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President Obama Signs Financial Reform Bill: a Good Start Toward Federal Regulation of Exchange Facilitators

July 21st, 2010 by Alexandra Hart

All States 1031 and the Federation of Exchange Accommodators (FEA), the nationwide §1031 Qualified Intermediary trade association, supports strong regulation of the QI industry.

The Federation of Exchange Accommodators (“FEA”) is pleased to announce that the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) was signed by President Obama today.

The Dodd-Frank Act authorizes the creation of a Bureau of Consumer Financial Protection to be housed within the Federal Reserve.  The Bureau is charged with regulating consumer financial products and services.  The new law requires the Director of the Bureau to conduct a study and propose legislation and/or regulations to protect consumers using exchange facilitators, also known as Qualified Intermediaries, who facilitate tax-deferred exchange transactions under Internal Revenue Code §1031.  The study and recommendations must be completed with 1 year after the new law takes effect, and a program or proposed regulations must be implemented within 2 years after the Director’s report.

The FEA, the trade association representing the exchange facilitator industry, believes that this is an important first step toward assuring comprehensive protection for all consumers. “The FEA especially thanks House Financial Services Committee Chairman Barney Frank and Rep. Mike Michaud and for proposing this provision in the financial reform bill.  We are enthusiastic about working with the Bureau of Consumer Financial Protection to develop regulations, especially with respect to the security of client funds held by exchange facilitators,” commented Suzanne Goldstein Baker, chairperson of the FEA’s Federal Legislative Committee.

FEA President David Gorenberg echoed this sentiment, “This is a great beginning.  However, there is much work to be done to achieve our goal of comprehensive federal regulation that will cover all exchange clients and transactions.”  During the legislative process, the FEA communicated to legislators its support for the bill, along with technical concerns that many transactions will not fit the definitional scope of the Consumer Financial Protection Act of 2010, incorporated within the Dodd-Frank Act, and the need for a broad solution.  “We are looking forward to working with the Director and the legislative sponsors to identify and suggest regulations or legislation that will not be limited to transactions solely involving individuals engaged in exchanges for ‘personal, family or household use,’” stated Ms. Goldstein Baker.  “The FEA will work to ensure that all taxpayers, regardless of whether they are individuals or business entities, benefit from the same mandatory safeguards that protect consumers,” added Mr. Gorenberg.

The FEA is a robust supporter of federal regulation of its industry to require prudent funds management standards and other protections for its clients.  In 2007 the FEA petitioned the FTC for regulatory oversight and submitted to it a comprehensive draft regulation.  The FTC denied the petition, opining that there was no evidence of pervasive fraud throughout the industry and thus, the burdens of regulation would outweigh the potential benefits. The FEA has since been actively involved in passing state legislation to regulate exchange facilitators.  The FEA drafted a “model law” which the states of California, Colorado, Maine, Nevada, Oregon, Virginia and Washington have adopted with slight variations. The FEA has also submitted to the Secretary of the Treasury and the Internal Revenue Service a proposed amendment to Treasury Regulations which would impose reasonable, understandable standards of prudent funds management requiring that funds held by Qualified Intermediaries be invested in a manner that maintains liquidity and preserves principal. 

For more information, please contact Alexandra Hart at All States 1031 toll free at (877)395-1031 ext. 217 or email AHart@AllStates1031.com

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New law just signed in New Hampshire affecting 1031 exchangers

July 14th, 2010 by Alexandra Hart

Breaking news from the Federation of Exchange Accommodators (FEA):

SB 483 signed into law in New Hampshire!nh-flag1

The FEA has received confirmation that the New Hampshire Governor has signed SB 483 into law in that state.  The new law amends prior law which would deprive taxpayers Section 1031 tax deferral on a state level if they purchased replacement property in the name of a new entity, notwithstanding that the acquiring entity was a disregarded entity.  The typical situation would be that in which a taxpayer was required by a lender or TIC sponsor to acquire a replacement property in the name of a new single member LLC.  The State of New Hampshire began disallowing exchange treatment on those transactions in 2008 and began to audit previously closed transactions as far back as 2004, without notice either to taxpayers or to the professionals in the industry.  The new law makes it clear that exchange treatment will not be affected by taking title in the new entity as long as the entity is a single member LLC, revocable trust or other entity which is disregarded for federal income tax purposes.  The amendment eliminates the “claw back” efforts to 2004. This ammendment is great news for New Hampshire residents or property owners who want to defer taxes with a 1031 exchange while protecting their assets in various pass through entities.

For more information, please contact Alexandra Hart at All States 1031 toll free at (877)395-1031 ext. 217 or email AHart@AllStates1031.com

 

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Posted in 1031 News, All States News, Tenants-in-Common

New law extending homebuyer credit closing date and IRS guidance on it

July 6th, 2010 by Moore McLaughlin

first-time-homebuyerOn July 2, 2010, President Obama signed into law H.R. 5623, the “Homebuyer Assistance Improvement Act of 2010″ (the Act), which provides first-time homebuyer credit relief to taxpayers who could not meet a key June 30, 2010 closing date. The Senate passed the Act on June 30, 2010, by unanimous consent, and the House of Representatives passed it on June 29 by a vote of 409-5. On the same day that it was signed into law, the IRS issued a reminder that special filing and documentation requirements apply in claiming the homebuyer credit, including the information that must be provided by those taxpayers eligible to take advantage of the new law relief.

The cost of the closing reprieve is fully offset by expanding the bad check penalty under Code Sec. 6657 to cover electronic payments, and providing for disclosure of prisoner return information under Code Sec. 6103(k)(10) to state prisons.

