In Ocmulgee Fields, Inc. (2009), the United States Tax Court had another opportunity to consider whether a taxpayer can acquire replacement property from a related party in a 1031 like-kind exchange. Relying on its prior decision in Teruya Brothers, Ltd. (2005), the court rejected the claimed like-kind exchange even though the replacement property had been acquired through a qualified intermediary. The Tax Court indicated its belief that the basis shifting that occurs in a like-kind exchange is sufficient grounds to apply the anti-abuse rule in Code Section 1031(f)(4). The case is important because it highlights the potential tax risk in acquiring replacement property from a related party.
In general, Congress and the IRS have always cast a wary eye on transactions between related parties. The Internal Revenue Code does not contain a blanket ban on such transactions. However, many sections of the tax code apply special rules where Congress or the IRS suspects a greater potential for abuse. In particular with section 1031, the IRS and the courts have generally held that an exchanger cannot purchase replacement property from a related party. One exception is where the related party is also doing a 1031 exchange, and buying from an unrelated party.
Interestingly, however, the IRS and the courts have recently ruled on several occasions that an exchanger may sell the relinquished property to a related party without violating the letter or spirit of the related party rules under section 1031.
The moral of this case is to be aware of the relationships among all of the parties to an exchange and consult an experienced tax attorney when in doubt. If you would like to know more about the recent cases, or related party exchanges, contact All States 1031 Exchange Facilitator, LLC owner F. Moore McLaughlin, Esq., CPA, CES at fmm@allstates1031.com or Alexandra L. Hart at ahart@allstates1031.com or by calling at 877-395-1031.
Tags: 1031, 1031 exchange, All States, IRS, Moore McLaughlin, related party exchange