Private Letter Rulings (PLRs)

Following are summaries and observations on a number of private letter rulings and technical advice memoranda issued by the Rulings Branch of the Internal Revenue Service. These rulings are directed only to those Taxpayers who requested them. Section 6110(j)(3) of the Internal Revenue Code provides that they may not be used or cited as precedent. Final Regulations pertaining to many of the issues addressed in these rulings have not yet been adopted. Therefore, rulings may be modified or revoked at any time or by the adoption of final Regulations to the extent the Regulations are inconsistent with any conclusions in the rulings.

The document numbers assigned by the IRS to its private letter rulings are composed of three groups of numbers. The first two numbers represent the year (88=1988). The second two numbers represent the week in which the document was released (36=the 36th week of 1988). The last three numbers indicate its position in the series of rulings issued that week (in 8836006, 006=the 6th ruling issued in the 36th week of 1988).

PLR 8836006 Tenants in Common: Each of A, B and C owns a one third undivided interest as a tenant in common in three separate parcels (D, E and F). A, B and C will exchange their interests to provide B with the entire ownership of parcel D and to give each of A and B an undivided one half interest in parcels E and F. In order to equalize values, B will also give A and C a note payable over five years. Relying on Rev. Ruls. 79 44 and 73 476 the IRS stated that the severance of a tenancy in common occasioned by the transfer of a co tenant's interest in real property for other real property qualifies for non-recognition treatment under Section 1031(a). Thus B, will not recognize any gain on the exchange. A and C will have to recognize gain only to the extent required by Section 1031(b) for the note (boot). Pursuant to Rev. Rul. 65 155, A and C may elect to recognize the gain for the boot under the Section 453 installment method.

PLR 8847042 Construction Services: Taxpayers enter into agreement where they will convey rental property held for investment to a developer. Developer will demolish the present building and construct two townhouses and convey one townhouse and the underlying portion of the lot back to Taxpayers in exchange for the second townhouse and remaining portion of the lot. The IRS ruled that this exchange would qualify for non-recognition if it was completed within the time allowed by Section 1031(a) NOTE: This ruling was revoked February 27, 1989 (PLR 8921058) as an exchange of real property for services (demolition of existing building and construction of townhouse). See Reg. §1.1031(k)-1(e).

PLR 8852031 Direct Deeding: Taxpayer contracted to transfer property to purchaser. To accommodate the exchange, purchaser will deposit funds with trustee. Trustee may apply the funds toward the purchase of property which satisfies purchaser's obligation to Taxpayer. If the purchaser fails to fully satisfy its obligation, the trustee will release the remaining funds to Taxpayer. The Taxpayer represents that the parties in the exchange are Taxpayer and trustee. The IRS addressed only the issue of whether a Taxpayer qualifies for Section 1031 treatment if the other party to the exchange does not have title to the property transferred to the Taxpayer and does not take title to the property received from the Taxpayer. The IRS made no determination as to whether trustee is the party with whom Taxpayer is exchanging properties. Relying on W.D. Hayden & Co. v. Commissioner, the IRS concluded that the applicability of Section 1031 does not depend on whether the party with whom Taxpayer makes the exchange has title to the property transferred to Taxpayer or received title on the property transferred from Taxpayer. NOTE: The IRS announced on June 16, 1989 that it has reconsidered and revoked PLR 8852031 due to its concern about the parties to the exchange, but not out of concern over the direct deeding issues. (The proper parties to the exchange are Taxpayer and purchaser). See Reg. §1.1031(k)-1(g)(4).

PLR 8912023 Partnership Interests: Limited partnership owns commercial real estate. The partnership's general partner is a corporation, while eight individuals hold limited partnership interests. Three of these eight limited partners are also stock- holders of the general partner. The general partner will liquidate under Section 333 and distribute its assets to the three stockholder/limited partners. After liquidation, at least one of the general partner's stockholders will exchange his general partner interest for a limited partner interest. At least one of the limited partners will exchange his limited partner interest for a general partner interest. Each partner's profits, losses, and capital will remain the same after the exchanges. The Service ruled that any gain or loss realized by the partners on the proposed exchanges of partnership interest would qualify for non-recognition. NOTE: This ruling was revoked by the Service in April 1989. Section 1031(a)(2)(D) of the Code provides that the non-recognition provisions under Section 1031(a) shall not apply to any exchanges of interests in a partnership. Compare to Magneson v. U.S. infra.

PLR 8915012 Conversion to Personal Residence: Taxpayer owns rental property held for investment which will be exchanged for property to be occupied by Taxpayer as a personal residence. The Service ruled that since the property to be received by Taxpayer would not be held for productive use in a trade or business or for investment, the non-recognition provisions under Section 1031(a) would not apply.

