The reverse exchange: is it a further liberalization of Sec. 1031 deferred exchanges of real estate?

Recently issued regulations under Sec. 1031 represent a step forward in the safe structuring of deferred like-kind exchanges. The regulations are applicable to both real and personal property. However, the focus of this article is on deferred exchanges of real estate, the area where these regulations are likely to receive their most significant application.

The regulations are applicable to only one of the two types of deferred exchanges--the one in which the taxpayer acquires the replacement property after the transfer of the taxpayer's own property (relinquished property). By definition, they do not cover deferred exchanges in which the taxpayer acquires the replacement property before the transfer of the relinquished property.(1) These latter exchanges represent a significant number of deferred real estate transactions. In fact, many legal and real estate professionals advertise to serve as intermediaries in "reverse exchanges" or "reverse Starkers," despite knowing that their legal validity is unsettled.

Evolution of the Deferred Exchange

The nontaxable exchange provisions of Sec. 1031 represent a well-established planning technique for deferral of taxable gains on real estate. Under Sec. 1031, gains can be deferred when the taxpayer's property is exchanged for other property in a transaction that meets three basic requirements.

1. The reliquished and replacement properties must be held for productive use in trade or business or for investment.

2. The properties exchanged must be like kind.(2)

3. There must be a legitimate exchange of properties, as opposed to a sale and a separate unrelated purchase.(3)

Over the past 30 years, the courts have permitted increasingly greater latitude in meeting the third requirement. This period has seen like-kind real estate exchanges evolve from strictly two-party simultaneous transactions to include complex exchanges involving multiple parties and multiple properties packaged in a series of transactions that close at different times.

Legal precedent for deferred exchanges was first established in the Ninth Circuit case of Starker.(4) In Starker, the court recognized that the transactions involving the relinquished and the replacement properties could close at different times. Despite this legal recognition that a deferred exchange was an acceptable tax deferral technique, uncertainty followed the Starker decision on the form, structure and timing of these exchanges.

The Starker decision was codified by the Deficit Reduction Act of 1984 (DRA), which also resolved some of the timing questions left by the case.(5) The DRA required that the potential replacement properties be identified within 45 days and that the exchange be completed within 180 days after the transfer of the relinquished property.(6) By enacting these rules, the DRA limited statutory authorization of deferred exchanges to those in which the taxpayer transfers property and subsequently receives replacement property. This type of exchange is commonly known as a Starker exchange. The DRA did not specifically address the status of reverse exchanges.

The regulations answer many questions about the form and structure of Starker exchanges but continue to be silent on reverse exchanges. There remains today no clear, direct congressional, administrative or judicial support for deferred reverse exchanges. There is also nothing to prohibit them.

This lack of guidance has resulted in contrary views among tax professionals regarding the legal validity of reverse exchanges. Some practitioners argue that a reverse exchange can never qualify a like kind under Sec. 1031. They conclude that the purchase of replacement property and the subsequent sale of the taxpayer's own property are two distinct transactions, each having its own separate tax consequence. They interpret the definition of deferred exchanges in the DRA as an attempt by Congress to exclude the reverse exchange and further argue that the IRS had the opportunity to approve of such exchanges in the regulations, but declined. The IRS position is that "the deferred exchange rules of section 1031(a)(3) do not apply to reverse-Starker transactions. Therefore, the final regulations . . . do not apply to reverse-Starker transactions. However, the Service will continue to study the applicability of the general rule of section 1031(a)(1) to these transactions."(7)

Other practitioners believe that a reverse exchange is valid like-kind exchange. However, among these practitioners there are two arguments as to why these exchanges are viable. One view holds that the basic validity of reverse exchanges flows from the principle of the Starker holding--that title to the relinquished property can pass to the buyer at a different time than title to the replacement property passes to the seller. Proponents of this view argue that even though the order of the transactions in Starker is different, there is no language in the case that excludes application of the holding to a properly structured reverse exchange. They further contend that providing administrative or judicial sanctioning of reverse exchanges is consistent with the general attitude of the courts that "[t]axpayers have been allowed wide latitude in structuring . . . [these] transactions."(8)

The authors concur with this view and also believe that the reasoning of cases involving simultaneous and Starker-type deferred exchanges provide a model for determining when an exchange, including a reverse exchange, is a valid like-kind exchange. There is, however, a second view of reverse exchanges that holds they are not deferred but, rather, are simultaneous exchanges. This article will discuss both practitioner viewpoints.

