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Self-swappers seek Supreme Court review

February 05, 2010

A company whose attempted like-kind exchange failed because it replaced the exchange property with replacement party from a related party is seeking Supreme Court review, reports Tax Analysts ($link).

Teruya Brothers Ltd. used a qualified intermediary to hold funds on the $13 million sale of two properties to an unrelated party. They met the Section 1031 45-day and 180-day requirements for identifying and closing on the replacement property, but they acquired the replacement property from a corporation related to Teruya Brothers.

The Tax Court and the Ninth Circuit appellate panel agreed with the IRS that the use of the related party converted the transaction to a swap between the two related parties, followed by an immediate sale of the $13 million properties to the unrelated party. As the tax law says that a sale of a property acquired from a related party within two years of the exchange disqualifies the original swap, this made the original transaction taxable.

Teruya Brothers argues that this result is an unauthorized IRS rewrite of Section 1031. The odds are always against taxpayers seeking Supreme Court review. Unless and until the Supreme Court reverses this result, taxpayers are wise to not have their qualified intermediaries acquire replacement property from related parties.

Tags: like-kind.Section 1031.