maloney, 93 TC 89 (1989); Wagensen, 74 TC 653 (1980). But compare Barker, 668 F. Supp. 1199, 60 AFTR2d 87-5507 (DC Ill., 1987); Weintrob, TCM 1990-513.
26. If the property is leased by the partnership to a master lessee on a triple-net basis, and undivided interests (subject to the master lease) are then distributed to the partners, it seems fairly clear that the co-ownership arrangement should not be recharacterized as partnership under Section 7701.
27. Under Section 453(b)(i), an installment sale is any sale in which one or more payments is to be made in the following tax year.
28. A standby letter of credit is not treated as payment under Temp. Reg. 15A.453-1(b)(3)(i). Because most of the payments on the note will be made shortly after the closing, the cost of the standby letter of credit usually is not significant.
29. The redemption of the interests of Jack and Karen, who own 50% of JKLM, does not terminate JKLM under Section 708(b)(1)(B) because a redemption is not treated as a "sale or exchange" for this purpose.
30. The problem is even worse if there are more than three partners who wish to defer gain; in that event, if each partner wants to receive a different replacement property, the partners have no choice but to apply the 200%-of-value rule.