PLR 1308020: IRS says exchange-management software does not disqualify a like-kind exchange intermediary

Plain-English summary

The IRS ruled that a company serving as a qualified intermediary for like-kind exchanges did not become a disqualified person merely by providing clients with proprietary software. The software matched relinquished and replacement properties, prepared 45-day identifications, calculated depreciation and gain or loss, and helped enforce restrictions on exchange funds. The IRS treated the matching and identification functions as exchange services that do not make the company an agent, and found that the automated calculations did not make it the clients' accountant. The ruling therefore approved the company's status as a qualified intermediary on the described facts.

Ruling snapshot

• Question: Did providing described exchange-management software make the applicant a disqualified person for its like-kind exchange clients?
• Outcome: Approved
• Key authorities: IRC §§ 1031, 1031(a), 1031(b), 1031(k), and 6110(k)(3); Treas. Reg. § 1.1031(k)-1

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201308020 Third Party Communication: None
Release Date: 2/22/2013 Date of Communication: Not Applicable
Person To Contact:
Index Number: 1031.05-00 ----------------------------, ID No. ---------------
-----------------
Telephone Number:

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

--------------------------- Refer Reply To:
----------------------------- CC:ITA:B04
-------------------------------------------- PLR-132683-12
---------------------------------- Date:
November 15, 2012

TY: -------

LEGEND:

Applicant = -----------------------------
Parent = ----------------------------------------------------------

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

This responds to your request for a private letter ruling, dated July 26, 2012, concerning
how the software you provide to like-kind exchange program (LKE Program) clients
affects your status as a qualified intermediary (QI) under § 1.1031(k)-1(g)(4) of the
Income Tax Regulations.

FACTS

Parent is a tax and business advisory firm. Parent owns 90 percent of Applicant, an
affiliate company that provides services to its clients relating to exchanges of property
under § 1031 of the Internal Revenue Code. Applicant and Parent are both
partnerships for tax purposes using an annual accounting period ending December 31,
and the cash method of accounting for maintaining their books and records and filing
their federal income tax returns.

Applicant provides § 1031 services to two types of exchange clients: (1) clients that
engage in single exchange transactions (e.g., an exchange of investment real estate),
and (2) clients that engage in series of ongoing exchanges of tangible personal property
(referred to as LKE Programs). Applicant serves as the QI for both types of clients.
Applicant is not related to any of its clients in the manner described in either § 267(b) or
§ 707(b).
PLR-132683-12 2

Applicant provides its LKE clients with its in-house developed software. The software
allows clients to track and manage their exchanges and helps Applicant fulfill its
obligations as QI. Specifically, a client using the software can (i) match relinquished
and replacement properties, (ii) prepare and submit 45-day identifications, and (iii)
compute depreciation and gain or loss on the LKE Program assets. The Applicant uses
this software to enforce the restrictions on the use of the exchange funds under
§ 1.1031(k)-1(g)(6) of the regulations and to ensure proper identification of replacement
property. This software is not otherwise commercially available.

Applicant provides no services to its clients other than services relating to like-kind
exchanges of property. Neither Parent nor any other party related to Applicant provides
any other services to Applicant’s clients. Applicant and Parent do not prepare or sign
the tax returns of Applicant’s clients. Applicant and Parent have a firm policy against
providing other services to Applicant’s clients. Furthermore, Applicant only receives a
fee from its clients for services relating to the exchanges of property. In no event has
Applicant ever replaced a client’s accountant or tax advisor, or assumed any of the
duties or responsibilities of the client’s regular accountant or advisor.

LAW AND ANALYSIS

Section 1031(a)(1) of the Code provides that no gain or loss is recognized on the
exchange of property held for productive use in a trade or business or for investment if
such property is exchanged solely for property of like kind to be held either for
productive use in a trade or business or for investment.

Section 1031(a)(3) limits the time for the identification and receipt of replacement
property for non-simultaneous (or deferred) like-kind exchanges. It provides that any
property received by the taxpayer is treated as non like-kind property if-- (A) such
property is not identified as property to be received in the exchange within 45 days of
the date on which the taxpayer transfers the property relinquished in the exchange, or
(B) such property is received after the earlier of-- (i) 180 days after the date on which
the taxpayer transfers the property relinquished in the exchange, or (ii) the due date
(determined with regard to extension) for the transferor's tax return for the taxable year
in which the transfer of the relinquished property occurs.

In addition to the timing limitations for identification and replacement, § 1031(b) provides
that gain realized in an exchange is recognized to the extent of the money or fair market
value of other non-like-kind property (boot) received by an exchanging taxpayer in the
exchange. Section 1.1031(k)-1(f)(1) of the regulations provides that gain or loss may be
recognized if the taxpayer actually or constructively receives money or other property
before the taxpayer actually receives like-kind replacement property. If the taxpayer
actually or constructively receives money or other property in the full amount of the
consideration for the relinquished property before the taxpayer receives like-kind
replacement property, the transaction will constitute a sale and not a deferred
PLR-132683-12 3

exchange, even though the taxpayer may ultimately receive like-kind replacement
property.

The Income Tax Regulations under § 1031 also provide various safe harbors by which
a taxpayer may avoid having actual or constructive receipt of boot in a deferred
exchange. One safe harbor involves the use of a qualified intermediary. Section
1.1031(k)-1(g)(4)(i) 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)(ii) provides that the qualified intermediary safe harbor applies
only if the agreement between the taxpayer and the qualified intermediary 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) defines a qualified intermediary as a person who-- (A) is
not the taxpayer or a disqualified person, 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)(2) defines a “disqualified person” to include an 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. Performance of the following services is not taken into account in
determining whether a person is a disqualified person-- (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. In
addition, § 1.1031(k)-1(k)(4)(i) generally provides that a person who bears a relationship
(as described in either § 267(b) or § 707(b), determined by substituting in each section
“10 percent” for “50 percent” each place it appears) with a person described in
§ 1.1031(k)-1(k)(2) is a disqualified person.
PLR-132683-12 4

In this case, Applicant’s providing of its software to its LKE program clients does not
make Applicant an agent of its clients. The software supplied by Applicant enables an
LKE program client to manage a high volume of exchange transactions. The software
also assists Applicant in fulfilling its obligations as QI. The matching of relinquished and
replacement properties and preparing and submitting 45-day identifications are services
described in § 1.1031(k)-1(k)(2)(i) and thus not taken into account in determining
whether Applicant is an agent. In addition, although the software also computes
depreciation and the gain or loss from an LKE Program client’s transactions, these
functions do not result in Applicant being considered an accountant for its clients.
The depreciation and gain or loss functions are essentially automated math calculations
based on data input by the LKE Program client and do not rise to the level of an
accountant/client or other agency relationship. Accordingly, Applicant is not a
disqualified person to an LKE Program client under § 1.1031(k)-1(k) as a result of
providing software with the functions described.

RULING

Applicant is not a disqualified person, as defined in § 1.1031(k)-1(k), for providing the
described software to its LKE Program clients.

DISCLAIMERS

Except as expressly provided herein, no opinion is expressed or implied 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 taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

The rulings contained in this letter are based upon information and representations
submitted by Applicant and accompanied by a penalty of perjury statement 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
                                   Chief, Branch 4
                                   (Income Tax & Accounting)

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