Types of Reverse Exchanges

A reverse exchange occurs when the taxpayer intends to make a like-kind exchange but, for some reason, acquires the replacement property before selling the relinquished property. The taxpayer may fear that replacement property vital to his business will be sold to another party. Perhaps the reverse exchange is the result of the buyer backing out of a previously arranged simultaneous exchange or the seller forcing a premature closing on the replacement property. In any event, the taxpayer completes the replacement leg of the exchange first. This is accomplished by using the buyer of the relinquished property or an outside party, known as an accommodator or intermediary, to purchase and hold title to the replacement property. At a later date in a separate transaction, the relinquished property is transferred to the buyer and the taxpayer receives the replacement property.

The taxpayer typically provides a loan to the accommodator to fund the down payment on the replacement property. The property is usually financed with an assumable mortgage. When the taxpayer receives the replacement property, he assumes the mortgage.

There are three types of reverse exchanges:

* Type 1: "Reverse regs." exchange.

* Type 2: "Biggs"(9) reverse exchange.

* Type 3: "Simple" reverse exchange.

The first two types rely on an accommodator or intermediary who is hired to complete the exchange. The first transaction under these two approaches is the same. It is the separation in time between the first and second transaction that creates the deferred exchange.

The transactions for the "reverse regs." exchange (Type 1) are:

* First transaction: The accommodator acquires the replacement property from the seller. The accommodator holds title to the replacement property while the taxpayer seeks a buyer for his relinquished property.

* Second transaction: At a later date, after identifying the buyer, the accommodator exchanges the replacement property for the taxpayer's relinquished property. The accommodator immediately sells the relinquished property to the buyer.

Using a "Biggs" reverse exchange (Type 2), the second transaction becomes:

* Second transaction: At a later date, the buyer purchases the replacement property from the accommodator. The buyer then exchanges the replacement property for the taxpayer's relinquished property.

A reverse exchange can also be affected without an accommodator. In a "simple" reverse exchange (Type 3), the buyer serves a dual role, facilitating the transactions for the taxpayer and purchasing the relinquished property. A "simple" reverse is the rarest of the three types of reverse exchanges. It will most likely be the result of a simultaneous exchange that has unraveled.

The flowchart on page 574 illustrates the three types of reverse deferred exchanges.

The Agency Problem and the Regulations

It can be argued that many of the concepts in the regulations that resolve questions about the proper form and structure of Starker exchanges should be applied to reverse exchanges. Notwithstanding this argument, it should be recognized that many of the same uncertainties that plagued deferred exchanges before the regulations were issued still exist today for reverse exchanges.

The major threat to reverse exchanges is the risk that the taxpayer-accommodator relationship might be characterized by the courts as one of principal and agent. If the accommodator is treated as the taxpayer's agent, the purchase of the replacement property by the accommodator would be tantamount to a purchase by the taxpayer, defeating the like-kind exchange. The taxpayer would be deemed to be in constructive receipt of the replacement property.

One of the most important results of the regulations is the creation of a safe harbor that approves the use of certain "qualified intermediaries" or accommodators. If the accommodator meets the guidelines set out in the safe harbor, determinations of whether there is a valid exchange or constructive receipt will be made without regard to the accommodator's potential status as the taxpayer's agent.

Regs. Sec. 1.1031(k)-1(g)(4)(i) states:

In the case of a taxpayer's transfer of relinquished property involving a qualified intermediary, the qualified intermediary is not considered the agent of the taxpayer for purposes of section 1031(a). In such a case, the taxpayer's transfer of relinquished property and subsequent receipt of like-kind replacement property is treated as an exchange, and the determination of whether the taxpayer is in actual or constructive receipt of money or other property before the taxpayer actually receives like-kind replacement property is made as if the qualified intermediary is not the agent of the taxpayer. (Emphasis added.)

This regulation is important in two ways. First, it recognizes the potential threat to deferred exchanges presented by the agency issue. Second, it diffuses that threat for Starker exchanges constructed within the guidelines of the regulations. The safe harbor can be viewed as, in effect, creating a special agency class that in and of itself will not disqualify an exchange from like-kind treatment.