PLR 8915032 Direct Deeding, Letter of Credit: Taxpayer plans to exchange parcel A for other property owned by a bank. The bank does not have a suitable property to exchange with Taxpayer at present but Taxpayer and the bank intend to identify a suitable replacement property. At the execution of the agreement the bank made a cash deposit to L, to which the Taxpayer will be entitled if the bank defaults. At the closing, parcel A will be conveyed to the bank and simultaneously L will return the deposit to the bank. Then, the bank will issue a non negotiable, non transferable, unconditional irrevocable instrument drawn on the bank's general credit. The instrument will expire 250 days after the closing and will be in the amount of the exchange value plus a growth factor of no more than 10 percent. The exchange value can be satisfied with a cash payment on the earliest of (1) Taxpayer's filing of its federal income tax return for the year in which parcel A was transferred, (2) the failure to identify a suitable property for the exchange within 45 days as specified by Section 1031(a)(3)(A), or (3) if a suitable property is identified within the 45 day period, if it is not transferred to Taxpayer within 180 days after parcel A was transferred, on the 181st day. In order to avoid duplication of state transfer taxes the replacement property will be transferred directly from the seller thereof to the Taxpayer. The Service ruled that the exchange will qualify under Section 1031 and Taxpayer will not recognize any gain on the exchange except to the extent of any money received as part of the exchange. The Service went on to say that the receipt of a growth factor pursuant to the Exchange Agreement will be taxable to the Taxpayer as interest income and will not constitute other property or money for purposes of Section 1031(b) and (d) of the Code. NOTE: The ruling sanctions the use of a cash earnest money deposit as well as direct deeding. It also holds that Section 291 of the Code (dealing with corporate preference items) is not applicable. See Reg. §1.1031(k)-1(g)(4).

PLR 8938045 Condominium: Taxpayer owns a commercial building from which it conducts a business. Taxpayer will exchange its fee simple ownership for a commercial condominium office. The Service ruled this was a good like kind exchange conditioned upon the existence of a common interest in the underlying land being part of the condominium articles.

PLR 8933019 Tenants in Common: Partitioning a farm held by three tenants in common with the result that each would receive a fee simple interest was a like kind exchange.

PLR 8946068 Multi-Asset Exchange: The Service ruled that a limited partnership which owned a Federal Communications Commission non wire line cellular telephone license operating in two states, and exchanged the license and operating assets for another company's non wire line license and operating assets in a third state was entitled to like kind exchange treatment.

PLR 9152010 Acquisition by REIT: Taxpayer (a C corporation) intends to convert existing real estate holdings to properties that would be considered investment grade by a publicly traded real estate investment trust, and be acquired by a publicly traded REIT. Pursuant to an exchange agreement, Taxpayer will (i) transfer existing properties, (ii) be acquired by REIT, (iii) acquire replacement property. A REIT, which acquires Taxpayer in a reorganization described in Section 368(a)(1)(c) of the Code, will be treated for purposes of Section 1031(a)(3) of the Code as the distributor or transferor of the relinquished property transferred before the reorganization.

PLR 9215049 Agricultural Conservation Easement: Taxpayer owns a farm in fee simple, which it holds for productive use. The county in which the farm is located wants to acquire an agricultural conservation easement in perpetuity on the farm to prevent the development or improvement of the land for any purpose other than agricultural production. Under state law, the agricultural conservation easement is an interest in real property. The Service ruled that the easement is of like-kind to fee simple title to other farm property. (See also Rev. Rul 55-749, 1955-2 C.B. 295 where land was exchanged for perpetual water rights that are considered real property rights under applicable state law; and Rev. Rul. 72-459, 1972-2 C.B./ 472 where an easement and right-of-way granted to an electric power company were held to be properties of like-kind with real property).

PLR 9341029 Bequest: Taxpayer received a one-half interest in improved property A through a bequest from Taxpayer's brother. Taxpayer represented that it held property A for investment. Taxpayer will enter into an exchange agreement with a qualified intermediary under which the qualified intermediary will sell property A, place funds received from the sale in a qualified escrow, acquire suitably identified replacement property, and cause that property to be conveyed to the Taxpayer within the times set forth in Section 1031(a)(3)(B) of the Code. The Service ruled that the proposed exchange would qualify. Unfortunately, the relevant dates have been redacted from the ruling as published, and therefore it is impossible to know how long a period of time elapsed between the receipt of Property A through the bequest, and it's ultimate disposition in the exchange. However since the beneficiary of a bequest received a stepped-up basis and acquisition date equal to its value of date of death (or 6 months thereafter in the case of alternate valuation), presumably the holding period was relatively short and the property appreciated rapidly during that period.

