PLR 1030020: Bank could serve as both qualified intermediary and trustee

Plain-English summary

The IRS ruled that a national banking association could serve as both a qualified intermediary and the trustee of a qualified trust in the same deferred like-kind exchange under section 1031. The bank's trustee services for customers, including services performed by banks in its controlled group, were routine financial and trust services that did not make it a disqualified person. The IRS also treated the bank as the same qualified intermediary as a merged subsidiary for pending exchanges, based on the federal merger statute. The rulings allowed the bank to handle exchange funds and continue pending transactions if the applicable agreements and safe-harbor requirements were satisfied. The ruling did not provide a general conclusion beyond the stated facts and conditions.

Ruling snapshot

• Question: Could the applicant combine qualified intermediary and trustee roles and succeed to a subsidiary's pending exchange agreements after a merger?
• Outcome: Approved
• Key authorities: IRC § 1031; Treas. Reg. § 1.1031(k)-1; 12 U.S.C. § 215a(e); IRC §§ 267 and 707

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201030020 Third Party Communication: None
Release Date: 7/30/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 1031.05-00, 1031.06-00 -------------------------- , ID No.-----------------
-----------------------------------------------------
Telephone Number:

                                                            --------------------

-------------------------------------------- Refer Reply To:
-------------------------------- CC:ITA:B04
--------------------------------------------------------- PLR-150105-09
-------------------------- Date:
-------------------------------- April 29, 2010

TY:-------

LEGEND:

Applicant = ------------------------------------------------------------------------------------------
Parent = --------------------------------
Date 1 = --------------------------
Holding = ------------------------------
Bank-Sub = ----------------------

Dear -----------------

This responds to your request for a private letter ruling dated November 9, 2009, on the
eligibility of Applicant to serve as a qualified intermediary (QI) and as a trustee of a
qualified trust (QT) for like-kind exchanges under § 1031 of the Internal Revenue Code,
including for exchanges in which it is a successor to a prior QI following a corporate
reorganization.

FACTS

1. General Information.

Applicant, a national banking association and subsidiary of Parent, provides banking,
financial and trust services to its customers, which include services as trustee to trusts
for the benefit of its customers. Other subsidiaries of Parent, which also are banks and
trust companies, provide banking, financial and trust services to their customers,
including services as trustees of trusts for the benefit of their customers.

One of the services provided by Applicant is the facilitation of deferred like-kind
exchanges under § 1031 of the Code. Applicant serves as a QI, as defined in
§ 1.1031(k)-1(g)(4)(iii) of the Income Tax Regulations for many of its customers.
PLR-150105-09 2

2. Combining of QI and Trustee in One Entity.

To accommodate the demand by customers for greater security in § 1031 exchanges,
Applicant proposes to structure exchanges to utilize QTs, as defined in
§ 1.1031(k)-1(g)(3)(iii), simultaneously with QIs, as defined in § 1.1031(k)-1(g)(4). The
QTs will hold the exchange funds during the exchange period. Applicant will serve as
trustee for these QTs and as QI in the same transactions.

3. QI Merger.

Effective on Date 1, Parent acquired Holding and thereafter dissolved it. Bank-Sub, a
subsidiary of Holding, became a subsidiary of Parent. Bank-Sub is a national banking
association that also serves as a QI in deferred like-kind exchanges under § 1031.

Parent plans to merge Bank-Sub into Applicant, pursuant to 12 U.S.C. § 215a, in a
transaction intended to qualify as a tax-free reorganization under § 368(a)(1)(D) of the
Code. At the time of the reorganization, Bank-Sub will be a party to numerous
exchange agreements as QI. In this capacity, it will hold exchange proceeds resulting
from the transfer of relinquished property by its customers and for which replacement
property is not yet purchased. In such cases, as a result of the reorganization,
Applicant will succeed to and become custodian of the exchange proceeds held by
Bank-Sub under those exchange agreements. Applicant will also become a party to the
exchange agreements as the successor to Bank-Sub in the reorganization by operation
of 12 U.S.C. § 215a.

