Non-safe-harbor reverse-exchange guidance.

• Author: Bakale, Anthony

In Rev. Proc. 2000-37, the IRS issued safe-harbor guidance for certain "reverse" Sec. 1031 exchanges. In a reverse exchange, a taxpayer acquires replacement property before selling relinquished property. Rev. Proc. 2000-37 provides a safe harbor for certain "parking" arrangements, in which an accommodation party acquires and holds title to the replacement property until the taxpayer can arrange the sale of the relinquished property. The safe harbor applies to transactions occurring after Sept. 14, 2000, in which the taxpayer does not park the replacement property for longer than 180 days. (See. Hamill, "Rev. Proc. 2000-37 Offers Long-Awaited Reverse-Exchange Safe Harbor," TTA, March 2001, p. 190.)

Tax advisers welcomed this guidance, even though reverse-exchange arrangements often cannot be consummated within 180 days. An open question is how the Service -will treat reverse-exchange parking arrangements that fail to comply with this requirement, or how it will view exchanges initiated before the effective date. Letter Ruling 200111025 provides insight into how the IRS might evaluate parking arrangements that fall outside the safe harbor.

In Letter Ruling 200111025, a taxpayer held a park for investment purposes. A tax-exempt organization wanted to purchase the park, but could not do so without first obtaining certain state approvals. As a result, the taxpayer received payment from the organization for an option to purchase the park. The taxpayer intended to complete a Sec. 1031 exchange when it sold the park, and the agreement with the organization clearly indicated the taxpayer's intent.

On the taxpayer's behalf, an accommodation party purchased property intended to be replacement property for the park property. It funded the purchase with proceeds of a bank loan and a loan from the taxpayer. The taxpayer guaranteed the bank loan and the accommodation party paid a fee for the guaranty. The taxpayer also indemnified the accommodation party against any environmental liability for the replacement property. The taxpayer then contracted to lease the property from the accommodation party for one year, with an option to extend the lease for an additional year. The lease was a triple-net lease, and the accommodation party also assigned other leases associated with the property. The taxpayer had the option to acquire the property for its fair market value, specified as the accommodation party's acquisition cost if the purchase occurred within 18...