Bank QI Merger Issues
PLR 201030020, issued July 30, 2010, addressed the following fact pattern: Applicant is a national banking association, owned by Parent. Applicant provides qualified intermediary services as well as other banking services to its customers. Applicant uses qualified trusts (“QTs”) as defined in Treas. Regs. 1.1031(k)-1(g)(3) to hold exchange funds. Applicant is a subsidiary of Parent. Parent acquired another QI (“Bank-Sub”) and proposes to merge it with Applicant pursuant to 12 U.S.C. § 215(a), in a transaction intended to qualify as a tax-free reorganization. As a result, Applicant will succeed Bank-Sub as the qualified intermediary in numerous pending like-kind exchange transactions. Applicant requested three rulings:
- whether Applicant may simultaneously serve as a QI and as trustee of a QT for the same customer in a single transaction;
- 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
- 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.
May the same party serve both as QI and as trustee of a qualified trust?
The Service ruled that the QI and trustee may be the same individual or entity, so long as the following general conditions are met: (a) the QI/trustee is not a disqualified person as defined in Treas. Reg. § 1.1031(k)-1(k); (b) the trust agreement and exchange agreement 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 (Treas. Reg. § 1.1031(k)-(g)(6)),; and (c) the QI acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property and transfers the replacement property to the taxpayer.
Do trustee functions by banks qualify as routine financial services, or do they disqualify a bank from acting as a QI for its trust beneficiaries?
The Service ruled that, “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.” Therefore, these services do not disqualify a bank from acting as a QI with respect to customers who receive those services, whether directly from that bank or from another member of the same controlled group.
What is the status of the successor QI upon merger with another QI while exchanges are pending?
Perhaps the most interesting aspect of this letter ruling is that the Service explicitly noted, “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.”
Because Applicant and Bank-Sub were merging pursuant to “… 12 U.S.C. § 215a(e) [a statute dealing exclusively with the merger of national or state banks into national banks] 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 [quoting the statute] ‘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.”
Because this ruling relies on the language of 12 U.S.C. § 215a, it is not possible to extrapolate if other types of QI mergers would be treated in a similar positive fashion.
As always, note that private letter rulings are not binding on the courts or on the IRS in other transactions, and that they may not be cited as precedent. However, they are useful as an indication of the thinking of the IRS on the issues discussed.
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