RULINGS REQUESTED

Applicant requests rulings concerning (1) whether Applicant may simultaneously serve
as a QI and as trustee of a QT for the same customer in a single transaction; (2)
whether Applicant’s service, or the service by any member (affiliate) of the same
controlled group as Applicant, as trustee of a trust for the benefit of a customer,
constitutes a routine financial and trust service that will not cause Applicant to be a
disqualified person; and (3) whether Applicant, following the merger of Bank-Sub into
Applicant, will be deemed the same QI as Bank-Sub with regard to pending like-kind
exchanges for which Bank-Sub was serving as QI before the merger.

APPLICABLE LAW

Section 1031(a) of the Code provides that no gain or loss shall be recognized on the
exchange of property held for productive use in a trade or business or for investment if
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such property is exchanged solely for property of like kind which is to be held either for
productive use in a trade or business or for investment.

Section 1.1031(k)-1 of the regulations provides rules for the application of § 1031 to
“deferred exchanges” (exchanges in which, pursuant to an agreement, the taxpayer
transfers property held for productive use in a trade or business or for investment (the
“relinquished property”) and subsequently receives property to be held either for
productive use in a trade or business or for investment (the “replacement property”)). If
the taxpayer actually or constructively receives money or property which does not meet
the requirements of § 1031(a) in the full amount of the consideration for the relinquished
property, the transaction will constitute a sale, and not a deferred exchange, even
though the taxpayer may ultimately receive like-kind replacement property. Section
1.1031(k)-1(g) provides several safe harbors the use of which will result in a
determination that the taxpayer is not in constructive receipt of money or other property
for purposes of § 1031. Moreover, more than one safe harbor can be used in the same
deferred exchange, but the terms and conditions of each must be separately satisfied.
See § 1.1031(k)-1(g)(1).

Section 1.1031(k)-1(g)(3)(i) provides that in the case of a deferred exchange, the
determination of whether the taxpayer is in actual or constructive receipt of money or
other property before the taxpayer actually receives like-kind replacement property will
be made without regard to the fact that the obligation of the taxpayer's transferee to
transfer the replacement property to the taxpayer is or may be secured by cash or a
cash equivalent held in a qualified escrow account or in a qualified trust.

Section 1.1031(k)-1(g)(3)(iii) provides that a qualified trust is a trust wherein--

(A) The trustee is not the taxpayer or a disqualified person (as defined in § 1.1031(k)-1
(k)), except that the relationship between the taxpayer and the trustee created by the
qualified trust will not be considered a relationship under § 267(b)), and

(B) The trust agreement expressly limits the taxpayer's rights to receive, pledge, borrow,
or otherwise obtain the benefits of the cash or cash equivalent held by the trustee as
provided in § 1.1031(k)-1(g)(6).

Section 1.1031(k)-1(g)(4)(i) of the regulations provides that in the case of a taxpayer's
transfer of relinquished property involving a qualified intermediary, the qualified
intermediary is not considered the agent of the taxpayer for purposes of § 1031(a). In
such a case, the taxpayer's transfer of relinquished property and subsequent receipt of
like-kind replacement property is treated as an exchange, and the determination of
whether the taxpayer is in actual or constructive receipt of money or other property
before the taxpayer actually receives like-kind replacement property is made as if the
qualified intermediary is not the agent of the taxpayer. Section 1.1031(k)-1(g)(4)(i)
applies only if the agreement between the taxpayer and the qualified intermediary
PLR-150105-09 4

expressly limits the taxpayer's rights to receive, pledge, borrow, or otherwise obtain the
benefits of money or other property held by the qualified intermediary as provided in
§ 1.1031(k)-1(g)(6).

Section 1.1031(k)-1(g)(4)(iii) provides that a qualified intermediary is a person who--

(A) Is not the taxpayer or a disqualified person (as defined in § 1.1031(k)-1(k)), and

(B) Enters into a written agreement with the taxpayer (the “exchange agreement”) and,
as required by the exchange agreement, acquires the relinquished property from the
taxpayer, transfers the relinquished property, acquires the replacement property, and
transfers the replacement property to the taxpayer.

Section 1.1031(k)-1(k)(1) provides that a disqualified person is a person described in
§ 1.1031(k)-1(k)(2), (k)(3), or (k)(4).