PLR 9413006 Build to Suit: In what surely is one of the most generous letter rulings ever issued in the 1031 area, the IRS held that the general partner of the Taxpayer partnership could, prior to receipt of replacement property, draw down funds held by the intermediary title company in order to construct improvements on land owned by the seller of the replacement property. The IRS rationalized that there was no constructive receipt by the Taxpayer because the Taxpayer represented that all funds drawn down by the general partner "arose from [the general partner's] performance under the construction contract and none represents receipts from the transfer of the relinquished property." The obvious question is why there was not actual receipt of funds by the Taxpayer or his agent.

PLR 9413024 Option Payment: The Service ruled that an option payment received five years before the exchange will be considered part of the exchange for purposes of Section 1231 capital gain characterization. However, that amount will be treated as boot during the year the exchange is completed because it was not invested in replacement property.

PLR 9431025 Held for Investment: Taxpayer acquired lot 1 and lot 2 in 1969. Taxpayer lives in a house built on lot 1. Developer will acquire all of lot 2 and part of lot 1 in exchange for two townhouses to be built on other property. Taxpayer offered lot 2 to developers from 1979 to present, and received numerous telephone calls and letters before reaching the agreement with the developer. The Service ruled that the exchange of lot 2 for the two townhouses will qualify as a like-kind exchange, but gain or loss must be recognized on the part of lot 1 transferred to the developer which was held for personal use. (Editor's note: Apparently the Service was not aware of the fact that property held "primarily for sale" is disqualified even if not held as inventory.)

PLR 9439007 Related Parties: Taxpayer and related parties own undivided interests in different tracts of land. Following the exchange, Taxpayer and related party will each own 100% fee interest in separate properties. The Service ruled that the simultaneous transfer of like-kind properties involving an intermediary is treated as an exchange. (Editor's note: This exchange will be disqualified if either the Taxpayer or the related party transfers the property it received within two years of the exchange, unless one of the exceptions to Section 1031(f) applies.)

PLR 9447008 Rental Car Fleet: Taxpayer is in the business of owning and renting cars and trucks. The Service ruled that the vehicles could be exchanged for replacement vehicles under an exchange agreement with a qualified intermediary. (Editor's note: several commentators have expressed surprise that the Taxpayer's lender still qualified as an intermediary given its level of involvement with the Taxpayer.)

PLR 9448001 Exchange of Businesses: The Service ruled that the Taxpayer could not aggregate assets, i.e., treat several different types of assets as a single asset, in determining whether the exchange of one business for another business is an exchange of like kind property. (Editor's note: Taxpayer cited Rev. Rul. 85-135, 1985-2 C.B. 181 and ignored the fact that it was clarified by Rev. Rul 89-121, 1989-2 C.B. 203 as well as the Regulations on exchanges of multiple properties (1.1031(j)-1.)

PLR 9448010 Soft Credits: Taxpayer assigns its rights under the contract to sell the relinquished property to intermediary; proceeds are paid to the intermediary, Taxpayer assigns its rights under the contract to acquire the replacement property to the intermediary; replacement property is conveyed to Taxpayer. (Editor's note: This ruling seems to imply a willingness by the Service to rule on the mechanical aspects of exchanges. The only troubling aspect of the ruling is that the Taxpayer appears to have the ability to receive "soft credits" (e.g., fee waivers) in lieu of interest on the money being held by the intermediary.)

PLR 9535028-9535033 Litigation Settlement: In six similar rulings the IRS ruled that a property exchange to settle litigation over a family's real estate holdings qualified for non-recognition under Section 1031.

PLR 9601046 Conservation Easement: A grant of a conservation easement in perpetuity was classified by the Service as real property for purposes of identifying replacement property under IRC 1031. The easement was acquired by the Department of Interior Fish and Wildlife Service for use by the Taxpayer for a seasonal habitat of migratory waterfowl. The Taxpayer was engaged in the business of cattle grazing and duck hunting. The Taxpayer received a fee interest in replacement property.

PLR 9609016 Undivided Fractional Interests in Farmland: An exchange of fractional interests in 23 parcels of farm land for 100 percent interests in other parcels of farm land qualified under IRC §1031 provided the values of the properties were approximately equal.

PLR 9621012 Conservation Easement: The Service ruled that if a conservation easement transferred is an interest in real estate under state law, the exchange of the easement for timberland, farm land, or ranch land would qualify under IRC §1031.

PLR 9627014 Multi-Asset Exchange: Rental Cars: This ruling involves sales by a qualified intermediary to the manufacturer, who re-sells the vehicles at auction. The ruling allows great flexibility in structuring mass exchanges where some of the proceeds transferred by the ultimate buyers will not be attributed to vehicles being exchanged. It accomplishes this by having all of the proceeds from the sales go into one pool of funds held by an entity acting as an "agent" of the sellers, who then determines which of the proceeds should to go the intermediary, and which should go directly to the Taxpayer. The Taxpayer's designation of relinquished vehicles and the assignment of rights to the vehicles are accomplished through certain standard forms created by the Taxpayer. The ruling also provides additional support for allowing a Taxpayer to bifurcate large, ongoing transfers of vehicles (or other assets) simply by designating which vehicles belong to a particular group.

