Posted by JHyre in TexOhio on July 31, 2001 at 09:55:43:
Transfers Without Proper Notice Don’t Qualify for Like-Kind Exchange
In technical advice, the Service has determined that a couple’s transfers of properties to a qualified intermediary did not comply with the safe harbor
requirements and failed to qualify as a tax- deferred like-kind exchange under section 1031.
A couple engaged in a series of complex transactions that involved the disposition of three pieces of property in exchange for replacement property. In doing so, the couple used a qualified intermediary for the transactions.
However, they did not directly assign the surrendered property to the qualified intermediary. Instead, the couple transferred the sales contract to the intermediary. Then, the property was deeded directly to the purchaser of the
surrendered property.
The Service explained qualified intermediary safe harbor rules of reg. section 1.1031(k)-1(g)(4) are “specific and exact.” If the requirements are not
met, then obtaining a tax-deferred exchange qualification is problematic. The couple, said the Service, didn’t give any actual or written notice to the purchasers of the assignments of the purchase contracts. Because of the couple’s noncompliance, the Service concluded, the transactions should be treated as a series of purchases and sales that are taxable under section 1001.
The Service also pointed out that there was no limitation on the couple’s rights to the proceeds of the surrendered property. Consequently, said the Service, the transactions did not qualify for like-kind exchange treatment and were nothing more than a series of interrelated sales and purchases of real property. TAM 200130001.
In short, the taxpayer’s advisor (if any) and the intermediary were sloppy. I’d bet money that the intermediary was a small, fly-by-night outfit…no experienced & credible intermediary would have missed such technicalities…it is WELL known that 1031 demands strict compliance with ALL of the requirements. The couple has strong case against the intermediary for malpractice.
Bottom line: You get what you pay for. So endeth the sermon!
John Hyre