Section 1.1031(k)-1(k)(2) provides that the term “disqualified person” includes a person
who is the agent of the taxpayer at the time of the transaction. For this purpose, a
person who has acted as the taxpayer's employee, attorney, accountant, investment
banker or broker, or real estate agent or broker within the 2-year period ending on the
date of the transfer of the first of the relinquished properties is treated as an agent of the
taxpayer at the time of the transaction. However, the performance of the following
services are not taken into account--

(i) Services for the taxpayer with respect to exchanges of property intended to qualify for
nonrecognition of gain or loss under § 1031; and

(ii) Routine financial, title insurance, escrow, or trust services for the taxpayer by a
financial institution, title insurance company, or escrow company.

Section 1.1031(k)-1(k)(3) provides that a disqualified person also includes a person that
bears a relationship to the taxpayer described in either § 267(b) or § 707(b) (determined
by substituting in each section “10 percent” for “50 percent” each place it appears).

Section 1.1031(k)-1(k)(4)(i) provides, that except as provided in § 1.1031(k)-1(k)(4)(ii), a
disqualified person includes any person bearing a relationship, described in either
§ 267(b) or § 707(b) (determined by substituting in each section “10 percent” for “50
percent” each place it appears) to a person that is an agent as described in § 1.1031(k)-
1(k)(2). A fiduciary of a trust and a beneficiary of such trust is a relationship described
in §§ 267(b) and 707(b).

12 U.S.C. §215a(e) provides that, with respect to a corporate merger, the corporate
existence of each of the merging banks or banking associations participating in such
merger shall be merged into and continued in the receiving association and such
PLR-150105-09 5

receiving association shall be deemed to be the same corporation as each bank or
banking association participating in the merger. All rights, franchises, and interests of
the individual merging banks or banking associations in and to every type of property
(real, personal, and mixed) and choses in action shall be transferred to and vested in
the receiving association by virtue of such merger without any deed or other transfer.
The receiving association, upon the merger and without any order or other action on the
part of any court or otherwise, shall hold and enjoy all rights of property, franchises, and
interests, including appointments, designations, and nominations, and all other rights
and interests as trustee, executor, administrator, registrar of stocks and bonds, guardian
of estates, assignee, receiver, and committee of estates of lunatics, and in every other
fiduciary capacity, in the same manner and to the same extent as such rights,
franchises, and interests were held or enjoyed by any one of the merging banks or
banking associations at the time of the merger.

ANALYSIS

1. Combined Use of One Entity as QI and as Trustee of a QT in the Same Transaction.

At the request of customers, Applicant wishes to combine its services as QI and as
trustee of QTs. More than one safe harbor may be used in the same deferred
exchange, provided that the terms and conditions of each are satisfied. Section
1.1031(k)-1(g)(1). For Applicant to be the trustee of a QT, it may not be a disqualified
person (as defined in §1.1031(k)-1(k)) and the trust agreement must expressly limit the
exchanger’s rights to receive, pledge, borrow, or otherwise obtain the benefits of the
cash or cash equivalent held by the trustee. For Applicant to be QI, it may not be a
disqualified person (as defined in §1.1031(k)-1(k)), the exchange agreement must
expressly limit the exchanger’s rights to receive, pledge, borrow, or otherwise obtain the
benefits of the cash or cash equivalent held by Applicant as QI and, as required by the
exchange agreement, Applicant as QI must acquire the relinquished property from the
exchange customer, transfer the relinquished property, acquire the replacement
property, and transfer the replacement property to the exchange customer. If all of
these requirements are satisfied by Applicant in a transaction, it will be both the QI and
the trustee of a QT in that transaction. The fact that Applicant serves in both capacities
in the same transaction is not a disqualification of either safe harbor and will not make
Applicant a disqualified person.

