Chicago Deferred Exchange Company ("CDEC") is pleased to announce we've received a new proprietary private letter ruling from the IRS sanctioning the acquisition of a partnership interest by an Exchange Accommodation Titleholder ("EAT") under certain circumstances.

Revenue Procedure 2000-37 provides that an Exchange Accommodation Titleholder ("EAT") can acquire and hold "qualified indicia of ownership" in property that is intended to be Replacement Property, on behalf of a Taxpayer, for up to 180 days.

Under Rev. Proc. 2000-37, the EAT must be the owner of the property for Federal income tax purposes. CDEC applied for and received a proprietary Private Letter Ruling in 2001 that concludes the EAT can expressly state that it is acting as the Taxpayer's agent for all purposes, except for Federal income tax purposes, without violating its status as an EAT (see: PLR 200148042).

Utilizing the agency relationship between the EAT and the Taxpayer as its cornerstone, CDEC's new ruling, PLR 200909008 concludes that the EAT's acquisition of an interest in a partnership that owns property, where the remaining partnership interest is already owned by the Taxpayer, is not inconsistent with its status as an EAT and when the EAT transfers the partnership interest to the Taxpayer, the Taxpayer will be treated, for Federal income tax purposes, as having acquired an interest in the underlying property.

The transaction can be illustrated by the following example:

Fred and Ginger own investment property in Hoboken in the name of the F&G Partnership. After many blissful years, Fred wants to sell his interest and cash out. Ginger wants to keep the property they own together and desires to structure her acquisition of Fred's interest in a tax-efficient manner.

As it happens, Ginger owns other property in Chattanooga that she's selling and she decides to structure the sale as part of a Section 1031 tax-deferred exchange.  Her tax advisor informs her that, based on Revenue Ruling 99-6, if she acquires all of Fred's interest in the F&G Partnership, the partnership will be treated as having terminated with the assets distributed equally to the partners. And Ginger will be treated as having acquired Fred's interest in the real estate. Perfect! Ginger puts her old property on the market and plans accordingly.

Unfortunately, after a few false starts with the buyer of Ginger's Chattanooga property, the closing is delayed until several months after the date she promised to buy out Fred's interest in Hoboken. Ginger now considers a reverse exchange/parking arrangement.

Rev. Proc. 2000-37 requires that, at the time qualified indicia of ownership of the property is transferred to the EAT, the Taxpayer's bona fide intent must be that the property held by the EAT represent Replacement Property in a Section 1031 exchange.

In our example, the qualified indicia of ownership acquired by the EAT is the partnership interest in the F&G Partnership. IRC Section 1031(a)(2)(D) specifically excludes the exchange of an interest in a partnership, so the EAT, arguably, has acquired non-qualifying property. 

However, because we can affirmatively state that the EAT is acting as Ginger's agent (for all purposes other than Federal income tax purposes), Ginger will be treated as having constructively received the partnership interest at the time the partnership interest is acquired by the EAT.  Therefore, the logic of Revenue Ruling 99-6 applies at that time, and the EAT is treated as acquiring property that represents qualifying replacement property under IRC Section 1031.