Relief for First-Time Homebuyers Unable to Meet Closing Deadline

The Code Sec. 36 first-time homebuyer credit generally is equal to the lesser of $8,000 ($4,000 for a married individual filing separately) or 10% of the principal residence’s purchase price. However, for purchases after November 6, 2009, a taxpayer (i.e., a “long-time resident”) may claim the homebuyer credit if he (and, if married, his spouse) maintained the same principal residence for any 5-consecutive year period during the 8-years ending on the date that the taxpayer buys the subsequent principal residence. The maximum allowable homebuyer credit for such taxpayers, who are treated as first time homebuyers for purposes of the first-time homebuyer credit, is $6,500 ($3,250 for a married individual filing separately), or 10% of the purchase price of the subsequent principal residence, whichever is less.

For purchases after Nov. 6, 2009:

… the first-time homebuyer credit phaseout range is between $125,000 and $145,000, and for those filing a joint return, it’s between $225,000 and $245,000.

… the first-time homebuyer credit cannot be claimed for a home if its purchase price exceeds $800,000; and

… a number of anti-abuse provisions apply. For example, dependents cannot claim the first-time homebuyer credit; a purchaser must be at least 18 years of age on the date of purchase; and the definition of a qualifying purchase for first-time homebuyer credit purposes is amended to exclude property acquired from a person related to the person acquiring the property or the spouse of the person acquiring the property, if married.

The first-time homebuyer credit applied to a principal residence bought before May 1, 2010 and, under pre-Act law, to a principal residence bought before July 1, 2010, by a person who entered into a written binding contract before May 1, 2010, if the purchase closed before July 1, 2010. (Certain service members on qualified official extended duty service outside of the U.S. get an extra year to buy a qualifying home and get the credit.)

New law. The Act provides that if a written binding contract to purchase a principal residence was entered into before May 1, 2010, to close on the purchase of a principal residence before July 1, 2010, the credit may be claimed if the purchase is closed before October 1, 2010. (Code Sec. 36(h)(2), as amended by Act Sec. 2(a)).  Thus, this extension allows homebuyers who signed a contract no later than the April 30th deadline, intending to close before July 1, 2010, to complete their closing by the end of September and still qualify for the credit. Conforming amendments are made for purposes of the longer periods for those service members on qualified official extended duty service outside of the U.S. (Code Sec. 36(h)(3)(B)).

Required documentation. In IR 2010-80, the IRS reminds taxpayers that special filing and documentation requirements apply to anyone claiming the homebuyer credit. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties’ names and signatures if required by local law, the property address, the purchase price, and the date of the contract.

Besides filling out Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, all eligible homebuyers must also include with their return one of the following documents:

… A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement. While the Form 5405 instructions indicate that a properly executed settlement statement should show the signatures of all parties, IRS recognizes that the elements of the settlement document may vary from jurisdiction to jurisdiction and may not reflect the signatures of the buyer and seller. The settlement statement that must be attached to the return is considered to be properly executed if it is complete and valid according to local law. In locations where signatures are not required, the IRS encourages the buyer to sign the settlement statement prior to attaching it to the tax return even in cases where the settlement form does not include a signature line.

… For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.

… For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

… A taxpayer who entered into a binding contract before May 1, 2010 (and who closes by July 1, 2010) must also attach pages from the signed contract showing all parties names and signatures, the property address, the purchase price, and the date of the contract.

… A taxpayer claiming the credit as a long-term resident of the same main home must attach copies of one of the following: Form 1098, Mortgage Interest Statement (or substitute statement), property tax records, or homeowner’s insurance records. These records should be for 5 consecutive years of the 8-year period ending on the purchase date of the new main home.

Options for claiming the credit. IR 2010-80 also reminds taxpayers that there are three options for claiming the credit on a qualifying 2010 purchase:

… If a 2009 return has not yet been filed, a taxpayer can claim the credit on Form 1040 for the 2009 tax year. Though such a return cannot be filed electronically, taxpayers can still use IRS Free File to prepare their return. The returns must be printed out and sent to IRS, along with all required documentation. (Taxpayers can use direct deposit for their refunds.)

… If a 2009 return has already been filed, a taxpayer can claim the credit on an amended return using Form 1040X.

… Whether or not a 2009 return has been filed, a taxpayer can wait until next year and claim the credit on a 2010 Form 1040.

The three-month extension of the closing date is intended to provide tax relief for those who could not close on time because of backlogs at lenders and federal programs involved in homebuyer loans. In the words of the Act’s supporters, the three-month extension “will give time for all the new mortgages to be processed and not punish those homeowners who have been delayed through no fault of their own.”

Bad Check Penalty Extended to Electronic Payments

Under Code Sec. 6657, subject to a good faith and reasonable cause exception, if a check or money order is used to pay any amount due under the Code and the amount is not duly paid on presentation, the person tendering the check or money order is subject to a penalty equal to 2% of the amount of the check or money order. If the amount of the check is less than $1,250, the penalty is $25 or the amount of the check, whichever is the less.

New law. For instruments tendered after July 2, 2010, the Act expands the bad check penalty under Code Sec. 6657 to cover electronic payments. (Code Sec. 6657, as amended by Act Sec. 3)

Disclosure of Prisoner Return Information to State Prisons

Under Code Sec. 6103(k)(10), to the extent necessary for effective Federal tax administration, before 2012, the IRS may disclose to the head of the Federal Bureau of Prisons return information of an individual incarcerated in a Federal prison that IRS has determined may have filed or facilitated the filing of a false return

New law. For disclosures made after July 2, 2010, the Act also authorizes the disclosure of return information of an individual incarcerated in a State prison to the head of any State agency charged with the responsibility for the administration of prisons. (Code Sec. 6103(k)(10), as amended by Act Sec. 4).