2. The Trustee Function by Banks as Routine Trust and Financial Services.

Applicant represents that it provides banking, financial, and trust services to its
customers, including services as trustee of trusts for the benefit of its customers.
Applicant serves as QI for many of these same customers. In addition, other
subsidiaries of Parent, in the same controlled group as Applicant, are also banks and
trust companies. These affiliated entities also provide banking, financial and trust
services to their customers, including services as trustees of trusts for the benefit of
PLR-150105-09 6

their customers. Applicant is asking for a ruling that these relationships, both between
itself and its own customers as trustee and beneficiary and between affiliated entities
and its exchange customers, will not result in Applicant’s classification as a disqualified
person.

Service as a trustee by a bank or trust company constitutes a routine financial or trust
service by a financial institution within the meaning of § 1.1031(k)-1(k)(2)(ii) of the
regulations. Under this regulation, such services are not taken into account for
purposes of classifying an entity as a disqualified person. Therefore, service by
Applicant as trustee for the benefit of a customer in an exchange transaction will not
cause it to be treated as a disqualified person with respect to a customer. For the same
reason, Applicant will not be considered a disqualified person with respect to a
customer merely because an entity in the same controlled group as Applicant performs
trustee services for the customer.

3. Status of a Successor QI Following a Merger While an Exchange is Pending.

Under § 1.1031(k)-1(g) of the regulations, when a taxpayer uses a QI to facilitate a like-
kind exchange under § 1031, the taxpayer is considered to have engaged in the
exchange with the QI. Consequently, the QI which is the transferee of the relinquished
property and the QI which is the transferor of the replacement property must be the
same person.

In the case of the merger of Bank-Sub into Applicant, under 12 U.S.C. § 215a(e), every
type of property and chose in action of Bank-Sub will be transferred to and vested in
Applicant by virtue of the merger without any deed or other transfer. Bank-Sub’s rights
and obligations under all of its contracts will continue in Applicant and Applicant will be
deemed to be the same party as Bank-Sub under those contracts. Most important,
Applicant shall hold and enjoy all rights of property, franchises, and interests, including
appointments, designations, and nominations, and all other rights and interests as
“trustee, executor, administrator . . . and in every other fiduciary capacity, in the same
manner and to the same extent as such rights, franchises, and interests were held or
enjoyed by” Bank-Sub, as a merging bank, at the time of the merger. Thus, under 12
U.S.C. § 215a(e), Applicant is treated as the same person as Bank-Sub for purposes of
pending like-kind exchanges in which Bank-Sub served a QI under § 1031 prior to the
merger. Therefore, Applicant may serve as QI for like-kind exchanges initiated by
Bank-Sub prior to the merger and conclude the transaction as if it were the same QI.

RULINGS

1. Applicant will not be a disqualified person as defined in § 1.1031(k)-1(k) of the
   regulations with regard to Applicant’s service as a QI for a customer as a result of
   Applicant also serving as a trustee of such customer’s QT.
   PLR-150105-09 7

2. Banking and trust services as a trustee performed by Applicant or by any bank or
   trust company that is a member of the same controlled group as Applicant (as
   determined under § 267(f)(1) of the Code (substituting “10 percent” for “50 percent”
   where it appears)) will constitute routine financial and trust services by a financial
   institution within the meaning of § 1.1031(k)-1(k)(2)(ii). Thus, the performance of such
   services by Applicant or any other bank or trust company in the same controlled group
   as Applicant for its exchange customers will not cause Applicant to be a disqualified
   person within the meaning of § 1.1031(k)-1(k).

3. After the merger of Bank-Sub into Applicant, Applicant will be regarded as the same
   person as Bank-Sub for purposes § 1.1031(k)-1(g)(4)(iii) with respect to exchanges for
   which Bank-Sub is serving as QI at the time of the merger. Accordingly, for exchanges
   pending at the time of the merger for which Bank-Sub is serving as QI, Applicant will be
   considered the transferee of the relinquished property.

CAVEATS:

Except as expressly provided herein, we express or imply no opinion concerning the tax
consequences of any aspect of any transaction or item discussed or referenced in this
letter.

This ruling is directed only to the Applicant requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative(s).

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the Applicant and accompanied by a penalty of perjury statement
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executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

                                  Sincerely,




                                  Michael J. Montemurro
                                  Branch Chief, Branch 4
                                  (Income Tax & Accounting)

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