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Reverse-Starker like-kind property exchanges.

The preamble to TD 8346, which published the final like-kind exchange and deferred exchange regulations on Apr. 25, 1991, explained that the IRS had requested comments on whether reverse-Starker transactions should qualify for tax-free exchange agreement treatment under any provision of Sec. 1031. A reverse-Starker exchange is a transaction in which the taxpayer receives the replacement property prior to the date on which the taxpayer transfers the relinquished property.

The preamble notes that the Service had concluded that the deferred exchange rules in Sec. 1031(a)(3) and Regs. Sec. 1.1031(k)-1 did not apply to reverse-Starker transactions. However, these transactions might qualify under the general rules of Sec. 1031(a)(1) or (a)(3).

The author understands that some months ago the IRS considered issuing guidance on reverse-Starker transactions in the form of a revenue ruling, perhaps addressing a situation in which the transfer of the relinquished property was subject to governmental review or approval so that the timing of the transaction was not within the control of any of the parties to the transaction. This ruling did not materialize.

More recently, a speaker from the U.S. Treasury Tax Legislative Counsel office suggested that the Treasury might prefer guidance in the form of additional regulations, which would limit nontaxable exchange treatment to reverse transactions under specified circumstances. It was noted that the Treasury position--that reverse-Starker transactions could never qualify as Sec. 1031 exchanges in any situation--might not prevail in litigation. In the meantime, the Treasury Department 1992 Business Plan dated May 15, 1992 included a project under Tax Accounting for coordination of the deferred like-kind exchange provisions with the Sec. 453 installment reporting rules. However, this project may not reach reverse-Starker transactions if the drafter of the Business Plan follows the analysis of TD 8346 that a reverse-Starker transaction does not constitute a deferred exchange.

A careful tax adviser may, depending on the circumstances, recommend that an escrow arrangement be used so that the taxpayer will not receive the replacement property before transferring the relinquished property. From lames C. Godbout, CPA, Washington, D.C.
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Author:Godbout, James C.
Publication:The Tax Adviser
Article Type:Brief Article
Date:Jan 1, 1993
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