CCA 200919043: Prewired property exchange risked anti-abuse recharacterization
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This page covers legal advice the IRS Office of Chief Counsel wrote for IRS staff, issued in 2009, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.
Plain-English summary
Chief Counsel viewed a prearranged real-estate transaction as vulnerable under the step-transaction and substance-over-form doctrines. It would characterize the taxpayer as contributing the original real estate to a partnership and then using cash to buy new real estate. Although property generally can be contributed to a partnership without recognizing gain, the taxpayer retained the original property, acquired new property without gain, and appeared to seek an artificial basis increase through the partnership. The advice concluded that the transaction series likely could be recharacterized under the partnership anti-abuse rule in Treasury Regulation section 1.701-2.
Ruling snapshot
- Question: Could a prewired partnership and section 1031 transaction be recharacterized when it produced an artificial basis increase without recognized gain?
- Outcome: Advice given: the IRS likely could apply step-transaction, substance-over-form, or the partnership anti-abuse rule.
- Key authorities: IRC § 1031; Treas. Reg. § 1.701-2.
Full text (IRS public release)
ID: CCA-331130-09 Number: 200919043
Release Date: 5/8/2009
Office: ----------------
UILC: 701.01-00
From: --------------------
Sent: Tuesday, March 31, 2009
To: --------------------
Cc: ------------------
Subject: Re: -------- Informal Request for Info – Please Read ASAP
Speaking based on the facts of the email, it sounds like something we would challenge using the Step Transaction doctrine or Substance over form doctrine.
The proper characterization is treating it as though the taxpayer contributed real estate to the partnership, then used their cash to buy new real estate. Given the fact that this is a 1031, it all seems pre-wired. Particularly given the fact that the taxpayer continues to own the original property and has acquired new property without any recognized gain. We do allow taxpayers to contribute property to partnerships without gain recognition, however, in this case the taxpayer is attempting to use a partnership to get an artificial basis step-up in the property. This series of transactions would likely be subject to the recharacterization under partnership anti-abuse rule § 1.701-2.
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