It can be argued that if the agency issue can be disregarded for Starker exchanges, it should also be disregarded for reverse-Starkers. In fact, the role of the accommodator in a "reverse regs." (Type 1) exchange falls comfortably within the definition of a "qualified intermediary" as contained in the safe harbor under Regs. Sec. 1.1031(k)-1(g)(4)(iii).

A qualified intermediary is a person who . . .[i]s not the taxpayer or a disqualified person . . . and . . . [who] [e]nters into a written agreement with the taxpayer . . . and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer. Because the qualified intermediary must transfer both the replacement and relinquished properties, under a strict construction of the definition, the "Biggs" (Type 2) and "simple" (Type 3) reverse exchanges would be excluded.

* When is the agency issue really important? The agency issue remains a threat to exchanges left unprotected by the regulations, including reverse exchanges. This threat, however, appears to be reduced by a series of Sec. 1031 cases that has allowed extensive involvement by the taxpayer without finding an agency relationship with the accommodator.(10) In fact, the favorable treatment accorded to qualified intermediaries in the regulations is probably the result of these cases. Although the agency issue has not been adequately adjudicated, there is considerable precedent to support the conclusion that, even if the regulations are not extended to reverse exchanges, an agency relationship would not be found. These cases collectively provide a line of reasoning that deemphasizes the importance of the agency issue. What emerges is a model for determining when the "exchange" requirement (the third of the basic requirements of a like-kind exchange) is met for simultaneous and deferred exchanges, including reverse exchanges. According to this model, if three factors are present, the "exchange" requirement is fulfilled and the question of whether the accommodator is the taxpayer's agent is not relevant. The three factors are:

1. There can be no constructive receipt by the taxpayer (measured without reference to an accommodator who holds money or property subject to substantial restrictions).

2. There must be proof of intent to effect a like-kind exchange.

3. There must be contractual interdependence or an integrated exchange plan.

All three of these factors are present in a Starker exchange if the taxpayer adheres to the guidelines set out in the regulations. However, in a reverse exchange there are inherent difficulties associated with each of these factors that are not present in either simultaneous or Starker exchanges.

Constructive Receipt

Perhaps the most controversial legacy remaining from the Starker decision is its interaction with the constructive receipt doctrine. In Starker, a legitimate exchange was found despite the taxpayer's right to receive cash at any time in lieu of like-kind property.(11) This portion of the Starker holding is inconsistent with other Sec. 1031 cases and the deferred exchange regulations. It is reasonable to expect that the constructive receipt doctrine would be applied to reverse exchanges.

In a reverse exchange, the problem of constructive receipt is different from a Starker exchange. In a Starker exchange, the concern is whether the taxpayer has control of the proceeds from the sale of the relinquished property during the period before the purchase of the replacement property. The taxpayer's access to the replacement property is the issue in a reverse exchange.(12) Because vesting title to the replacement property in the taxpayer would constitute actual receipt, an accommodator or other party is necessary to facilitate the reverse exchange. If the facilitating party takes title but the taxpayer is granted beneficial use of the property, the constructive receipt doctrine would seem to be violated. Even if use is extended under what appears to be a valid lease agreement, the constructive receipt issue is still present. To avoid the possibility of invalidation of the exchange, the taxpayer should not have access to the replacement property until the exchange has been finalized or the exchange period has lapsed.

Avoiding constructive receipt may be a problem when extensive management services are required. A taxpayer who plans to manage the replacement property may be faced with the dilemma of what to do during the period of ownership by the accommodator. Adequate third-party management may be difficult to obtain for such a short period and the accommodator may not be prepared to provide these services. It may be possible for the taxpayer to render consultation or limited management services under a management services agreement, without violating the constructive receipt doctrine. This option should be pursued only with careful tax planning.

Intent

In establishing intent, the courts have traditionally looked to the actions of the taxpayer. In court cases involving simultaneous and Starker-type deferred exchanges, the taxpayer has usually established intent through the negotiation process conducted with an arm's-length party to the exchange, specifically, the buyer and/or the seller.(18) Normally in these discussions, the taxpayer indicates a desire to exchange rather than to sell the property. Negotiations may be conducted indirectly through the taxpayer's agent or through the accommodator. They culminate in an exchange agreement (now mandatory under the regulations in Starker exchanges(14)) and in purchase and sale contracts that specifically refer to the exchange and the exchange agreement. The negotiation process, exchange agreement and contracts provide a network of documentation that allows the taxpayer to establish an intent to exchange either directly or indirectly with someone who is truly an arm's-length party to the transactions. In a reverse exchange, intent can be established in a similar manner with similar documentation.

