IRS issues guidance on use of accommodation parties in deferred like-kind exchanges.

Sec. 1031 (a) (1) provides that a taxpayer does not recognize gain or loss on an exchange of property held for productive use in a trade or business or for investment, if he exchanged the property solely for like-kind property that he intends to hold for the same reasons. Sec. 1031 (a) (3) provides that property received by a taxpayer cannot be treated as like-kind property if it is (1) not identified as property to be received in the exchange on or before 45 days after the date on which the taxpayer transfers the relinquished property or (2) received after the earlier of 180 days after the date on which the taxpayer transfers the relinquished property, or the due date (determined with regard to extensions) for the transferor's Federal income tax return for the year in which the transfer of the relinquished property occurs.

Determining the owner of property for Federal income tax purposes requires an analysis of all of the facts and circumstances. As a general rule, the IRS considers the party that bears the economic burdens and benefits of ownership as the owner of property for Federal income tax purposes. In 1991, Treasury and the Service promulgated final regulations under Regs. Sec. 1.1031(k)-l, for deferred like-kind exchanges under Sec. 1031(a)(3).

Since the promulgation of these final regulations, taxpayers have engaged in a wide variety of transactions, including so-called "parking" transactions, to facilitate reverse like-kind exchanges. Parking transactions typically are designed to "park" the desired replacement property with an accommodation party until the taxpayer arranges for the transfer of the relinquished property to the ultimate transferee in a simultaneous or deferred exchange. Once such a transfer is arranged, the taxpayer transfers the relinquished property to the accommodation party in exchange for the replacement property. Then, the accommodation party transfers the relinquished property to the ultimate transferee. In other situations, an accommodation party may acquire the desired replacement property on behalf of a taxpayer and immediately exchange such property with the taxpayer for the relinquished property, thereafter holding the relinquished property until the taxpayer arranges for a transfer of such property to the ultimate transferee. In the parking arrangements, taxpayers attempt to arrange the transaction so that the accommodation party has enough of the benefits and burdens relating to the property to be treated as the owner for Federal income tax purposes.

It is in the best interest of sound tax administration to provide taxpayers with a workable means of qualifying their transactions under Sec. 1031 when a taxpayer has a genuine intent to accomplish a like-kind exchange at the time that he arranges for the acquisition of the replacement property and actually accomplishes the exchange within a short time thereafter. Accordingly, this revenue procedure provides a safe harbor that allows the taxpayer to treat the accommodation party as the owner of the property for Federal income tax purposes, thereby enabling the taxpayer to accomplish a qualifying like-kind exchange.

QEAAs

The IRS will not challenge the qualification of property as either "replacement property" or "relinquished property" (as defined in Regs. Sec. 1.1031 (k)- 1 (a)) for Sec. 1031 purposes, or the treatment of the exchange accommodation titleholder (EAT) as the beneficial owner of such property for Federal income tax purposes, if the property is held in qualified exchange accommodation arrangement (QEAA).

Property is held in a QEAA if all of the following requirements are met:

1. Qualified indicia of the property's ownership is held by a person (the EAT) who is not the taxpayer or a disqualified person, and either such person is subject to Federal income tax or, if such person is treated as a partnership or S corporation for Federal income tax purposes, more than 90% of its interests or stock are owned by partners or shareholders subject to Federal income tax. Such qualified indicia of ownership must be held by the EAT at all times from the date of acquisition by the EAT until the property is transferred. For this purpose,"qualified indicia of ownership" means legal title to the property, other indicia of ownership treated as beneficial ownership of the property under applicable principles of commercial law (e.g., a contract for deed), or interests in an entity disregarded as an entity separate from its owner for Federal income tax purposes (e.g., a single-member limited liability company) and that holds either legal title to the property or such other indicia of ownership.

2. At the time the qualified indicia of ownership of the property is transferred to the EAT, it is the taxpayer's bona fide intent that the property held by the EAT represent either replacement property or relinquished property in an exchange intended to qualify for nonrecognition of gain (in whole or in part) or loss under Sec. 1031.

3. No later than five business days after the transfer of qualified indicia of property ownership to the EAT, the taxpayer and the EAT enter into a written agreement (the QEAA) that provides that the EAT is holding the property for the benefit of the taxpayer to facilitate an exchange under Sec. 1031, and that the taxpayer and the EAT agree to report the acquisition, holding and disposition of the property. The agreement must specify that the EAT will be treated as the beneficial owner of the property for all Federal income tax purposes. Both parties must report the property's Federal income tax attributes on their Federal income tax returns in a manner consistent with this agreement.

4. No later than 45 days after the transfer of qualified indicia of ownership of the replacement property to the EAT, the relinquished property is properly identified. Identification must be made in a manner consistent with the principles described in Regs. Sec. 1.1031(k)1(c). For purposes of this section, the taxpayer may properly identify alternative and multiple properties, as described in Regs. Sec. 1.1031 (k)- 1 (c) (4).

5. No later than 180 days after the transfer of qualified indicia of ownership of the property to the EAT, (1) the property,, is transferred (either directly or indirectly through a qualified intermediary (as defined in Regs. Sec. 1.1031(k)-1 (g)(4))) to the taxpayer as replacement property or (2) the property is transferred to a person who is not the taxpayer or a disqualified person as relinquished property.

6. The combined time period that the relinquished property and the replacement property are held in a QEAA does not exceed 180 days.

Permissible agreements. Property will not fail to be treated as being held in a QEAA as a result of any one or more of the following legal or contractual arrangements, regardless of whether such arrangements contain terms that typically would result from arm's-length bargaining between unrelated parties with respect to such arrangements:

1. An EAT that satisfies the requirements of the qualified intermediary safe harbor set forth in Regs. Sec. 1.1031 (k)- 1 (g) (4) may enter into an exchange agreement with the taxpayer to serve as the qualified intermediary in a simultaneous or deferred exchange of the property under Sec. 1031.

2. The taxpayer or a disqualified person guarantees some or all of the obligations of the EAT, including secured or unsecured debt incurred to acquire the property, or indemnifies the EAT against costs and expenses.

3. The taxpayer or a disqualified person loans or advances funds to the EAT or guarantees a loan or advance to the EAT.

4. The property is leased by the EAT to the taxpayer or a disqualified person.

5. The taxpayer or a disqualified person manages the property, supervises improvement of the property, acts as a contractor or otherwise provides services to the EAT as to the property.

6. The taxpayer and the EAT enter into agreements or arrangements relating to the purchase or sale of the property, including puts and calls at fixed or formula prices, effective for a period not in excess of 185 days from the date the property is acquired by the EAT.

7. The taxpayer and the EAT enter into agreements or arrangements providing that any variation in the value of a relinquished property from the estimated value on the date of the EAT's receipt of the property be taken into account on the EAT's disposition of the relinquished property through the taxpayer's advance of funds to, or receipt of funds from, the EAT.

Permissible treatment. Property will not fail to be treated as being held in a QEAA merely because the accounting, regulatory or state, local or foreign tax treatment of the arrangement between the taxpayer and the EAT is different from the treatment required by this revenue procedure.

Effective Date

This revenue procedure is effective for QEAAs entered into with respect to an EAT that acquires qualified indicia of ownership of property on or after Sept. 15, 2000. REV. PROC. 2000-37, IRB 2000-40

REFLECTIONS. While the Service has tried to provide taxpayers with a workable means of qualifying deferred like-kind transactions, it limited the scope of Rev. Proc. 2000-37 by noting that "no inference" can be made for similar arrangements entered into before the revenue procedure's effective date or for "parking" arrangements that do not meet the terms of the safe harbor described.