PLR 9642029; 9642032-35 Undivided Fraction Interests in Farmland: In five substantially similar rulings, the Service ruled that an individual's exchange of an undivided one-sixth interest in various farm properties for a 100 percent interest in specific farm property is a good like-kind exchange.

PLR 9649009 Continuity of Business: This ruling involved an exchange of like kind assets following several statutory mergers. A common parent of a consolidated group merged several of its subsidiaries together and then transferred business assets to an unrelated corporation in an IRC §1031 exchange. The Service ruled that these transactions would not cause the mergers to fail the continuity of business enterprise requirement of Reg. 1.3568-1(d).

PLR 9741017 Partnership Interest: Two brothers each own a one-half interest in Taxpayer, which itself owns 10 rental properties. Management of the properties is performed by a property management corporation, of which the brothers are equal stockholders. The brothers represented that they had never executed any partnership agreement regarding Taxpayer or considered themselves to be any thing other than equal owners of the properties. For five consecutive years however, all net income and losses of the Taxpayer relating to the properties have been reported on a Form 1065 Partnership Return. The Service concluded that the interests to be exchanged represent interests in a partnership. Therefore, because the exchange is an exchange of interests in a partnership, it cannot qualify for nonrecognition treatment under Section 1031.

PLR 9751012 Single Member LLC, Merger and Liquidation: A foreign corporation owns the majority of the outstanding stock in Taxpayer, a US Holding Company, and X, a US Operating Company. Taxpayer owns all the outstanding stock in sub 1 and sub 2 which each hold hotel property for investment. X, sub 1 and sub 2 will transfer their properties to a qualified intermediary. Before acquiring replacement property, sub 1 and sub 2 will liquidate into Taxpayer under Section 332 and X will merge with Taxpayer under Section 368 (a)(1)(A) of the code. Taxpayer will then form a separate single member limited liability company under the laws of each state in which replacement property will be acquired. The receipt of the replacement properties by the LLC will complete the deferred exchange transaction, which began with the transfer of the relinquished property by sub 1, sub 2 and X. The Service ruled that (i) Taxpayer will be treated as both the transferor of the relinquished properties and transferee of replacement properties, (ii) the acquisition of replacement property by each non-electing LLC, wholly owned by Taxpayer will be deemed an acquisition by Taxpayer and (iii) the transaction will not violate the requirement under Section 1031 (a)(i) that replacement property is to be "held for productive use in a trade or business or for investment" merely because the replacement property is received by one or more wholly-owned, non-electing LLCs.

PLR 9807013 Domestic Eligible Entity: Taxpayer, a limited partnership, will transfer relinquished property to a qualified intermediary. In order to achieve its business objective and satisfy the requirements of lender, Taxpayer will form a single asset entity, a "replacement entity" to take title to each replacement property to be received in the exchange. Each "replacement entity" will be a "business entity" that is a "domestic eligible entity" within the meaning of Section 301.7701-2 and 3 of the regulations. Taxpayer will be the sole owner of the ownership interests in each replacement entity. The Service ruled that Taxpayer's receipt of the replacement properties through the replacement entities will be treated as the receipt of real property directly by the Taxpayer for purposes of Section 1031.

PLR 9812013 Multi-Asset Exchange: Auto Leasing Portfolio: In an exceedingly generous ruling directed to a leasing company the Service held:

1. Each transfer and receipt will constitute a separate and distinct like-kind exchange transaction that qualifies for deferral of gain recognition.

2. The role of the intermediary in the purchase of property that is not replacement property, and thus not involved in the like-kind exchange constitutes "routine financial or trust services" for Taxpayer under Reg. §1.1031(k)-1(k)(ii) and does not disqualify the intermediary from being a qualified intermediary.

The ruling indicates that there were not one, but two separate escrow accounts, one of which was "qualified" and used to purchase replacement property, and one "non-qualified" escrow which was used to purchase non-replacement property. This type of depository account was formally sanctioned by Revenue Procedure 2003-39.

PLR 9814019 Reverse Exchange of Utility Easements: An examination of the facts of this transaction reveals a reverse exchange between two parties, in which the conveyance of the new utility easement to the Taxpayer's is followed by relinquishment of the old utility easement. Other than a brief reference to Rev. Rul. 72-549 in support of the conclusion the two easements are like-kind property, there is no discussion whatsoever of the reverse order of the exchange. A representative of the IRS National Office has acknowledged that this is the first ruling involving a reverse exchange, but cautions that the facts were ambiguous about the time periods involved.