Since intent is ultimately a question of fact, other collateral evidence may be used to strengthen the taxpayer's contention that an exchange is intended. For example, evidence or prior efforts to consummate a simultaneous exchange of the same properties should be relevant, as should the choice of an experienced, unrelated professional accommodator to act as an intermediary.

Not only must the weight of the evidence support an intent to effect an exchange, but the timeliness of that evidence is important. In a reverse exchange, it is crucial that an intent to exchange be clearly established by the closing of the accommodator's purchase of the replacement property.(15) If the evidence of an intent to exchange arises after title to the replacement property passes to the accommodator, the exchange may also be found to lack the last necessary ingredient--contractual interdependence or an integrated exchange plan.

Contractual Interdependence/Integrated Exchange Plan

Contractual interdependence requires that the successful completion of contracts governing the transfer of the relinquished property and the transfer of the replacement property be directly interdependent. If one contract fails the other would also fail. If the two contracts are not interdependent, they will be viewed as two sales contracts and not an exchange.(16)

In Biggs, the Fifth Circuit substituted another standard for contractual interdependence--that of an "integrated exchange plan."(17) In developing this standard, the court adopted the "step transaction" doctrine articulated by prior courts. This doctrine views the various steps of an exchange in light of the exchange objective. When these steps are, in effect, "a series of transactions designed and executed as parts of a unitary plan to achieve an intended result, [the plan] will be viewed as a whole . . . . The series of closely related steps [will be viewed as] merely the means by which to carry out the plan and will not be separate."(18)

The current standard is probably best articulated by the Tax Court in Garcia.

Contractual interdependence, in a technical sense, is not prerequisite to a finding of an exchange. Although the presence of direct dependence is convincing, an exchange may still be demonstrated in its absence.

The infusion of the "step-transaction" doctrine into the realm of section 1031 was clear in Biggs . . ., which set forth the standard of the "integrated plan" in determining whether a qualified exchange had occurred.(19) Cases omitted.)

In a deferred exchange and especially in a reverse exchange, this liberalized standard is vital. Most sellers in a reverse exchange will probably be unwilling to have the sale of the replacement property dependent on the taxpayer's subsequent sale of the relinquished property. Sellers will be reluctant to enter into an exchange contract that might subsequently be rescinded. The integrated exchange plan requirement can be met through a properly executed exchange agreement with the accommodator if the contracts with the seller and buyer reflect and reference the exchange and that agreement.

The three factors discussed above provide a judicially supported approach for determining when the "exchange" requirement has been met. Provided the other basic requirements of a like-kind exchange are also met, a reverse exchange should be found to be a viable like-kind exchange. If a taxpayer engages in a Starker exchange that falls outside of the safe harbors, the presence of these three factors should also be sufficient to validate that exchange as like kind.

Different Views of Biggs

Practitioners who believe reverse exchanges fall within the ambit of Sec. 1031 generally cite Biggs as primary support. Biggs desired to exchange a farm located in Maryland for other farmland. After locating a willing buyer for his property, but before entering into a contract with that buyer, Biggs located suitable replacement property in Virginia that he contracted to purchase on behalf of an unidentified syndicate. The "syndicate" was later identified as a title company owned by his attorney that would act as accommodator in the exchange. Subsequently, the title company purchased the Virginia farmland. Although the down payment was advanced by Biggs and the title company used none of its own funds to purchase the property, it did assume some minor risk with regard to mortgage liabilities and by taking title. A few weeks later, the title company sold a contract interest in the Virginia property to the buyer. The buyer subsequently traded its contract interest in the Virginia property to Biggs for the contract rights to purchase Biggs' Maryland property. About three months later, the exchange was completed with the transfer of titles. The Fifth Circuit, in upholding the Tax Court decision, concluded that there was a valid like-kind exchange and that the title company-accommodator was not an agent of the taxpayer.

