CCA 1313024: IRS reviews factual issues in a proposed section 1031 exchange analysis

Plain-English summary

An IRS attorney reviewed a draft memo concerning whether a taxpayer's handling of sale proceeds and replacement property transactions satisfied the requirements for a section 1031 exchange. The referenced memo itself was withheld, and the released document contains review comments rather than a final conclusion. The comments ask whether the taxpayer had actual or constructive receipt of sale proceeds, whether the taxpayer owned or subleased certain cars, and who controlled the accounts and loans involved. The reviewer also identifies possible problems with direct receipt of sales proceeds, transfers among accounts, and the status of the escrow holder under Treas. Reg. § 1.1031(k)-1(g)(3)(ii).

Ruling snapshot

• Question: Do the facts and fund transfers in the proposed transaction support nonrecognition under IRC § 1031?
• Outcome: Advice given through review comments; no final conclusion was issued in the released text.
• Key authorities: IRC § 1031; Treas. Reg. § 1.1031(k)-1(g)(3)(ii)

Full text (IRS public release)

ID: CCA-083012-12 Number: 201313024
Release Date: 3/29/2013
Office: -----------------
UILC: 1031.00-00

From: ---------------
Sent: Thursday, August 30, 2012 9:14:00 AM
To:
Cc:
Subject: Review of memo dealing with section 1031 (----------------------)

[The referenced memo is withheld in full. The comments are provided below.]

  Comment 1:

  We are not able to either agree or disagree with the memo at this point because the facts
  are still somewhat unclear, as noted in the following comment bubbles.




                                                           We realize that the information
  provided by the taxpayer has been difficult to put together.

  In the analysis, it’s not clear whether you’re arguing that taxpayer had actual receipt or
  constructive receipt of the funds from the sale of the relinquished property. A better
  understanding of the facts will dictate which argument to make.

  We’d be happy to discuss the points we raise with you and/or review another draft
  document.

Comment 2:

  Does Taxpayer own the cars that are leased to -------------------------------------? Is Taxpayer a
  sublessor?

Comment 3:

  Did Taxpayer get the $ first and then transfer it to the QI or were the sales contracts
  assigned to the QI?

Comment 4:

  (a/k/a -----------------------------). We should note that, under the ----------------------------------------
  ----------------which provides rules governing the -------------------------------------------------, the
  taxpayer’s rights are restricted. I think the key point here is that, although the -------------------
  ----------------------------------------satisfies the §1031 requirement (i.e., restriction on TP’s
  rights), the following transfers of the funds to different accounts and the agreement
  governing such subsequent accounts (i.e. the --------------------------------------) defeat the
  restrictions in the -----------------------------------------------------.

Comment 5:

In what respect restricted? Explain briefly.

Comment 6:

Note here that pursuant to the -----------------------------------------------------, the funds are
automatically and daily transferred to the ----------------------------------. We also want to point
out that the ---------------------------------------provides rules governing this account, and
pursuant to such account, Taxpayer seems to control the funds. ------------------------------------

Comment 7:

Lenders include ----------and --------, correct? See the --------------------------------------
preamble. Who is lender and who is borrower?

Comment 8:

Also point out that some sales proceeds can be directly received by Taxpayer and deposited
into the ----------------------------------. See -----------------------------------------------. Obviously if
that is the case, there is no successful §1031 exchange.

Comment 9:

Cars owned by Taxpayer?

Comment 10:

IDR #8 says that transfers to repayment account are initiated by -------------------------------------
------------------------------------------------------------------------------------------------------------, not
taxpayer.

Comment 11:

What document controls the ---------------------------? IDR #17 says that -----------------------------
is part of ----------------------------------, correct?

Comment 12:

Loan to whom? Who is lender? From preamble to ---------------------------------- and the --------
--------------------------------------, it looks like --------- and ---------and others are the lenders and
taxpayer is borrower. Please spell this out.

                                               3

Comment 13:
This sentence should be illustrated a little more. How did Taxpayer use the funds? Did they
receive money first? Did they direct the account to make payments without involving the
QI?

Comment 14:

Why the term “beneficiaries”? Did taxpayer purchase the vehicles from the entities listed in
the chart? Or are the entities on the chart lenders? Are these loan repayments or
purchases? In the --------------------------------------, term “beneficiary” is used for lender.

Comment 15:

We should point out that in a series of transfer of the funds, the limitation of the -----------------
--------------------------------------- becomes ineffective.

Comment 16:

We can also point out that the escrow holder is a disqualified person under §1.1031(k)-
1(g)(3)(ii). We should describe §1.1031(k)-1(g)(3)(ii) and explain how such section applies
here.

Comment 17:

This statement implies that Taxpayer received cash and used the cash to acquire
replacement properties. Is that right?