PLR 9826033 Multi-Asset Exchange: Rental Cars: The Service ruled that the acquisition by the Intermediary of non-replacement properties on behalf of a leasing company Taxpayer in a 1031 exchange constituted "routine financial or trust services" and did not result in the determination that the Intermediary is a disqualified person. See also Revenue Procedure 2003-39.

PLR 9850001 Single Member LLC, Section 332 Liquidation, Section 368 Reorg: A foreign corporation owns the majority of the outstanding stock in a U.S. Holding Company (H) which in turn owns all of the stock of Taxpayer, a U.S. Operating Company. The foreign corporation also owns 95% of the stock of S, a U.S. Operating Company, which in turn is the sole owner of LLC1, a limited liability company. Taxpayer transfers a hotel in a Section 1031 exchange. Prior to acquiring replacement property, Taxpayer forms LLC2, a wholly-owned single member limited liability company. Replacement property is acquired by Taxpayer within the exchange period and transferred directly to LLC2. Subsequent to completing the exchange, Taxpayer will liquidate into H under Section 332. H will then merge with S in a corporate reorganization under Section 368(a)(1)(A) of the Code. As a result of the merger, S will be the sole owner of LLC2 and LLC1. S will then transfer its interest in LLC2 to LLC1 and both entities will continue to exist.

The Service ruled that (i) the liquidation of Taxpayer into H and the merger of H into S will have no effect on the requirement under Section 1031(a)(1) that replacement property be held by the Taxpayer for productive use in a trade or business or for investment, and (ii) the transfer by S of its interest in LLC2 to LLC1 will have no effect on the Section 1031 exchange because both LLC1 and LLC2 will be disregarded as entities separate from the owner and the assets of each will be treated as assets of the owner.

PLR 9851039 Agricultural Conservation Easement: Taxpayers, two testamentary trusts, own fee simple interests in two separate farms. Taxpayers desire to exchange agricultural conservation easements in both farms for a third farm with improvements to be held by Taxpayers for investment. The Service ruled the agricultural conservation easements were like-kind to the fee interests to be acquired by Taxpayers and the exchange qualifies for non-recognition of gain under Section 1031.

PLR 9853028 Netting Liabilities: Three partnerships owning investment property desire to exchange the property under Section 1031. The buyer of the relinquished property obtains bond financing to complete the purchase, which precludes the buyer from assuming the mortgage currently encumbering the property. To finance the replacement property, the Taxpayers obtain new financing in an amount that equals or exceeds the debt that encumbers the relinquished property. The Service ruled that consideration received in the form of debt relief on the transfer of the relinquished property could be netted against the liabilities incurred on the acquisition of the replacement property, even though the liabilities were not "assumed" by the parties. See also Wittig v. Commissioner infra.

PLR 9911033 Two-Member LLC: A two-member LLC acquiring replacement property in a Section 1031 exchange is disregarded as an entity separate form the Taxpayer where the second member is a member for the sole and limited purpose of preventing the Taxpayer from voluntarily placing the LLC into bankruptcy.

PLR 9926045 Exchange of Timberland: An exchange with a related party for an undivided interest in a portion of old-growth timberland for a 100 percent interest in one-half of the timberlands to be held for investment is a good exchange regardless of the fact that the related party plans to harvest the timber within two years of the exchange.

PLR 9936065 Conversion from LLC to Limited Partnership: The conversion of multi-member LLCs into limited partnerships in the middle of a Section 1031 exchange won't terminate the LLCs under Section 708 and the new partnerships are considered a continuation of the LLCs.

PLR 20001994 Tenancy in Common Interests Held by Partnership: The exchange of several partnerships fee simple interests in mobile home parks for undivided interests in apartment buildings to be held by the partnerships as tenants in common qualified under Section 1031. The proceeds of refinancing for business purposes in year 1 will not be considered as payments of boot in the exchange transactions. The ownership as tenants in common will not result in the formation of a partnership among the partnerships.

PLR 200019014 (February 10, 2000) Partnership Status: Co-owners provided heat, air conditioning, hot and cold water, unattended parking, normal repairs, cleaning of public areas and trash removal. Citing Rev. Rul. 75-374, the IRS held that the co-owners were not partners because the services were usual and customary. This is a very generous ruling. The Service could have easily concluded that the mere fact that the co-owners were in the real estate leasing business constituted a business activity that would have classified the arrangement as a partnership.

PLR 200040017 (June 30, 2000) U.S. Virgin Islands Property: The IRS ruled in PLR 9038030 that U.S. Virgin Islands property is not foreign property for purposes of Section 1031. This position was later reaffirmed and clarified in PLR 200040017, where the IRS, relying on §932, explained that with respect to an individual who is a citizen or resident of the United States, the term "United States" shall be treated as including the Virgin Islands but only if the individual received income (presumably gross income) from the Virgin Islands property during the year. Note: property located in Puerto Rico, a U.S. protectorate, is never like-kind to US property.