The ability to understand and apply the holding of Biggs is diminished by both the court's failure to adequately address the deferred exchange and agency issues and by a complicated set of facts. One commentator offers the following analysis: "The actual fact situation in Biggs was so unbelievably complex that it is unclear whether the Tax Court (or the Fifth Circuit) actually recognized the significance of some of its holdings . . . ."(20)

Among proponents of reverse exchanges, two distinct views of Biggs and of reverse exchanges have emerged. The first view interprets the fact pattern differently than the Fifth Circuit and concludes that Biggs really represents a deferred reverse exchange (Type 2). Although the authors concur with this view, it is important to recognize that the Fifth Circuit appears to have rejected this conclusion. In this regard, the timing of the Biggs and Starker decisions is illuminating. The Tax Court opinion in Biggs (1978) was rendered before the Ninth Circuit opinion in Starker (1979), which, in turn, preceded the Fifth Circuit opinion in Biggs (1981). The Fifth Circuit, in citing Starker on an unrelated point, stated that "we need not, and do not, express either acceptance or disapproval of the ultimate holding in Starker."(21)

In choosing to reject the deferred exchange rationale, the Fifth Court appears to have concluded that Biggs was, instead, a simultaneous exchange between the buyer, taxpayer and an "independent" accommodator-seller. This conclusion has given rise to a second view of reverse exchanges--that reverse exchanges are simultaneous exchanges. This view holds that the accommodator is an independent party that has stepped into the shoes of the seller, creating a simultaneous exchange. By acting in this capacity, the accommodator can "warehouse" the replacement property for an unlimited period of time--until the exchange is completed.(22) It is important to note that this view of reverse exchanges appears to be the prevailing view among practitioners advocating their validity.(23)

The "Independent" Accommodator

Sustaining the view that reverse exchanges are simultaneous should require a court to find that the accommodator is an independent principal in the exchange and not the agent of the taxpayer. Because the accommodator in reverse exchanges takes title to the replacement property, it can be argued that he acts more as a principal than does his counterpart in Starker exchanges. In most situations, an accommodator in a Starker exchange will not take title to either the relinquished or the replacement properties. This is accomplished through "direct deeding," a common practice in multi-party exchanges.(24) Using direct deeding, title to the relinquished property is passed directly from the taxpayer to the buyer and title to the replacement property moves from the seller to the taxpayer. Title does not pass through the accommodator. Instead, the accommodator receives and transfers contract rights to the respective properties. In a reverse exchange, direct deeding is used to convey the relinquished property but, unlike Starker exchanges, title to the replacement property is held by the accommodator.

If the accommodator holds title to the replacement property, he may assume risk for personal injury or environmental claims. The accommodator may also be at risk for possible loss if the property declines in value and may have the right to appreciation if the value increases. As in Biggs, there may be some risk for mortgage liabilities. Although assumption of risk is not conclusive, it gives the accommodator a strong argument that its actions are those of a principal.

Most accommodators, however, are unwilling to be exposed to "unnecessary" risk. Usually, there are clauses in the exchange agreement that provide that the taxpayer will reimburse the accommodator in the event of claims against the property or if there is a market decline. As in Biggs, there may also be a provision allowing the accommodator to terminate the agreement at any time.(25) Often the taxpayer is required to pay for insurance that virtually eliminates risk to the accommodator.

Assumption of risk is not the only factor bearing on whether the accommodator is an independent party. Another important factor is the extent to which the taxpayer has control over the property management decisions of the intermediary. The more control the taxpayer has over decisions made while the accommodator is in possession of the property, the less the accommodator appears to be acting as a principal. In addition, other factors (such as the prior relationship of the parties) may be considered by a court in determining whether the accommodator is an independent party or an agent of the taxpayer.(26)

The resolution of whether the accommodator is an independent party should be a function of all the facts. Two important factors should be the level of risk assumed by the accommodator and the extent of the taxpayer's control. In today's financial environment, prudent accommodators are usually reluctant to assume any unnecessary risk and most taxpayers are probably unwilling to leave major decisions regarding the property in the hands of the intermediary. Given this environment, a court adjudicating the agency issue may find the "independence" of the accommodator and the view that reverse exchanges are simultaneous difficult to sustain.

It is also difficult to align the logic supporting simultaneous reverse exchanges with the rationale of Starker and the regulations. If reverse exchanges are simultaneous, why are Starker transactions not also simultaneous? If the accommodator in Biggs is truly an independent party, is it not reasonable to also conclude that most, if not all accommodators are, by law independent parties and never agents of the taxpayers?(27) Clearly, through the deferred exchange regulations, the Service rejects both of these notions.

