Reverse like-kind exchange safe harbor.

• Author: Sair, Edward A.
• Position: IRS policy

The IRS issued Rev. Proc. 2000-37, providing a safe harbor for taxpayers entering into "parking" transactions to effectuate a reverse like-kind exchange ("reverse-Starker" transactions). Parking transactions involve an accommodation party that holds property in an exchange so that a taxpayer does not concurrently own both the relinquished and replacement exchange properties.

Under the boundaries of the safe harbor, the Service will not challenge:

* Qualification of a property as either replacement property or relinquished property for Sec. 1031 purposes; or

* Treatment of an exchange accommodation titleholder (EAT) as the beneficial owner of such property for Federal income tax purposes, if the property is held in a qualified exchange accommodation arrangement (QEAA), as defined in Section 4.02 of the revenue procedure.

Rev. Proc. 2000-37 sets specific time limits and adopts other requirements for completing parking transactions that qualify for the safe harbor. Importantly, however, in addition to sanctioned safe-harbor transactions, the IRs specifically states that non-safe-harbor transactions may be acceptable, and that the revenue procedure does not infer that transactions outside of its scope are invalid. Rev. Proc. 2000-37 is effective for transactions after Sept. 14, 2000.

Background

Sec. 1031(a)(1) provides that, in general, no gain or loss is recognized on the exchange of property:

* Held for productive use in a trade or business or for investment; and

* If such property is exchanged solely for like-kind property to be held either for productive use in a trade or business or for investment.

Sec. 1031 (a) (3) allows a deferred exchange provided the replacement property is:

* Identified within 45 days after the date the taxpayer transfers the property relinquished in the exchange; and

* Received after the earlier of 180 days or by the due date of the transferor's return for the tax year in which the transfer of the relinquished property occurred.

In 1991, the Service issued Regs. Sec. 1.1031(k)-1, providing rules for deferred like-kind exchanges under Sec. 1031(a)(3). The preamble to the final regulations states that the deferred-exchange rules under Sec. 1031(a)(3) do not apply to reverse-Starker exchanges and consequently; that the final regulations do not apply to such exchanges. Reverse-Starker exchanges are exchanges in which replacement property is acquired before the relinquished property is transferred; see Starker, 602 F2d...