PLR 200111025 (December 8, 2000) Reverse Exchange Outside the Safe Harbor: The Service allowed a non-safe harbor parking arrangement (issued prior to the Rev. Proc.) where Taxpayer parked replacement property with an Accommodation Party for a period of up to 18 months. While some may view this PLR as a blueprint that could be utilized in structuring transactions outside the safe harbor, Taxpayers and practitioners should be very wary of following this ruling in the absence of their own ruling. This ruling did not go into the type of analysis of risk/reward and burdens of ownership that is appropriate to determine whether a true arm's length transaction existed but instead focused strictly on any agency analysis.

PLR 200118023 (March 2001) Acquisition of Membership Interest in LLC: Taxpayer acquired, as its replacement property, the membership interest in a single member LLC that was owned by the QI. The Service concluded this was a good exchange because the LLC was ignored for Federal income tax purposes and that the transfer of all interest in the LLC would be treated as a transfer of the property.

PLR 200137032 (June 2001) Co-Op Conversion: The exchange of a New York co-op apartment lease and shares for a condo unit in the same building qualified for tax-deferral under IRC Section 1031. Taxpayer owned a New York cooperative apartment (which includes shares of stock in the corporation, as well as an interest in a long term proprietary lease [greater than 30 years]). Taxpayer desired to exchange the co-op interest for legal title to a condo unit in the same building. The Service held that state law usually determines whether an interest in property constitutes real property or personal property. Under several New York statutes, including real property transfer tax, stock ownership in a co-op is often treated as and equated to an interest in real property and that in this case, the condo deed constituted a fee interest in the same underlying real property and the same common areas as the co-op apartment.

PLR 200131014 (August 6, 2001) Qualifying Use of Replacement Property: The transfer of two separate replacement properties to two separate single member limited liability companies does not violate the held for investment requirement under Section 1031. Taxpayer sold one relinquished property and acquired two hotel properties as replacement property. In each acquisition, Taxpayer acquired the property in a separate single member limited liability company, of which the Taxpayer was the sole member. The Service concluded (as it has done in previous rulings) that because the LLCs were ignored for Federal income tax purposes, the exchange was good (and the Taxpayer was deemed to have acquired property to be held for investment).

PLR 200151017 (September 17, 2001) Merger of Related Companies: The merger of two first tier subsidiaries wholly owned by a common parent after the transfer of the relinquished property and after the identification of replacement property did not disqualify the exchange.

PLR 200201007 (October 2, 2001) Perpetual Conservation Easement: The exchange of a perpetual conservation easement over a ranch for a fee interest in another ranch that would also be burdened with a perpetual conservation easement constitutes a valid like-kind exchange. Under state law, the easement was perpetual in duration and constituted an interest in real property. This is an interesting ruling because the easement was negative in character (i.e. it would now preclude the existing owners from using the land for purposes other than retaining it in its natural state). The ruling also confirms that categorization under local law is an important element of the analysis.

PLRs 200201007, 0203033, 0203042 (October 2001) Exchange of Perpetual Conservation Easements: In a two-party exchange, Taxpayer transfers a PCE on land it owns to a 501(c)(3) organization. In return, Taxpayer receives fee interest in ranch land that will also be burdened with a PCE. A conservation easement is considered an interest in real property that is freely transferable regardless of the fact that it is negative in character, and for state law purposes, is considered a real property interest. The Service allowed the transactions as an exchange of like-kind properties. (Compare this result to Wiechens v. Commissioner where water rights of limited duration are deemed not like-kind to real estate).

PLRs 200208004, 200209010 Determining Basis in a Multi-Asset Exchange: An exchange of nuclear power generation plants concludes that liabilities assumed by the Taxpayer that are non-qualifying assets for purposes of the exchange will be taken into account for purposes of determining gain to the Taxpayer, but will not be taken into account in computing substitute basis until such time as economic performance occurs with respect to the liabilities.

PLR 200211016 Bankruptcy of Qualified Intermediary: Taxpayer entered into an exchange with a qualified intermediary. Shortly thereafter, a state agency was appointed as receiver for the QI, and its assets were frozen. As a result, Taxpayer was unable to access the cash held by the QI to complete his exchange within the statutory period provided in the Code. Taxpayer requested an extension of the 180-day period and was denied. The Service held that the statutory provisions of 1031 prevail and that no extensions are to be granted for hardships. (See also Christensen v. Commissioner where Taxpayer appealed for an extension of the exchange period and was denied). Contrast this position to certain extensions of time granted for natural disasters and acts of terrorism.

