IRS is rethinking its position on sec. 1031 followed by a corporate reorganization.

• Author: Zachariah, Allan J.

Sec. 1031(a)(1) provides that no gain or loss shall be recognized on the exchange of property held for the productive use in a trade or business or for investment, if such property is exchanged solely for property of a like kind that is to be held either for productive use in a trade or business or for investment. Pursuant to Sec. 1031(a)(3), any property received by the taxpayer (the replacement property) will be treated as if it is not of a like kind to the property transferred (the relinquished property), if the replacement property is (1) not identified within 45 days of the taxpayer's transfer of the relinquished property or (2) received after the earlier of (i) 180 days after the taxpayer's transfer of the relinquished property or (ii) the due date of the taxpayer's return for the year in which the taxpayer's transfer of the relinquished property occurred.

There are many instances in which a corporation may be in the middle of satisfying the requirements of Sec. 1031(a)(3) when it becomes involved in a reorganization. The question is whether the Sec. 1031(a)(3) attributes follow the corporate entity through its reorganization.

Sec. 381 (a) provides that, in the case of the acquisition of assets of one corporation by another in a distribution to which Sec. 332 applies or in a transfer to which Sec. 361 applies (but only if the transfer is in connection with a Type A, C, D, F or G reorganization), the acquiring corporation shall succeed to and take into account, as of the close of the day of transfer, the items described in Sec. 381(c) of the transferor corporation, subject to certain conditions and limitations. (For this purpose, a reorganization is Type D only if the requirements of Sec. 354(b)(1) are met.) Sec. 381 (c) does not refer to like-kind exchanges under Sec. 1031. Sec. 381(c) does refer to other provisions which, like Sec. 1031, provide for the deferral of income recognition in the context of transactions potentially spanning two or more tax years. For example, Sec. 381(c)(13) states that the acquiring corporation will be considered to be the transferor corporation after the date of transfer for purposes of applying the provisions of Sec. 1033 (involuntary conversions). In addition, Sec. 381(c)(8) provides that if the acquiring corporation acquires installment obligations, the income from which the transferor corporation reports on the installment basis under Sec. 453, the acquiring corporation will be treated as if it were...