For more information on this new law, contact All States 1031 Exchange owner and tax attorney/CPA Moore McLaughlin at fmm@AllStates1031.com or by phone toll-free at 877-395-1031.

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No depreciation deductions or like-exchange treatment for equipment held for rent or sale

July 1st, 2010 by Moore McLaughlin

Rental EquipmentIn Chief Counsel Advice (CCA) 201025049 dealing with equipment for rent or sale, the IRS has concluded that a taxpayer could not demonstrate that the equipment was devoted to use in its trade or business and that it looked to such use of the equipment to recover the cost of the equipment. Instead, the taxpayer held the equipment primarily for sale and, as a result, it could not claim depreciation deductions for the equipment and could not treat exchanges of the equipment as like-kind swaps under Code Sec. 1031.

Background. Under Code Sec. 167(a), taxpayers may claim a depreciation deduction for the exhaustion, wear and tear of property used in a trade or business or held for the production of income. However, under Reg. §1.167(a)-2, depreciation deductions can not be claimed for inventories or stock in trade.

Under Code Sec. 1031(a)(1), gain or loss is not recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of like kind which is held either for productive use in a trade or business or for investment. Nonrecognition treatment is not allowed under Code Sec. 1031(a)(2)(A) for an exchange of property that is stock in trade or other property held primarily for sale.

Facts. Corp X distributes, sells, rents, services, and finances an unspecified type of equipment. It orders the equipment directly from the manufacturer and identifies certain equipment as rental property before receiving it from the manufacturer. When it receives the equipment, Corp X capitalizes the cost of the equipment that has been designated as rental property and claims depreciation deductions on this equipment from the time it is available for rent. Apparently, Corp X capitalizes the cost of equipment other than designated rental property as “inventory” (as defined in Code Sec. 471) upon the receipt of the equipment from the manufacturer. Corp X’s rental equipment is available for rent by the hour, week, or month, and it reserves the right to withdraw the rented equipment during the rental period and substitute similar equipment. The rental agreements permit a renter to buy the rented equipment, but the information provided IRS does not indicate the amount of rent, if any, that would be applied against the purchase price in the event a renter buys the equipment. However, Corp X has indicated that the sales price would be the subject of further negotiation between it and the renter/purchaser.

Corp X structures its sales of property designated as rental equipment as like-kind exchanges under Code Sec. 1031. It negotiates sales with customers and assigns the sales contracts to a qualified intermediary (QI). Corp X then orders replacement property from a manufacturer and assigns its rights to acquire the equipment to the QI. The trustee under the exchange agreement collects the proceeds from the sale of the relinquished property and makes disbursements for purchase of the replacement property on Corp X’s behalf. The replacement property is assigned an order number and is entered into Corp X’s fixed asset depreciation system. Corp X sends a monthly statement to the QI and the manufacturer informing them of the replacement property and includes a statement to the effect that under Code Sec. 1031, Corp X has assigned its rights to acquire the equipment to QI.

An analysis of Corp X’s Year 1 fiscal year results shows that 91% of its income was generated from sales while 9% was generated from its rental operation. Also, a substantial amount of the equipment designated as rental equipment was sold by Corp X before the equipment generated any rental income.

Neither depreciation nor tax-free swap treatment is available. The CCA says that where an asset can function as both merchandise held for sale and as an asset used in a trade or business, the taxpayer’s primary purpose for holding that asset determines whether that asset is inventoriable. On the facts, the CCA concludes that Corp X’s equipment should be treated as inventory held primarily for sale to customers in the ordinary course of business. While Corp X does rent or hold some equipment for rent, it did not show that the equipment is actually devoted to use in its business and that it looks to consumption through this use to recover the cost of the equipment. A significant fact leading to the CCA’s conclusion is that a substantial amount of the equipment designated as rental equipment was sold by Corp X relatively soon after acquisition and before the equipment generated any rental income. Based on the available facts, the best that could be said is that for a relatively short period, Corp X rents or holds for rent some of its equipment pending the sale of that equipment.

As a result, the CCA concludes that Corp X cannot depreciate its equipment under Code Sec. 167. What’s more, because it holds the equipment primarily for sale, Corp X’s exchanges are not eligible for tax-free swap treatment because of Code Sec. 1031(a)(2)(A).

For more informaiton regarding this ruling or other 1031 exchanges issues, contact Alexandra L. Hart at AHart@AllStates1031.com or by phone toll-free at 877-395-1031.

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Posted in 1031 Exchange Basics, 1031 News, FAQs, Other, Qualifying Properties

Possible Extension of Homeowner Tax Credit

June 29th, 2010 by Moore McLaughlin
The following is an e-mail request courtesy of the Greater Fall River Association of Realtors®:gfrar3

Thank you for helping to get the word out and boost our participation on the NAR Call for Action this week and the push for the extension of flood insurance and rural housing loans as well as the closing deadline of the homebuyer tax credit.

The good news is we boosted our Call for Action response numbers from 7 percent earlier in the week to 12 percent today. President Sears’ reminder emails to all m

embers who had yet to respond, and to all Brokers to urge their agents to respond, had a significant impact. This Call for Action is still live for members to respond to.

The bad news is the Senate has not voted on the bill. The latest update from NAR Government Affairs is copied below, along with an article explaining the impasse in the Senate.

FROM: NAR Government Affairs

NAR is working very closely with key Members of Congress and the Senate, and Senior Congressional Staff on two issues of critical importance to the membership: an extension of the June 30, 2010 deadline for closing contracts eligible for the Homeowner Tax Credit, and a reinstatement of the National Flood Insurance Program.