PLR 200224002: Network Affiliations & FCC Licenses: Taxpayer exchanged several FCC licenses to operate radio for FCC licenses to operate television. [See TAM 200035005 where the Service concluded that radio and television licenses are like kind.] Taxpayer attempted to argue that the rights conferred by the licenses - the right to broadcast programming at a specific frequency on the electromagnetic spectrum in a specific geographic area - is not the only underlying property to which the license relates. The Service rejected Taxpayer's argument that the ability to affiliate with a major television network should also be included as part of the underlying property to which the license relates. Instead, the Service concluded, the appropriate manner of identifying the underlying property to which the license relates is to look at the license itself - which authorizes the use and operation of the radio transmitting apparatus on the assigned frequency of the electromagnetic spectrum. Any additional value attributed to the license by virtue of the operator's ability to affiliate with a major network is not inherently part of the property or rights conferred by the license.

PLR 200236026 Electronic Qualified Intermediary Program: The Service concludes that an exchange is valid where Qualified Intermediary and Taxpayer exchange electronic signatures through a secure web site. This ruling is not groundbreaking in its concept, though Taxpayers should be wary of engaging in electronic exchanges with QIs who do not have rulings.

PLRs 200231016, 200241013, 200242007: Vehicle Leasing Programs: These rulings preceded the release of Rev. Proc. 2003-39 that provides formal guidance for ongoing LKE Programs. A number of the features in these rulings were included in the Rev. Proc. i.e.: use of joint accounts to facilitate funds flow, Taxpayer acting as lender to purchaser, and a blanket assignment provision in a Master Exchange Agreement.

PLR 200251008, PLR 200329021: Reverse Build to Suit with Related Party: The Service issued rulings on two very similar structures. In both rulings, a related party to the Taxpayer owned a long-term leasehold interest in property that was, in one case, sub-leased in part to the EAT, and in another case, directly assigned to the EAT. In both transactions the owner of the fee interest was unrelated to the Taxpayer. At the time of the transfer of the leasehold interest to the EAT, the related party had already begun development on the land. The EAT then proceeded to construct improvements on the land, in accordance with the Taxpayer's specification. Taxpayer subsequently sold relinquished property and acquired the leasehold interest plus improvements from the EAT as its replacement property. The service, while acknowledging that the transactions involved exchanges between related parties, concluded nonetheless that the transactions qualified for non-recognition of gain treatment under Section 1031 since "both the Taxpayer and the related parties continue to be invested in the exchange property". Effectively, there was no "cashing out" by the related party. See Rev. Proc. 2004-51.

PLR 200303023: Partition of Jointly Held Property: Four related Taxpayers own contiguous tracts of real estate as tenants in common. They desire to partition the property so that each individual ends up owning, in fee simple, a tract of approximate equal value to their current interest in the real estate. The Service concluded that the partition of the property in this transaction does not constitute a sale or exchange or other disposition that would trigger gain recognition. Query whether this ruling could be interpreted as a means to avoid the more formalistic requirements of Section 1031.

PLR 200327003: Tenancy in Common Program under Rev. Proc. 2002-22: This is the first ruling issued since Rev. Proc. 2002-22 was published. While the Taxpayer/Sponsor did not meet all fifteen conditions of the Rev. Proc., the structure was very conservative. Nevertheless, this ruling may open the door to additional rulings in the coming years.

PLR 200338001: Qualified Intermediary/Disqualified Person: Taxpayer entered into an Exchange Agreement with a Qualified Intermediary. The QI was a limited liability company whose sole member was a party unrelated to Taxpayer. The LLC was manager managed - the manager was a separate limited liability company whose sole member was a law firm that was a disqualified person. The managers of the manager LLC included the owners of the law firm, among them, the son of the Taxpayer. The QI elected to be treated as a corporation and so was not a disregarded entity. The ruling concluded that the QI was not a disqualified person for purposes of Taxpayer's exchange.

PLR 200404044: Perpetual Water Rights Exchange for Farmland: Taxpayer desired to exchange perpetual water rights for fee interest in land. The Taxpayer's rights to the water were limited in quantity on an annual basis, but were not limited in duration. The Service allowed the exchange citing Rev. Ruling 55-749 (perpetual water rights were deemed like kind to a fee interest in property) and contrasted the Taxpayer's rights in this transaction with the Wiechens case where Taxpayer's rights were limited in duration, quantity and priority.

PLR 200428020: LKE Program: This supplements PLR 200327039 involving an LKE program. The modification to the prior ruling involves the Taxpayer advancing its own funds to the QI to acquire replacement property from sources that were not part of the original LKE program (i.e. probably from sources other than the identified manufacturers who provide a steady stream of new properties).

Taxpayer will manually identify the replacement property (rather than rely on the "deemed" identification). Aside from the fact that the ruling is allowing the Taxpayer to integrate features of an LKE program with a non LKE program, the ruling is interesting because it states that Taxpayer will assign its rights to acquire the replacement property "and all required notices of this blanket assignment will be given. This is in substantial conformity to the requirements outlined in 1.1031(k)-1(g)(4)(iii), (iv) and (v)..."

