Tax Alert: Supreme Court Declines Review of Like-Kind Exchange Related-Party Rule
3/03/2010
The Supreme Court recently declined to review a Ninth Circuit holding that a taxpayer could not avoid the Code Sec. 1031 like-kind exchange related-party rule by using a qualified intermediary (QI).
Code Sec. 1031 allows for a current deferral of gain or loss on the exchange of like-kind property held for productive use in a trade or business or for investment property if certain statutory identification and replacement period requirements are met.
However,
IRC Sec. 1031(f) places special requirements on like-kind exchanges between related parties. If property received in a like-kind exchange between related parties is disposed of within two years after the date of the last transfer in the exchange, any gain or loss not recognized on the original exchange must be recognized as of the date the property is disposed of.
QIs may be used to structure like-kind exchanges by
expressly agreeing under the terms of an exchange agreement to acquire the relinquished property from the taxpayer, transfer the relinquished property to the other party, acquire the replacement property, and transfer the replacement property to the taxpayer.
In 2009, the Ninth Circuit agreed with a Tax Court case (Teruya Brothers), concluding that using a QI in a like-kind exchange between related parties will yield the same result as if the transaction was arranged without the use of a QI in applying IRC Sec. 1031(f). The Supreme Court has denied reviewing the Ninth Court case.
Related IRS letter rulings conclude that a deferred like-kind exchange between two related parties, using a qualified intermediary, could result in nonrecognition treatment for both parties as long as they held the replacement property for the required two-year period.
In summary, like-kind exchanges between related parties will trigger recognition of gain if exchange properties are disposed of within two years regardless as to whether or not a qualified intermediary is used to facilitate the exchange.
For further information or clarification on this or other like-kind exchange-related matters, please contact Joseph A. Tighe, CPA, a J.H. Cohn tax partner, at 973-618-6243, or your J.H. Cohn engagement partner.
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