IRS issues guidance on use of accommodation parties in deferred like-kind exchanges.

• Author: Fiore, Nicholas J.

Sec. 1031 (a) (1) provides that a taxpayer does not recognize gain or loss on an exchange of property held for productive use in a trade or business or for investment, if he exchanged the property solely for like-kind property that he intends to hold for the same reasons. Sec. 1031 (a) (3) provides that property received by a taxpayer cannot be treated as like-kind property if it is (1) not identified as property to be received in the exchange on or before 45 days after the date on which the taxpayer transfers the relinquished property or (2) received after the earlier of 180 days after the date on which the taxpayer transfers the relinquished property, or the due date (determined with regard to extensions) for the transferor's Federal income tax return for the year in which the transfer of the relinquished property occurs.

Determining the owner of property for Federal income tax purposes requires an analysis of all of the facts and circumstances. As a general rule, the IRS considers the party that bears the economic burdens and benefits of ownership as the owner of property for Federal income tax purposes. In 1991, Treasury and the Service promulgated final regulations under Regs. Sec. 1.1031(k)-l, for deferred like-kind exchanges under Sec. 1031(a)(3).

Since the promulgation of these final regulations, taxpayers have engaged in a wide variety of transactions, including so-called "parking" transactions, to facilitate reverse like-kind exchanges. Parking transactions typically are designed to "park" the desired replacement property with an accommodation party until the taxpayer arranges for the transfer of the relinquished property to the ultimate transferee in a simultaneous or deferred exchange. Once such a transfer is arranged, the taxpayer transfers the relinquished property to the accommodation party in exchange for the replacement property. Then, the accommodation party transfers the relinquished property to the ultimate transferee. In other situations, an accommodation party may acquire the desired replacement property on behalf of a taxpayer and immediately exchange such property with the taxpayer for the relinquished property, thereafter holding the relinquished property until the taxpayer arranges for a transfer of such property to the ultimate transferee. In the parking arrangements, taxpayers attempt to arrange the transaction so that the accommodation party has enough of the benefits and burdens relating to the property to be...