Here are the latest details on the Tax Credit Closing Deadline:

Our best advice to members with questions and concerns is to proceed as if the June 30, 2010 date is binding.
NAR is pursuing all possible options with senior congressional staff to determine what other legislation may be available for passing a June 30 extension. Each of the possible options face difficult obstacles, but NAR’s efforts to clear the way are on going.
The Senate will NOT have any votes today (Friday, June 25) this will push the Tax Credit Extension deadline to the week of June 28, 2010.
Should Congress extend the date, information will be posted on www.realtor.org/government_affairs as soon as it happens.
The final outcome will be posted on www.realtor.org/government_affairs on July 1, 2010.

Here are the latest details on the national Flood Insurance Program:

The Senate will NOT have any votes today (Friday, June 25) this will push the consideration of H.R. 5569 (National Flood Insurance Program Extension Act of 2010) to the week of June 28, 2010.
NAR is working with Senate leadership in both parties to urge the Senate act quickly to pass H.R. 5569.
Additional information is available at http://www.realtor.org/government_affairs/natural_disaster

Filibuster halts bill boosting jobless benefits, aid to states
By Lori Montgomery, Washington Post | June 25, 2010
WASHINGTON - Senate Democrats yesterday abandoned efforts to provide more assistance to state governments and extend emergency unemployment benefits for millions of jobless workers, leaving in limbo President Obama’s push for more spending to bolster the economy.
The decision came after the Senate failed again to muster 60 votes to advance a package of tax cuts and emergency economic provisions. Senator Ben Nelson, a Nebraska Democrat, joined a united Republican caucus in voting to block the measure, citing concern that even the latest slimmed-down version would expand bloated budget deficits. The package fell short, 57-41.
Senate majority leader Harry Reid, Democrat of Nevada, blamed Republican intransigence for killing the measure and dismissed talk of continuing negotiations, saying the only path forward would require Republican compromise.
“We’ve tried and tried. This is our eighth week on this legislation,” Reid said, urging reporters to direct questions about the measure’s fate to Senate minority leader Mitch McConnell, Republican of Kentucky. “We are here. We’re willing to work.”
McConnell, meanwhile, blamed Democrats for the impasse. “The principle they’re defending here is not some program,” he said. “The principle Democrats are defending is that they will not pass a bill unless it adds to the debt.”
For Massachusetts, the vote could have widespread consequences. Emergency jobless benefits, which provide up to 99 weeks of support, expired June 2. About 30,000 laid-off workers in Massachusetts have already lost benefits; up to 100,000 would eventually be affected.
The bill also would have supplied a $16 billion boost in Medicaid funding for states, which would mean about $500 million for Massachusetts, according to the Center on Budget and Policy Priorities. That figure is lower than an earlier proposal, which would have supplied a $24 billion boost, or $760 million for Massachusetts.
Governor Deval Patrick and state legislative leaders had expected that money in their budget projections. Without the federal help, the Massachusetts House and Senate passed a stripped-down budget last night that cuts aid to communities.
The US Senate version also had funds for summer jobs programs, a program championed by Senator John F. Kerry.
“This is one of the worst moments I’ve seen in 25 years in the United States Senate,” the Massachusetts Democrat said after the vote.
Other senior Democrats said they are likely to try again to attract GOP support for the measure, which Obama has called critical to propping up the nation’s still-fragile economic recovery. But after four months of talks, frustrated senior Democrats said they would probably delay further action.
“People are in the mood of letting the dust settle before finding the next step,” said Senate Budget Committee chairman Kent Conrad of North Dakota.
The legislation would have increased budget deficits by $33 billion over the next decade.
The US House did pass a bill yesterday that spares doctors a 21 percent cut in Medicare payments. The measure, already passed by the Senate, would delay cuts six months while lawmakers work on a permanent solution. The bill goes to Obama for his signature.
Matt Viser of the Globe staff contributed to this report.

 
Thanks again and have a wonderful weekend,
Brian

Brian Doherty
Local Government Affairs Coordinator
Direct Phone: (781) 839-5510
Direct Fax: (781) 839-5560

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IRS rules swap of emissions credits is tax-deferred Sec. 1031 exchange

June 29th, 2010 by Moore McLaughlin

Private letter ruling 201024036 issued recently by the IRS concludes that the swap of two different types of emissions credits will be a tax-deferred exchange under Code Sec. 1031.

Background. In general, under Code Sec. 1031, no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind which is held either for productive use in a trade or business or for investment, if statutory identification and receipt time limits are met. “Like kind” refers to the nature or character of the property and not to its grade or quality, and one kind or class of property can’t be exchanged for property of a different kind or class. (Reg. § 1.1031(a)-1(b))

Intangible personal property is of like kind to other intangible personal property only if (1) the nature or character of the rights involved are of like kind (e.g., a patent is of like kind to a patent and a copyright is of like kind to a copyright) and (2) the nature or character of the underlying property to which the intangible personal property relates is of like kind. For example, an exchange of a copyright on a novel for a copyright on a different novel is a like-kind exchange, but an exchange of a copyright on a novel for a copyright on a song is not. (Reg. § 1.1031(a)-2(c)) Under Rev Proc 92-91, 1992-2 CB 503, Q&A 5, emission allowances are like-kind property for Code Sec. 1031 purposes.

