Chapter § 55.9 REVERSE-DEFERRED EXCHANGES

• Jurisdiction: Oregon

§ 55.9 REVERSE-DEFERRED EXCHANGES

§ 55.9-1 Generally

A reverse exchange is an exchange in which the replacement property is acquired before the relinquished property is sold. In contrast, in a forward-deferred exchange, the relinquished property is sold first and the replacement property is acquired and exchanged within 180 days of the sale of the relinquished property. In most reverse exchanges, an accommodator will hold either the relinquished property or the replacement property. This is referred to as "parking" the property. A reverse exchange should be attempted only if there is an absolute need to acquire the replacement property before the relinquished property is sold.

§ 55.9-1(a) Lack of Authority

Except for the safe harbor provided by Revenue Procedure 2000-37, 2000-2 CB 308, modified, Revenue Procedure 2004-51, 2004-2 CB 294, no safe-harbor regulations exist for a reverse exchange (see Treas Reg § 1.1031(k)-1(a)), nor much in the way of favorable court guidance. Thus, unless structured within the safe harbor of Revenue Procedure 2000-37, a much higher risk exists in embarking on a reverse exchange. A few cases, however, support reverse exchanges. In re Exchanged Titles, Inc., 159 BR 303 (Bankr CD Cal 1993); Biggs v. Comm'r of Internal Revenue, 69 TC 905 (1978), aff'd, 632 F2d 1171 (5th Cir 1980); J. H. Baird Pub. Co. v. C.I.R., 39 TC 608 (1962). These cases are discussed in more detail § 55.9-2(b) and § 55.9-2(c).

§ 55.9-1(b) IRS Basis for Attacking

Unless structured within the safe harbor of Revenue Procedure 2000- 37, 2000-2 CB 308, modified, Revenue Procedure 2004-51, 2004-2 CB 294, the IRS will generally attack a reverse exchange by taking the position that the accommodator in the transaction was the agent for the exchanger. See Tech Adv Mem 2000-39-005 (Sept 29, 2000). If the accommodator does not have the benefits and burdens of ownership, the accommodator will be treated as an agent for the exchanger. See DeCleene v. Commissioner, 115 TC 457, 470-71 (2000); Priv Ltr Rul 2001- 11-025 (Mar 16, 2001). This will prevent a simultaneous later transfer of the relinquished property for the replacement property, because, as discussed in § 55.5-6, an exchanger cannot effect an exchange with the exchanger's agent. In a typical deferred exchange, the exchanger must avoid receipt of the sales proceeds. In a reverse exchange, the key for the exchanger is to not be perceived as having received the replacement property. The courts have also found that it is important that the exchanger evidence an overall plan to effect a tax-free exchange. See Tech Adv Mem 2000-39-005. See also § 55.10-4.

§ 55.9-1(c) Creating Risks and Benefits in the Accommodator

For a reverse exchange not using the safe harbor of Revenue Procedure 2000-37, 2002-2 CB 308, modified, Revenue Procedure 2004-51, 2004-2 CB 294, the accommodator must be considered a principal in the transaction. The accommodator must have some of the risks and benefits of ownership. As a practical matter, accommodators are unwilling to accept any of the material risks of ownership, and exchangers are unwilling to allow the accommodator to have any of the benefits of ownership. The following are some types of risks and benefits that can be given to the accommodator:

• Title acquisition by the accommodator brings with it risks for personal injury and environmental claims.

• The accommodator can be personally liable on mortgages.

• The accommodator can assume the loss if the parked-property value declines.

• The accommodator can have the benefit if the parked-property value increases.

§ 55.9-2 Three Types of Reverse Exchanges

The three basic types of reverse exchanges are discussed in § 55.9-2(a) to § 55.9-2(c).

§ 55.9-2(a) True Reverse Exchange

A true reverse exchange is an exchange in which the exchanger actually acquires the replacement property first and later sells the relinquished property. No accommodator is used in a true reverse exchange.

The best case supporting the concept of a reverse exchange is Starker v. United States, 602 F2d 1341, 1354-55 (9th Cir 1979). In Starker, the court accepted the principle that the receipt of the replacement property need not occur simultaneously with the disposition of the relinquished property. Virtually no case law, however, supports a true reverse exchange. For this reason, a true reverse exchange is almost never attempted. For the most part, case law is against the use of true reverse exchanges.

In Rutherford v. C.I.R., 37 TCM (CCH) 1851-77 (1978), 12 heifers were transferred to the exchanger in 1973 in return for the exchanger's agreement to transfer 12 heifers in 1974, 1975, and 1976. The transaction was held to be tax-free.

In Bezdjian v. C.I.R., 845 F2d 217, 219 (9th Cir 1988), the exchanger attempted to exchange rental property for a gas station. The exchanger eventually acquired the gas station and sold the rental property to another party three weeks later. There was no prearranged agreement attempting to treat the transaction as an exchange. The transaction was held to be taxable.

In Lee v. C.I.R., 51 TCM (CCH) 1438 (1986), the exchanger sold property to different purchasers and directed that the proceeds be used to pay the indebtedness on farm property purchased the year before. The transaction was held to be taxable.

In Smith v. C.I.R., 537 F2d 972, 975-76 (8th Cir 1976), the court held that a cash sale of relinquished property followed by a transfer of the replacement property to the exchanger was taxable.

In Dibsy v. C.I.R., 70 TCM (CCH) 918 (1995), the exchange involved two liquor stores. The exchanger purchased the replacement property and operated it for six months before selling the relinquished property. The transaction was held to be taxable.

In C. Bean Lumber Transp., Inc. v. United States, 68 F Supp 2d 1055, 1060-61 (WD Ark 1999), the court disallowed a reverse trade-in involving trucks. The purchase of the replacement truck was not treated as being exchanged for a relinquished truck.

In Private Letter Ruling 98-23-045 (June 5, 1998), the IRS allowed a reverse exchange. The exchanger was a power company that acquired a replacement easement for power transmission lines before selling its existing relinquished easement. The transaction was done with one other company and had contractual interdependence, because the exchanger was obligated to transfer the old easement to the other party to the exchange after the new easement was acquired and the power lines were tested and in place.

§ 55.9-2(b) Park Replacement Property

In a reverse exchange in which the replacement property is parked, the exchanger causes the accommodator to acquire the replacement property and the accommodator holds the replacement property until the relinquished property is ready to be sold. When the relinquished property is ready to be sold, the exchanger transfers the relinquished property to the accommodator, who simultaneously transfers the replacement property to the exchanger.

This type of exchange is really a simultaneous exchange, but it is thought of as a reverse exchange because the exchanger, through the accommodator, acquires the replacement property before the relinquished property is conveyed.

If the...