Applying the Regulations to Reverse Exchanges

Whether reverse exchanges are viewed as deferred or simultaneous is important because of potential applications of the statutes and regulations governing deferred exchanges. If reverse exchanges are simultaneous, these rules do not apply. This means, for example, that the accommodator may hold the replacement property for an unlimited period of time without violating Sec. 1031.

On the other hand, in a deferred reverse exchange, the length of time between the acquisition of the replacement property by the accommodator and the completion of the exchange could be a major factor in determining its legal validity. Even though the court in Starker allowed a time period that could have been as long as five years, the 180-day exchange period subsequently enacted by Congress for Starker exchanges may also be determinative for reverse-Starkers.

It seems reasonable that the Code and regulations should apply to deferred reverse exchanges when concepts serve similar purposes for both types of deferred exchanges. Some changes or rewording would be required to reflect the basic differences inherent in a reverse exchange.

Conclusion

The status of reverse like-kind exchanges is uncertain because Congress failed to include them in the definition of deferred exchanges in the DRA. Recent regulations for deferred exchanges have not clarified the situation. Today, considerable confusion surrounds reverse exchanges. Not only do practitioners disagree about the validity of reverse exchanges, but those practitioners who support the validity are divided about their reasons why. The majority view appears to be that reverse exchanges are simultaneous exchanges with the accommodator acting as an "independent" seller in the exchange. The authors believe that extending the Starker rationale to include reverse exchanges as deferred exchanges is the better view. Under this approach, it is necessary that the exchange be structured properly. In addition to meeting the basic requirements of a like-kind exchange:

* There must be no constructive receipt of the replacement property by the taxpayer.

* There must be evidence of intent to effect a like-kind exchange.

* There must be contractual interdependence or an integrated exchange plan.

Taxpayers engaging in reverse exchanges should be aware of the special problems that exist with regard to each of these areas. Taxpayers should also consider the likelihood that even courts that view reverse exchanges with favor are likely to apply some of the restrictive Code provisions and the deferred exchange regulations. Most important, taxpayers should realize that while there is strong logic sustaining reverse exchanges, the status of reverse exchanges as a planning technique remains in doubt. This uncertainty will continue until there is direct judicial, congressional or administrative intervention on this issue. There is strong sentiment supporting legislative and/or administrative clarification of the viability of reverse exchanges. (1) Regs. Sec. 1.1031(k)-1(a). (2) Sec. 1031(a)(1). Generally, any type of real estate, whether improved or unimproved, may be traded for other real estate. In 1989, Congress limited the definition of like kind by prohibiting exchanges of domestic for foreign real estate and vice versa. See Sec. 1031(h). (3) See June Pinson Carlton, 385 F2d 238 (5th Cir. 1967)(20 AFTR2d 5376, 67-2 USTC [paragraph] 9625); Emsy H. Swaim, 651 F2d 1066 (5th Cir. 1981)(48 AFTR2d 81-5653, 81-2 USTC [paragraph] 9575); and Mark T. Maxwell, S.D. Fla., 1988 (62 AFTR2d 88-5406, 88-2 USTC [paragraph] 9560). (4) T.J. Starker, 602 F2d 1341 (9th Cir. 1979)(44 AFTR2d 79-5525, 79-2 USTC [paragraph] 9541). (5) PL 98-369. See also Regs. Sec. 1.1031(k)-1(b). (6) Sec. 1031(a)(3). (7) Preamble, TD 8346 (4/25/91). (8) See Swaim, note 3, at 81-2 USTC 87,914-87,915. See also Starker, note 4, at 79-2 USTC 87,970; Franklin B. Biggs, 632 F2d 1171 (5th Cir. 1980)(47 AFTR2d 81-484, 81-1 USTC [paragraph] 9114), aff'g 69 TC 905 (1978), at 913; and Maxwell, note 3, at 88-2 USTC 85,741. (9) The designation comes from Biggs, id. (10) See James Alderson, 317 F2d 790 (9th Cir. 1963)(11 AFTR2d 1529, 63-2 USTC [paragraph] 9499) (acquisition of the replacement property); 124 Front Street, 65 TC 6 (1975), acq. 1976-2 CB 2 (advance of funds); J.H. Baird Publishing Co., 39 TC 608 (1962) (supervision of improvements to replacement property); and Biggs, note 8 (use of a disqualified person as accommodator, payment of closing costs and retention of growth factor). (11) See Starker, note 4, 9th Cir., at 79-2 USTC 87,972. For a further discussion, see Sommers, "Like-kind Prop. Regs. Create New Safe Harbors While Addressing Complexities," 19 Taxation For Lawyers 80 (Sept./Oct. 1990), at 84. (12) See Est. of Alexander S. Bowers, 94 TC 582 (1990), and Garbis S. Bezdjian, 845 F2d 217 (9th Cir. 1988)(61 AFTR2d 1105, 88-1 USTC [paragraph] 9306). See also Maxwell, note 3, and Swaim, note 3, for an analysis of "would be" Starker/simultaneous exchanges. (13) See Biggs, note 8; Earlene T. Barker, 74 TC 555 (1980); and Philip M. Garcia, 80 TC 491 (1983), acq. 1984-1 CB 1. (14) See Regs. Sec. 1.1031(k)-1(a) and (g)(4)(iii). (15) See Arthur E. Brauer, 74 TC 1134 (1980); Alderson, note 10; and Leslie Q. Coupe, 52 TC 394 [1969], acq. in result only 1970-2 CB xix. In these cases the taxpayer originally intended to sell his property but later decided, before title passed, that an exchange was preferable. (16) See Carlton, note 3; Maxwell, note 3; Edward C. Lee, TC Memo 1986-294; Est. of Bowers, note 12; and Bezdjian, note 12. Even if the two escrows close concurrently there may not be contractual interdependence. In Joyce M. Allen, TC Memo 1982-188, the court found that the closing of each escrow was not contingent on the other. See also Garcia, note 13, at 503, which distinguishes Allen. (17) Biggs, note 8, 5th Cir., at 81-1 USTC 86,063. (18) Biggs, id., quoting from Redwing Carriers, Inc., 399 F2d 652 (5th Cir. 1968) (22 AFTR2d 5448, 68-2 USTC [paragraph] 9540), at 68-2 USTC