The language about substantial conformity appears to be inconsistent with TAM 200130001 which took the position that no substantial compliance argument can be made with regard to the QI safe harbor.

PLR 200440002: Related Party Exchange: Taxpayer AB Partnership owns improved real property Building 1 that it wishes to exchange for other real property in a 1031 exchange. CD Partnership, a related party to AB owns improved real property Building 2 that AB wishes to acquire as its replacement property. AB Partnership sells its relinquished property, through a Qualified Intermediary, to an unrelated third party and identifies Building 2 as its replacement property, which it acquires, through a Qualified Intermediary, from CD Partnership.

CD Partnership also wishes to effectuate an exchange. It transfers Building 2 through a Qualified Intermediary to AB Partnership then identifies and purchases improved real property as its replacement property. Both AB and CD represent that they will not dispose of the replacement property received within 2 years of their receipt of the property.

The Service held that since the only subsequent disposition contemplated by the parties was the exchange of Building 2 by CD Partnership, the provisions of §1031(f)(4) and Revenue Ruling 2002-83 were not applicable. There is no cashing out of either party's investment in real estate and on completion of the transactions, both related parties will own property that is like-kind to the property exchanged.

Additionally, neither party will have ever been in receipt of cash or other non-like kind property.

Based on this ruling, it appears that §1031(f)(4) will not apply and the exception at §1031(f)(2)(C) will apply where the Taxpayer is receiving replacement property from a related party through a QI and the related party is also doing an exchange of the replacement property transferred. [1031(f)(2)(C) excepts out transfers between related parties where it can be established, to the satisfaction of the Secretary, that neither the exchange nor the subsequent disposition had, as one of its principal motives, the avoidance of federal income tax].

This ruling is significant because, in effect, it invalidates the notion that a related party exchange will always fail under §1031(f)(4) whenever a Taxpayer acquires replacement property, through a QI, from a related party. Recall that the new instructions on IRS Form 8824 indicate that, on the basis of Revenue Ruling 2002-83, any exchange where a Taxpayer receives replacement property from a related party, either directly or through a Qualified Intermediary, will fail.

Query whether the result would have been the same if CD Partnership had been unable to acquire replacement property? If the parties could still show that there was no tax avoidance motive, the transaction may still have been a good exchange.

PLR 200450005: An Interpretation of the LKE Program Safe Harbors under Revenue Ruling 2003-39: This may be the first LKE ruling interpreting Rev. Rul. 2003-39. The Service said that notice provided in written payoff quotes and, in the case of auction sales, electronic files submitted to the auction house and the bill of sales, meets the assignment and written notice requirements of sec. 6.02 of the Rev Proc. Query whether this works on an exchange following a foreclosure as well.

The ruling also held that an SUV is like kind to a passenger automobile. This may provide support to the argument that positions taken for depreciation purposes are not relevant in determining whether properties are like-kind under Section 1031. Query where if that is the case, this concept could be applied to real property where a cost segregation study has been done?

PLR 200513010: 2nd PLR issued under Rev. Proc. 2002-22: In the second letter ruling issued under Rev. Proc. 2002-22 The Taxpayer/sponsor posed two questions which apparently distinguish this ruling from the prior letter ruling, and the revenue procedure:

Does a deemed consent procedure with regard to the annual renewal of the management agreement satisfy the requirements of the Rev. Proc. that unanimous consent be obtained, at least annually, to renew the agreement. The Sponsor represented that the co-owners would receive notice of the intent to renew the management agreement prior to the end of each year. Any objecting co-owner would be required to name a substitute manager and provide a management agreement with commercially reasonable terms. The objecting co-owner's proposed management agreement would then need to be approved unanimously by the other co-owners. The Service concluded that the deemed consent procedure satisfied the provisions of the Rev. Proc. that the management agreement be renewed, at least annually, by unanimous consent.

The second interesting aspect of the letter ruling relates to the term during which the sponsor will remain an investor in the property. Rev. Proc. 2002-22 states that the activities of a co-owner, or a person related to a co-owner, (in this case the management company, which is a sister entity of the sponsor) will not be attributable to the other co-owners so long as the sponsor retains an interest in the property for less than 6 months. The rationale is that the business activities of the sponsor are not attributed to the other co-owners merely because the sponsor retains a co-ownership interest. These are not business activities "with respect to the property" which was the concern of the Revenue Procedure. There is very little discussion of this issue in the letter ruling, but apparently since the activities of the property manager were deemed to meet the "customary services" test, the Service was not troubled by the Sponsor's permanent investment in the property.

This ruling is helpful to Taxpayers considering investing in TIC interests, because continuing investment by the sponsor serves to align the interests of the investors with those of the sponsor. Contrast this fact situation with one in which the sponsor simply "flips" the property out to TIC investors, with no continuing economic interest in the property.