Attorney-at-Law

“BE INTERPOSER TWIXT US TWAIN”

In Uncategorized on 08/10/2016 at 23:02

Judge Gale almost quotes The Bard in Estate Of George H. Bartell, Jr. Deceased, George David Bartell and Jean Louise Bartell Barber, Co-Personal Representatives And Estate Of Elizabeth Bartell, Deceased, George David Bartell And Jean Louise Bartell Barber, Co-Personal Representatives, et al., 147 T. C. 5, filed 8/10/16.

The Bartells ran a drugstore chain in Washington State for 100 years, but Walgreens and Rite-Aid were closing in, and the supermarkets in the strip malls wherein the Bartells flogged their medicaments were also getting in on the action, so the Bartells decided to go free-standing and ditch the strippers.

But this meant big capital gains. Jean Louise’s spouse was a broker and he told her the magic numbers: 1031. Real property swapped for real property is tax-free for income tax purposes.

See my blogpost “Form Matters – Part Deux,” 2/15/11, for the importance of magic language in such a deal.

The Bartells were doing a reverse 1031. They would buy the new before selling the old. They found a QI who knew how to paper the transaction.

The Bartells bankrolled the QI’s subsidiary AT (Accommodation Titleholder), which was a LLC shell with a loan from KeyBank (I represented them years ago) the Bartells guaranteed. Then the Bartells acted as construction manager for building their new store on the acquired land, negotiated easements and building permits, and triple-net-leased it from the AC until they could dump the old property.

This they did, using the proceeds from the dumped property to pay off KeyBank and get the new store from the AT.

IRS said taxable sale. Bartells said 1031.

There’s no question what happened. But did the Bartells do a deal with themselves?

“It has been observed that the ‘very essence of an exchange is the transfer of property between owners, while the mark of a sale is the receipt of cash for the property’. Carlton v. United States, 385 F.2d 238, 242 (5th Cir. 1967). A corollary of the requirement of a reciprocal transfer of property between owners is that the taxpayer not have owned the property purportedly received in the exchange before the exchange occurs; if he has, he has engaged in a nonreciprocal exchange with himself. ‘A taxpayer cannot engage in an exchange with himself; an exchange ordinarily requires a “reciprocal transfer of property, as distinguished from a transfer of property for money consideration”.’ DeCleene v. Commissioner, 115 T.C. 457, 469 (2000) (citation omitted).” 147 T. C. 5, at p. 32.

Note that the Bartells’ deals went down prior to Rev. Proc. 2000-37, 2000-40 I.R.B. 308, which gave us the 45 days to identify, 180 days to close rules. And their timing wouldn’t fly under today’s rules.

IRS wants benefits-and-burdens to determine ownership, and certainly the AT had none, as the Bartells indemnified them from all the ills that flesh is heir to. And indemnified KeyBank from jibsail to taffrail.

But the Bartells are Golsenized to Ninth Circuit, and Ninth Circuit expressly rejected benefits-and-burdens in the 1031 context.

The whole point of 1031, says Judge Gale, is form. As my abovecited blogpost noted.

In fact, there are Tax Court cases (see 147 T. C. 5, at p. 44) that permit the transferor to choose both relinquished and replacement properties, negotiate the deals, do the construction, and advance the money.

1031ers have much latitude. In the one benefits-and-burdens case that got the Tax Court nod, the transferor never used a QI. His deal was a give-and-go with the transferee, where the transferee got title subject to a buyback but never really had any skin in the game.

When the QI business got started with the 1986 Code, I wrote a comment to IRS that all Congress had done was create a new industry. And how!

“…where a section 1031 exchange is contemplated from the outset and a third-party exchange facilitator, rather than the taxpayer, takes title to the replacement property before the exchange, the exchange facilitator need not assume the benefits and burdens of ownership of the replacement property in order to be treated as its owner for section 1031 purposes before the exchange.” 147 T. C. 5, at pp. 58-59 (Footnote omitted).

And IRS’ argument that the cases involve reverse 1031s (old first, new second) and not forward 1031s (new first, old second), meets with a mox nix from Judge Gale.

And remember that broad latitude.

Now the Bartells did net-lease and run the replacement property before taking title and before selling the relinquished property, which no reported case ever dealt with, but broad latitude wins again.

There’s a lot of good language in this case for those fighting 1031s. Read it, and add the right quotes to your memo of law database.

 

 

 

 

 

 

 

 

 

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