Future Relief Under §1031 Possible Upon Bankruptcy of
Qualified Intermediary
By David I. Kempler,
Esq.
Buchanan Ingersoll & Rooney PC, Washington, DC
Property received by a taxpayer will not be treated as like-kind
property for purposes of §1031 if: (1) it is not identified as
property to be received in the exchange within 45 days after the date
on which the taxpayer transfers the property relinquished in the
exchange; or (2) “such property is received after the earlier of
(i) the day which is 180 days after the date on which the taxpayer
transfers the property relinquished in the exchange,” or (ii)
“the due date (determined with regard to extensions) for the
transferor's return for the taxable year in which the transfer of the
relinquished property
occurs.”1
Postponement of the 45-day identification period and the 180-day
exchange period may be available to taxpayers affected by a
Presidentially declared disaster or a terroristic or military
action,2 or to individual
taxpayers serving in the Armed Forces (or in support of the Armed
Forces) in a combat zone or in a qualifying deployment in a
contingency operation.3
The problem arises if the qualified intermediary either goes
bankrupt or becomes insolvent. In the past several months, there has
been a substantial increase in the number of qualified intermediaries
with financial problems that have resulted in bankruptcy filings.
Except as stated immediately above, there are no exceptions to the
45-day identification rule or to the 180-day replacement rule. There
is no good faith exception to the requirement that a taxpayer receive
replacement property within the 180-day exchange period. In one
case,4 the Tax Court rejected
taxpayers' argument that they should be able to defer gain from an
exchange where they made a good faith attempt to comply with the
requirements, and an event beyond their control (i.e., the seller of
one of the replacement properties cancelled the sale one day before
the closing) prevented them from receiving the replacement property
before the 180-day period expired. Since the Tax Court is not a court
of equity, the court stated that it could not ignore the plain
language of §1031(a)(3)(B)(i) and essentially rewrite it to
achieve what would be an equitable result.
In a letter to Congressman Barney Frank (D-Mass.), the IRS stated
that it is considering whether to provide some type of relief in the
area. This would be welcome news to taxpayers contemplating like-kind
exchanges.
For more information, in the Tax Management Portfolios, see
Levine, 567 T.M., Taxfree Exchanges Under Section 1031, and in
Tax Practice Series, see ¶1510, Like-Kind Exchanges.
1
§1031(a)(3).
2
§7508A.
3
§7508.
4
Knight v. Comr., T.C. Memo 1998-107 (1998).
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