Ground Level Ozone (Smog)

Ground Level Ozone (Smog)

Facts. The concentration of ground level ozone (i.e., smog) in Region often exceeds permissible air quality standards established by the Environmental Protection Agency (EPA). Ground-level ozone is principally created by two types of pollutants: nitrogen oxide (”NOx”) and volatile organic compounds (”VOCs”). NOx is produced during combustion of natural gas. VOCs are organic chemical compounds that evaporate under specific conditions. A program set up by a Region government agency we’ll call Authority develops and implement air pollution control measures in Region. To improve Region’s air quality and bring the area into compliance with state and federal law, Authority has established a program to review and control emissions in Region. Under this program, businesses that take measures to reduce their emissions of pollutants, for example by installing emission reduction equipment, may apply for and receive emission reduction credits. These credits are used by the holder to “offset” emissions that would otherwise exceed permitted levels. Each credit is a grant to the holder of the right to emit a specified amount of the pollutant per year for an indefinite period of time. Credits may be transferred temporarily or permanently. Credits for reducing ozone are designated by Authority as either NOx or VOCs credits.

Apart from the underlying pollutant, the terms and conditions of the two types of credits are identical. NOx credits may be used to offset VOCs emissions and VOCs credits may be used to offset NOx emissions, as long as the holder of the credits demonstrates that using the credits in this way will not cause or contribute to a violation of state or federal air quality standards.

Sub is a wholly owned subsidiary of Parent and a member of Parent’s consolidated group. Sub holds NOx credits for productive use in a trade or business or for investment. Parent anticipates the future need for VOCs credits in order to meet emission standards related to an undisclosed project. Authority has historically granted permission to use NOx credits to offset VOCs emissions, but this interpollutant use of credits is not economically optimal for Parent because the NOx credits are more valuable due to their relative scarcity. From a business perspective Parent would prefer to exchange NOx credits for VOCs credits held by unrelated third parties. This would generally allow Parent to emit a greater amount of VOCs than if it obtains authorization to use its NOx credits to offset its VOCs emissions.

Sub’s NOx credits exceed its needs. Parent proposes to cause Sub to distribute its NOx credits to Parent. Thereafter, Parent will swap the NOx credits it acquires from Sub for VOCs credits held by unrelated third parties. Parent would then use the VOCs credits to offset emissions from its trade or business.

Favorable ruling. Parent asked for a ruling that the exchange of emission credits was tax-deferred under Code Sec. 1031 and IRS responded positively. It ruled that the NOx and VOCs credits are like-kind property for Code Sec. 1031 purposes. It also ruled that Parent is considered to have, prior to the exchange, held the NOx credits for productive use in its trade or business. IRS concluded that gain or loss won’t be recognized on Parent’s exchange of NOx credits for VOCs credits immediately following the distribution of the NOx credits from Sub, provided all other Code Sec. 1031 requirements are met.

For more information regarding this PLR or any other 1031 questions, contact Alexandra L. Hart by e-mail at AHart@AllStates1031.com or by phone toll-free at 877-395-1031.

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Posted in 1031 Exchange Basics, 1031 News, Qualifying Properties

Happy Memorial Day 2010

May 31st, 2010 by Moore McLaughlin

Memorial Day 2010Alexandra and I extend our heartfelt thanks to all who have made the ultimate sacrifice in service to this great country.  America continues to be the best country because of all they have done for us.

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Massachusetts Homeowner Oil Heating System Upgrade and Insurance Law

May 31st, 2010 by Moore McLaughlin

Massachusetts Oil Tank LawThe following comes courtesy of Stephen Ryan, Esq., General Counsel of the Massachusetts Association of Realtors. 

The law regarding compliance rules for all Massachusetts homes heated with oil is designed to eliminate the oil leaks that have plagued numerous older homes in the Commonwealth where a fuel line leaves the oil tank and is then buried in concrete and reappears at the burner.

In some of the homes, the buried portion of the fuel line leaks, and this causes expensive environmental damage. In addition, the new law requires homeowner insurance companies to make available coverage, at an additional cost, for oil spills to all homes that are in compliance with the new rules. The law goes into effect on July 1, 2010. The following is from a recently released fact sheet from the Massachusetts Department of Environmental Protection.

The Law

By July 1, 2010, homeowners must upgrade their home heating system equipment to prevent leaks from tanks and pipes that connect to the furnace. Making a relatively small expenditure now will prevent a much greater expense in the future.

The new law (see Chapter 453 of the Acts of 2008: http://www.mass.gov/legis/laws/seslaw08/sl080453.htm) has two
major provisions that require:
􀁑 the installation of either an oil safety valve or an oil supply line with protective sleeve on systems that do not currently have these devices; and
􀁑 insurance companies that write homeowner policies to offer coverage for leaks from heating systems that use oil.

Most homeowner policies do not currently include such coverage, leaving many to pay for costly cleanups out of their own pockets. Although it is mandatory that insurance companies offer this coverage, the insurance is an optional purchase for homeowners.

Who must take action?

Owners of one- to four unit residences that are heated with oil must already have or install an oil safety valve or an oil supply line with a protective sleeve, as shown in the diagram below. Installation of these devices must be performed by a licensed oil burner technician. Technicians are employed by companies that deliver home heating oil or are self-employed. It is important to note that heating oil systems installed on or after January 1, 1990 are most likely already in compliance because state fi re codes implemented these requirements on new installations at that time.

Who is exempt?

Homeowners are exempt from taking these leak prevention steps if:
􀁑 the oil burner is located above the oil storage tank and the entire oil supply line is connected to and above the top of the tank; or
􀁑 an oil safety valve or oil supply line with protective sleeve was installed on or after January 1, 1990; and
􀁑 those changes are in compliance with the oil burning equipment regulations; a copy of the oil burner permit from the local fire department may be used to demonstrate compliance.

Why comply?

