Click herefor case of Goolsby v. Commissioner; T.C. Memo 2010-64, April 1, 2010.
Andrew Gustafson, CES®
In 2009, the landscape of 1031 tax deferred exchanges were impacted by a number of private letter rulings (PLR), chief counsel advisories (CCA) and Court rulings. Here is a short summary of the facts and impact of recent decisions and rulings affecting Internal Revenue Code §1031.
PLR 200901020 In this private letter ruling, the Tax Court ruled that residential density development rights are like-kind to real property when they are in perpetuity and real property under state law. The facts are that the property owner contracted to sell parcels of property. In the contract was a put option entitling the seller to transfer some or all of their residential development rights in a phased development plan. The exercised option would require the buyer to sell certain hotel development rights back to the seller. Once established the development rights were considered real property under state law, the PLR declared that the development rights qualify as like-kind property given the rights were in perpetuity, and directly related to the Exchangor's use of the property. The Court concluded the Exchangor had met this criterion.
CCA 200911006 In this chief counsel advisory, the IRS reversed its long-held position and agreed that trademarks, trade names, newspaper mastheads and customer-based intangibles can be like-kind. The CCA asserted that these intangibles may qualify for §1031 consideration if they can be separately valued from a business's goodwill. Treasury Regulations §1.1031(a)(2)(c)(1) requirements of "nature and character" still must be met; consequently, not all trademarks, trade names and mastheads are like-kind.
Ocmulgee Fields, Inc.
In this Court ruling, the Tax Court disallowed an exchange when the replacement property was acquired from a related party. The facts are the Exchangor engaged a Qualified Intermediary to transfer relinquished property under an exchange agreement. The Qualified Intermediary sold same property to an unrelated third party and used the exchange proceeds to acquire the replacement property related party transferring title to the Exchangor. The IRS rejected the exchange stating the intent was a series of transactions fabricated to avoid basis shifting and had not established the "lack of tax avoidance" exception under §1.1031(f)(2)(c). The Tax Court agreed with the IRS citing Teruya Bros., Ltd. (2005), noting the basis shift resulted in $1.8 million gain deferral at 15% rather than 34%.
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