On April 18, 2014, the Service released Private Letter Ruling 201416006. In this letter ruling, the Service permitted multiple, related parties to utilize the same exchange accommodation titleholder to park the same property involving separate qualified exchange accommodation arrangements. Even though only one of the taxpayers could successfully complete the reverse like-kind exchange, the Service ruled that the successful taxpayer would be able to defer gain recognition.
Gain deferral utilizing a §1031 like kind exchange typically involves the simultaneous or deferred exchange of like-kind properties. Under rules issued by the Service in Revenue Procedure 2000-37, taxpayers can also use an exchange accommodation titleholder to purchase a replacement property prior to selling the relinquished property. This is called a reverse like-kind exchange. Since the exchange accommodation titleholder (and not the taxpayer) is treated as the owner of the property, the taxpayer is still able to exchange the relinquished property and defer gain recognition. In this type of arrangement, the exchange accommodation titleholder must acquire the replacement property under an qualified exchange accommodation arrangement, which generally requires both the taxpayer and the exchange accommodation titleholder to treat the property consistently as owned by the titleholder and as part of a reverse like-kind exchange.
In this letter ruling, the taxpayer and two of its affiliates owned separate commercial office buildings, each of which they were interested in exchanging. Each entity entered into a qualified exchange accommodation agreement with the same, unrelated exchange accommodation titleholder. Under these agreements, the taxpayer and its affiliates each had the right to acquire the property as part of the agreement, but that this right would terminate upon prior notice by the taxpayer or either affiliate to acquire the property. The parties represented that the requirements of Revenue Procedure 2000-37 would be met.
In this situation, the Service ruled that Revenue Procedure 2000-37 does not prohibit this related, multi-party arrangement. Even though the taxpayer’s or its affiliates’ right to acquire the property terminates upon notice by another one of the parties, the Service ruled that this would not be an impediment to the parking arrangement. By using this technique, the taxpayer and its affiliates can buy itself additional time to identify the best property to relinquish.
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