Not only is complying with the new law required, it makes good financial and environmental sense. Homeowners who take these preventive measures can avoid the disruption and expense that can be caused by heating oil leaks. A leak may result in exposure to petroleum vapors in your home. If the leak reaches the soil or groundwater beneath your house, then a cleanup must be performed to restore your property to state environmental standards. Leaks that affect another property or impact drinking water supply wells can complicate the cleanup and increase the expense. Each year, several hundred Massachusetts families experience some kind of leak.

What will an upgrade cost?

The typical cost of installing either an oil safety valve or oil supply line with a protective sleeve ranges from $150 to $350 (including labor, parts, and local permit fees).

What could it cost to clean up a leak?

The cleanup cost for a “simple” leak can be as much as $15,000. In cases where the leak impacts the groundwater or is more extensive, the cleanup costs can reach $250,000 or more.

What kind of insurance is available?

To be eligible for the new insurance coverage, homeowners must ensure that their oil heating systems are in compliance with the new law. Homeowners who have been certified to be in compliance with (or exempt from) the leak prevention measures qualify to purchase insurance that:
􀁑 provides “first party coverage” of at least $50,000 for the cost of cleaning up a leak to soil, indoor air, or other environmental media from a home heating system at the residence itself and reimbursement for personal property damage; and
􀁑 provides “third-party coverage” of at least $200,000 for the cost of dealing with conditions on and off the insured’s property because the leak from this system has impacted or is likely to impact groundwater or someone else’s property. The coverage also includes costs incurred for legal defense, subject to a deductible not to exceed $1,000 per claim.

What steps should be taken?

􀁑 Determine whether you have had an oil safety valve or new oil supply line with protective sleeve installed since January 1,1990. If you have, your permit from the fire department for the installation can be used to document your compliance. You can request a copy from the fire department if the permit is on file, or a licensed oil burner technician can certify that status on a form.
􀁑 If you do not have an oil safety valve or oil supply line with protective sleeve in place, have one or the other installed and certified. Either contact your oil delivery company to ask if it employs a licensed oil burner technician, or find a service person in your area. (A list of licensed technicians can be viewed at http://db.state.ma.us/dps/licenseelist.asp. Click on the “individuals” tab, scroll down to and then select “Oil Burner - Technical Certificate” in the “select a license type” box, type in your city or zip code, and click “select”).
􀁑 Consider buying insurance coverage for the cleanup of a leak.
􀁑 Determine whether your existing policy provides oil leak coverage.
􀁑 If it does not, consider calling your homeowner insurance agent to amend the policy to include this coverage.

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Like-kind exchange relief for those snared by QIs in bankruptcy or receivership

March 10th, 2010 by Moore McLaughlin

The IRS has at long last granted relief for taxpayers who were unable to timely complete a like-kind exchange because their qualified intermediary (QI) entered into bankruptcy or receivership. IRS will not treat taxpayers as being in actual or constructive receipt of exchange proceeds if they cannot complete an exchange because of a default of a QI in bankruptcy or receivership. Affected taxpayers may use a special safe harbor method to report gain or loss.

The IRS received many comments on this issue and has been promising action on it for a long time.  As far back as 2007, when the real estate market started heading south in many areas, the IRS wrote Rep. Barney Frank (D-MA) to say that IRS was considering whether it was appropriate for it to extend relief where QIs went bankrupt.  In substantially similar letters written to a number of Washington legislators in mid-2009, the IRS again said it was considering relief measures.

Background.  In general, no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind which is held either for productive use in a trade or business or for investment. (Code Sec. 1031)  Under Code Sec. 1031(a)(3), for a deferred exchange to be treated as tax-free, a taxpayer must identify the replacement property within 45 days of the transfer of the relinquished property and must acquire the replacement property by the earlier of 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or the due date (determined with regard to extensions) of the taxpayer’s federal income tax return for the year in which the transfer of the relinquished property occurs.  Absent relief, if the statutory timing requirements are met, a taxpayer would have to treat the relinquished property as having been disposed of in a taxable sale or exchange.

The regulations allow a taxpayer to use a QI to facilitate a like-kind exchange. (Reg. §1.1031(k)-1(g)(4))  When a taxpayer uses a QI, generally he will transfer the relinquished property to the QI, who sells the property to a buyer.  The QI then takes the proceeds of the sale of the relinquished property, buys the replacement property, and transfers the replacement property to the taxpayer. If the taxpayer receives the replacement property within the period in Code Sec. 1031(a)(3) and meets the other Code Sec. 1031 requirements, he is treated as having engaged in a like-kind exchange of property with the QI and he will not recognize gain on the exchange.

Victims of the recession and the troubled real estate markets. In Rev Proc 2010-14, IRS says it is aware of situations in which taxpayers initiated like-kind exchanges by transferring relinquished property to a QI but were unable to complete the exchanges within the statutory time period solely due to the failure of the QI to acquire and transfer replacement property to the taxpayer (a “QI default”). In many of these cases, the QI enters bankruptcy or receivership, thus preventing the taxpayer from obtaining immediate access to the relinquished property’s sale proceeds.

The IRS says it’s generally of the view that in such situations, a taxpayer should not have to recognize gain from the failed exchange until the tax year in which he receives a payment attributable to the relinquished property.

Who is entitled to relief. A taxpayer is entitled to relief under Rev Proc 2010-14 if he:

(1) Transferred relinquished property to a QI in accordance with Reg. §1.1031(k)-1(g)(4).

(2) Properly identified replacement property within the identification period (unless the QI default occurs during that period).

(3) Did not complete the like-kind exchange solely because of a QI default involving a QI that becomes subject to a bankruptcy proceeding or a receivership proceeding under federal or state law.