87,891, quoting from Kanawha Gas & Utilities Co., 214 F2d V3

685, 691 [5th Cir. 1954) (45 AFTR 1805, 54-2 USTC [paragraph] 9508). (19) Garcia, note 13, at 502. (20) Solomon, "Multi-Party Exchanges and Other Recent Developments in Section 1031," Thirty-Third Tax Institute University of Southern California Law Center, New York: Matthew Bender, 1981, at 1-105. (21) Biggs, note 8, 5th Cir., at 81-1 USTC 86,063. (22) See Blackwell, "Warehousing the 1031 Replacement Property," 10 First Tuesday 9 (Nov. 1988). See also Santucci, Real Property Exchanges; 1031 and Other Tax Saving Strategies, Santucci Publications, 1990, at 59--60; and Wulff, "Tax Tips: Warehousing Gone Awry," 13 First Tuesday 26 (Sept. 1991). (23) A cooperative seller can help the taxpayer avoid the uncertainties of reverse exchanges. If the seller is willing to hold title to the replacement property until the relinquished property is sold, the exchange can be structured as a simultaneous exchange. (24) Rev. Rul. 90-34, 1990-1 CB 154. This ruling recognized the long-standing practice of direct deeding, first approved in W.D. Haden Co., 165 F2d 588 (5th Cir. 1948) (36 AFTR 670, 48-1 USTC [paragraph] 9147). See also Regs. 1.1031(k)-1(g)(8), Example 4. (25) Biggs, note 8, 5th Cir., at 81-1 USTC 86,059. (26) Drucker, "Reverse Tax-Deferred Exchanges," 12 CEB Real Property Law Reporter 233 (Nov. 1989), at 238. (27) Those practitioners who argue that accommodators are never agents of the taxpayer rely on a series of cases involving simultaneous exchanges that found the accommodator was not the taxpayer's agent. See Biggs, note 8; Brauer, note 15; and Baird Publishing Co., note 10. Also, in Coupe, note 15, at 406--407, the accommodator was found to be the agent of the buyer rather than the taxpayer.

Ross Bengel, MS, J.D., CPA Assistant Professor of Accounting College of Business Administration Loyola Marymount University Los Angeles, Cal. George A. Dasaro, MS, CPA Professor of Accounting College of Business Administration Loyola Marymount University Los Angeles, Cal.