Reverse like Kind Exchange Approved where Two Related Parties Used the Same Swap Facilitator

In PLR 201242003, the IRS permitted tax deferral under Section 1031 even though the Exchange Accommodation Titleholder entered into Qualified Exchange Accommodation Arrangements with more than one entity, including entities related to the taxpayer, who both had a bona fide intent to utilize a reverse exchange format to defer capital gain taxes.
 
PLR 20122003 notes that Rev. Proc. 2000-37 does not prohibit an Exchange Accommodation Titleholder (EAT) from functioning as an such to more than one taxpayer under multiple Qualified Exchange Accommodation Arrangements (QEAA) for the same parked exchange property.
 

Under Code Sec. 1031, gain or loss isn't recognized currently on the exchange of property held for productive use in a trade or business or for investment for property of like kind that will be held for productive use in a trade or business or for investment. The replacement property must be identified within 45 days after the date that the property given up in the exchange is relinquished. Additionally, the taxpayer must actually receive the replacement property no later than (a) 180 days after the date that the property given up in the exchange is relinquished, or (b) the due date (with regard to extensions) for the taxpayer's return for the year in which the relinquished property is given up, whichever is earlier. (Code Sec. 1031(a)(3))

When a two-way (or direct) exchange of like-kind property isn't possible, the solution often is a multiparty deferred exchange. In a regular deferred exchange, Seller gives up his property first. Often, however, the replacement property must be received first, before Seller has transferred his property. In this situation, the transaction is structured as a reverse multiparty like-kind exchange.

In Rev Proc 2000-37, 2000-2 CB 308, IRS said it wouldn't challenge the qualification of property as either replacement or relinquished property, or the treatment of the exchange accommodation titleholder as the beneficial owner of either type of property, if the property is held in a “qualified exchange accommodation arrangement.”

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

1. Qualified indicia of ownership (QIO) of the property are held by the EAT from the date of acquisition by the EAT until the property is transferred to the taxpayer as replacement property or to someone other than the taxpayer or a disqualified person as relinquished property. Among other conditions, the EAT can't be the taxpayer or a disqualified person under Reg. § 1.1031(k)-1(k)). QIO means legal title, 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 that is disregarded as an entity separate from its owner for 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. When the QIO of the property is transferred to the EAT, it is the taxpayer's bona fide intent that the property represent either replacement property or relinquished property in an exchange intended to qualify for Code Sec. 1031 treatment.
3. No later than five business days after QIO of the property are transferred to the EAT, the taxpayer and the EAT enter into a written QEAA providing that: (a) the EAT is holding the property for the benefit of the taxpayer to facilitate an exchange under Code Sec. 1031 and Rev Proc 2000-37; (b) both parties agree to report the acquisition, holding, and disposition of the property as provided in Rev Proc 2000-37; and (c) the EAT will be treated as the beneficial owner of the property for all federal income tax purposes. Both parties must report the federal income tax attributes of the property on their federal returns in a manner consistent with this agreement.
4. No later than 45 days after the transfer of QIO of the replacement property to the EAT, the relinquished property is properly identified in a way consistent with the identification requirements in Reg. § 1.1031(k)-1(c). The taxpayer may properly identify alternative and multiple properties under the rules of Reg. § 1.1031(k)-1(c)(4).
5. No later than 180 days after the transfer of QIO of the property to the EAT, (a) the property is transferred (either directly or indirectly) through a qualified intermediary (as defined in Reg. § 1.1031(k)-1(g)(4)) to the taxpayer as replacement property; or (b) 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.

The PLR concludes that may enter into QEAAs with more than one entity, including persons related to Taxpayer, each of which has a bona fide intent to acquire the same property as the replacement property for their respective exchanges. Rev Proc 2000-37 , does not prohibit an accommodation party from serving as an EAT to multiple taxpayers under multiple and simultaneous QEAAs for the same parked property. The fact that Related Party's QEAA failed because Taxpayer timely acquired Property under its QEAA using the same EAT does not invalidate Taxpayer's QEAA.

 

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