(4) Did not, without regard to any actual or constructive receipt by the QI, have actual or constructive receipt of the proceeds from the disposition of the relinquished property or any property of the QI before the QI entered bankruptcy or receivership. For purposes of this condition, relief of a liability under the exchange agreement before the QI default, either through the assumption or satisfaction of the liability in connection with the transfer of the relinquished property or through the transfer of the relinquished property subject to the liability, is disregarded.

Relief provisions. Rev Proc 2010-14, Sec. 4, provides that a taxpayer meeting the above conditions recognizes gain on the disposition of the relinquished property only as required under the safe harbor gross profit ratio method, and only as he receives payments attributable to that property.

Under the safe harbor gross profit ratio method, the portion of any payment attributable to the relinquished property that is recognized as gain is found by multiplying the payment by a fraction, having the taxpayer’s gross profit as the numerator, and having the taxpayer’s contract price as the denominator. For this purpose:

  • A payment attributable to the relinquished property means a payment of proceeds, damages, or other amounts attributable to the disposition of the relinquished property (other than selling expenses), whether paid by the QI, the bankruptcy or receivership estate of the QI, the QI’s insurer or bonding company, or any other person. Unless it exceeds adjusted basis, satisfied indebtedness is not a payment attributable to the relinquished property.
  • Gross profit means the selling price of the relinquished property, minus the taxpayer’s adjusted basis in it (increased by any selling expenses not paid by the QI using proceeds from the sale of the relinquished property).
  • The selling price of the relinquished property is generally the amount realized on its sale, without reduction for selling expenses. But if a court order, confirmed bankruptcy plan, or written notice from the trustee or receiver specifies, by the end of the first tax year in which the taxpayer receives a payment attributable to the relinquished property, an amount to be received by the taxpayer in full satisfaction of his claim, the selling price of the relinquished property is the sum of the payments attributable to the relinquished property (including satisfied indebtedness in excess of basis) received or to be received and the amount of any satisfied indebtedness not in excess of the adjusted basis of the relinquished property.
  • The contract price is the selling price of the relinquished property minus the amount of any satisfied indebtedness not in excess of the property’s adjusted basis. Satisfied indebtedness means any mortgage or encumbrance on the relinquished property that was assumed or taken subject to by the buyer or satisfied in connection with the transfer of the relinquished property.

Rev Proc 2010-14, Sec. 4, has detailed rules covering situations involving satisfied indebtedness exceeding adjusted basis, recapture income, and imputed interest.

A Code Sec. 165 loss deduction may be claimed for the amount, if any, by which the adjusted basis of the relinquished property exceeds the sum of (1) the payments attributable to that property (including satisfied indebtedness in excess of basis), plus (2) the amount of any satisfied indebtedness not in excess of basis. Those claiming a loss deduction may also claim a Code Sec. 165 loss deduction for the amount of any gain recognized in accordance with Rev Proc 2010-14, Sec. 4, in a prior tax year.

Illustration: Mr. Able, a calendar year taxpayer owned investment property (Property 1) with a fair market value of $1.5 million and an adjusted basis of $500,000.  He entered into an agreement with QI to facilitate a deferred like-kind exchange. On May 6, Year 1, Able transferred Property 1 to QI and QI transferred the property to a third party in exchange for $1.5 million. Able intended that the QI use the money held by it to acquire Able’s replacement property. On June 1, Year 1, Able identified Property 2 as replacement property. On June 15, Year 1, QI notified Able that it filed for bankruptcy protection and could not acquire replacement property. As a result, Able failed to acquire Property 2 or any other replacement property within the exchange period. As of December Year 1, QI’s bankruptcy proceedings are on-going and Able has received none of the $1.5 million proceeds from QI or any other source.

On July 1, Year 2, QI exits from bankruptcy and the bankruptcy court approves the trustee’s final report, which shows that Able will be paid $1.3 million in full satisfaction of QI’s obligation under the exchange agreement. Able receives the $1.3 million on August 4, Year 2 and does not receive any other payment attributable to the relinquished property.

Under Rev Proc 2010-14, Able is not required to recognize gain in Year 1 because he did not receive any payments attributable to the relinquished property in that year. He recognizes gain in Year 2, as follows:

… His selling price is $1.3 million, i.e., the payments attributable to the relinquished property (the amount specified by the trustee before the end of the first tax year in which he receives a payment attributable to the relinquished property).

… His contract price also is $1.3 million because there is no satisfied or assumed indebtedness.

… His gross profit is $800,000 (the selling price of $1.3 million less his $500,000 adjusted basis).

… His gross profit ratio is 80/130 (gross profit over the contract price).

… Able’s recognized gain in Year 2 is $800,000 (the $1.3 million payment attributable to the relinquished property multiplied by the gross profit ratio (80/130)).

Even though the payment attributable to the relinquished property ($1.3 million) is less than the $1.5 million that the QI received, Able is not entitled to a Code Sec. 165 loss deduction because the payment attributable to the relinquished property exceeds his adjusted basis in the relinquished property ($500,000). (Rev Proc 2010-14, Sec. 4.10, Ex. 1)

Rev Proc 2010-14 carries four other detailed examples illustrating nuances of the new safe-harbor relief.

Effective date of relief. Rev Proc 2020-14 is effective for taxpayers whose like-kind exchanges fail due to a QI default occurring on or after January 1, 2009.  A taxpayer who is within the scope of Rev Proc 2020-14 may, subject to the Code Sec. 6511 limitations on credit or refund, file an original or amended return to report a deferred like-kind exchange that failed due to a QI default in a tax year ending before January 1, 2009, in accordance with Rev Proc 2010-14.

