Section 1031 of the Internal Revenue Code generally provides that the exchange of certain types of property will not result in the current recognition of gain or loss. Under Code Section 1031, no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment.
A recently released IRS Revenue Procedure may afford taxpayers a greater opportunity to engage in like-kind exchanges.
In Revenue Procedure 2000-37, the IRS created a new safe-harbor giving some comfort to taxpayers who engage in "parking" arrangements in an attempt to facilitate reverse like-kind exchanges without recognition of gain or loss under Section 1031. Such transactions are necessary since Treasury Regulation Section 1031(a)(3) provides that the deferred exchange rules under Code Section 1031 do not apply in reverse like-kind exchanges (i.e., the replacement property is acquired prior to the time that the relinquished property is transferred).
An example of a reverse like-kind exchange accomplished through a "parking" arrangement is as follows:
An accommodation party acquires the replacement property desired by the seller who wishes to defer tax through a like-kind exchange and immediately exchanges such property with the seller for the property that the seller wishes to relinquish in the exchange. The accommodation party then holds the relinquished property until the taxpayer arranges for a transfer of such property to the ultimate transferee. The seller attempts to structure such transaction so that the accommodation party has enough of the benefits and burdens of ownership to be treated as the owner of property for federal income tax purposes.
See Revenue Procedure 2000-37.
This is especially good news for those taxpayers who desire to enter into like-kind exchanges when the direct exchange of like-kind property is not possible and taxpayers must obtain title to the replacement property prior to the transfer of the relinquished property to the ultimate transferee.
Until recently, taxpayers who engaged in reverse exchanges had no guidance with regard to whether the IRS would respect such arrangements or whether the IRS could disregard the accommodation party and thus treat the arrangement as a taxable sale. Effective September 15, 2000, if a taxpayer utilizes such "parking" arrangements where the property is held pursuant to a "qualified exchange accommodation arrangement" (QEAA) in accordance with Revenue Procedure 2000-37, then the IRS will not challenge the qualification of property as either "replacement property" or "relinquished property" (as defined in Treasury Regulation Section 1.1031(k) - 1 (a)) or the treatment of the titleholder as the beneficial owner of the property. Moreover, the IRS recognizes that under certain circumstances "parking" arrangements can also be accomplished outside the above safe harbor.
