Related-party like-kind exchanges.

In a case of first impression for it, the Tax Court held in Teruya Brothers, Ltd., 124TC No. 4 (2005), that a taxpayer could not avoid the Sec. 1031 (f) related-party rules by using a qualified intermediary (QI).

Background: Under Sec. 1031 (f), gain or loss on an exchange between related persons must generally be recognized if either the property transferred or the one received is disposed of within two years after the exchange. According to Sec. 1031(f)(4), non-recognition treatment does not apply to any exchange if it is part of a transaction (or series of transactions) structured to avoid Sec. 1031(f)'s purposes. Under Sec. 1031 (f)(2)(C), a disposition will not trigger the related-party bar if it is established to the IRS's satisfaction that neither the original transaction--nor the later disposition--had Federal tax avoidance as one of its principal purposes.

Facts: In 1995, in a series of planned transactions, the taxpayer transferred real properties to a QI, TGE, which then sold them to unrelated third parties. TGE used the sale proceeds, as well as additional taxpayer funds, to buy like-kind replacement properties for the taxpayer from a corporation related to the taxpayer.

Holding: The Tax Court held that the transactions were economically equivalent to direct exchanges of properties between the taxpayer and the related party (with boot from the former to the latter), followed by the related party's sales of the properties to unrelated third parties. The interposition of a QI could not obscure the end result. The court also found that the taxpayer did not meet Sec. 1031 (f) (2) (C)'s non-tax-avoidance exception; thus, it concluded that the taxpayer could not defer gains realized on the exchanges. For more discussion on related-party exchanges and the use of QIs, see Briskin, "Like-Kind Exchanges--Common Problems and Solutions," p. 204, this issue.