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Supreme Court lets stand decision that using qualified intermediary cannot avoid §1031 related party rule

February 24th, 2010 by Moore McLaughlin
Supreme Court of the United States of America

Supreme Court of the United States of America

The Supreme Court has declined to review a Ninth Circuit holding that a taxpayer could not avoid the Code §1031 like-kind-exchange related-party rule by using a qualified intermediary (QI). Teruya Brothers, Ltd. & Subsidiaries , (CA 9 2/11/2009) 104 AFTR 2d ¶ 2009-5345 , cert denied 2/22/2010.

Background. If statutory identification and replacement period requirements are met, gain or loss is not 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. (Code §1031) QIs may be used to structure like-kind exchanges. However, under Code §1031(f), gain or loss on an exchange between related persons (under Code §267(b) or Code §707(b)(1)) must generally be recognized if either the property transferred or the property received is disposed of within two years after the exchange. Nonrecognition treatment under the like-kind exchange rules does not apply to any exchange that is part of a transaction or series of transactions structured to avoid the purposes of the related party exchange rule. (Code §1031(f)(4)) However, under Code §1031(f)(2)(C), a disposition will not trigger the related party bar if it is established to IRS’s satisfaction that neither the original transaction nor the later disposition had as one of its principal purposes the avoidance of federal tax.

Facts. Teruya Brothers Ltd. (Teruya) owned 62.5% of the common shares of Times Super Market Ltd (Times), so the two entities were related.  In 1995, in one series of planned transactions, Teruya transferred Real Property 1 to TGE, a QI, which then sold it to an unrelated third party. TGE used the sale proceeds, as well as additional funds from Teruya, to buy like-kind Replacement Property 2 for Teruya from Times, and then transferred Replacement Property 2 to Teruya. In another series of planned transactions, Teruya transferred Real Property 3 to TGE, which sold it to an unrelated party. TGE used the sale proceeds from Real Property 3, plus some cash from Teruya, to buy like kind Replacement Properties 4 and 5 from Times.

Teruya realized a $1.3 million gain on Property 1 and a $10.7 million gain on Property 3. Times realized and recognized a $1.3 million gain on Property 2 and a $2.2 million gain on Property 5, but these gains were offset by a large net operating loss. Times realized a $6.4 million loss on Property 4, but did not recognize it because of the Code §267 related-party restriction on loss recognition.

Teruya treated its transactions as tax-deferred like-kind exchanges under Code §1031, but IRS said the transactions ran afoul of the Code §1031(f)(4) related-party rule and hit Teruya with a $4 million deficiency.

Tax Court. In 2005, the Tax Court held that the transactions were economically equivalent to direct exchanges of properties between Teruya and Times (with boot from Teruya to Times), followed by the sales of the properties by Times to unrelated third parties. The interposition of a QI couldn’t obscure the end result.

Observation: In 2009, the Tax Court applied its Teruya reasoning and decision to rule against another taxpayer on the QI- Code §1031(f) issue (see Ocmulgee Fields, Inc., (2009) 132 TC No. 6).

Ninth Circuit. In 2009, the Ninth Circuit concluded that the Tax Court did not err in determining that the transactions were structured to avoid the purposes of Code §1031(f)(4). It rejected Teruya’s contention that the economic consequences of the transactions to Times were irrelevant, and that Teruya’s continued investment in real property was dispositive. Code §1031(f)(1)(C)(i) disallows nonrecognition treatment if a related party disposes of exchanged property within two years, regardless of whether the taxpayer does as well. Thus, examining the taxpayer and related party’s economic position in the aggregate is often the only way to tell if Code §1031(f) applies.

The legislative history indicating Congress’s desire to bar like-kind exchange treatment where related parties have, in effect, cashed out of the investment, confirmed that a taxpayer and a related party should be treated as an economic unit to see if Code §1031(f) applies. The Ninth Circuit pointed out that the changing economic positions of Teruya and Times readily showed that the related parties used the exchanges to cash out of an investment in low-basis real property. Before the exchanges, Teruya owned Property 1 and Property 3, and Times owned Properties 2, 4, and 5. After the exchanges, Properties 1 and 3 had been sold, Teruya owned Properties 2, 4, and 5, and Times had the cash from the sale of Properties 1 and 3 (along with boot from Teruya). All in all, Teruya and Times decreased their investment in real property by approximately $13.4 million, and increased their cash position by the same amount. By allowing Teruya and Times to cash out of a significant investment in real property under the guise of a nontaxable like-kind exchange, the Ninth Circuit concluded that the transactions were undoubtedly structured to contravene Congress’s desire that nonrecognition treatment only apply to transactions where a taxpayer can be viewed as merely continuing his investment.

The Ninth Circuit said Teruya could have exchanged its properties directly with Times, followed by Times’s selling Property 1 and Property 3 to the third-party purchasers, but this would not have had a tax-free result, since direct exchanges between related parties are ineligible for nonrecognition treatment when the exchanged property is sold within two years. Instead, Teruya employed TGE; the latter’s involvement as a QI served no purpose besides rendering simple, but tax disadvantageous, transactions more complex in order to avoid Code §1031(f)’s restrictions.

The Ninth Circuit also affirmed the Tax Court’s conclusion that Code Sec. 1031(f)(4) applied because improper avoidance of federal income tax was one of the principal purposes of the transactions.

Late in 2009, Teruya appealed the Ninth Circuit’s decision to the Supreme Court. However, on February 22, 2010, the Supreme Court declined to review the decision.

For more information on 1031 exchanges, or to ask specific questions regarding the related party rule of §1031, please contact Alexandra L. Hart, CES® at All States 1031 Exchange Facilitator, LLC by e-mail at AHart@AllStates1031.com or Moore McLaughlin, Esq., CPA, CES® by e-mail at FMM@AllStates1031.com or either of them by phone toll-free at 877-395-1031 extension 217.

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