In the opinion issued by the U.S. Tax Court in Estate of Bartell v. Commissioner, 147 T.C. No. 5 filed August 10, 2016, the court ruled in favor of the taxpayer on the basis that the exchange intermediary had not acted as the taxpayer's agent where the transaction was structured as a non-safe harbor reverse construction exchange, the accommodator did not put any equity into the project, the accommodation period lasted for 17 months, and the taxpayer guaranteed the construction loan. The IRS unsuccessfully argued that the appropriate test for a non-safe harbor reverse exchange was whether the accommodator had the substantial benefits and burdens of ownership. The IRS has 90 days to appeal this decision and it is believed likely to do so. While the outcome of any such appeal is uncertain, the decision, if affirmed, will certainly be considered a major victory for taxpayers who desire to structure construction or reverses exchanges completing outside of the 180-day safe harbor exchange period. Anyone operating outside of the safe harbor time periods will be well advised to avoid using language of agency in the exchange documents as well as provisions that could be argued to implicate an agency relationship.
Significant to the decision is the fact that the case lies within the Ninth Circuit to which any appeal of this case lies and that Circuit, as noted by the Tax Court, has taken a different position than the IRS on the benefits and burdens issue stating:
As the Court of Appeals for the Ninth Circuit pointed out in Alderson v. Commissioner, 317 F.2d at 795: [O]ne need not assume the benefits and burdens of ownership in property before exchanging it but may properly acquire title solely for the purpose of exchange and accept title and transfer it in exchange for other like property, all as a part of the same transaction with no resulting gain which is recognizable under Section 1002 of the Internal Revenue Code of 1954.
Of particular interest to those dealing with the reasonable concerns regarding the time limits specified in Rev. Proc 2000-37 which sets out the safe harbor requirements for reverse exchanges the Tax Court States:
Given the inapplicability of Rev. Proc. 2000-37, supra, to the transaction at issue, the caselaw provides no specific limit on the period in which a third-party exchange facilitator may hold title to the replacement property before the titles to the relinquished and replacement properties are transferred in a reverse exchange. We express no opinion with respect to the applicability of section 1031 to a reverse exchange transaction that extends beyond the period at issue in these cases. In view of the finite periods in which the exchange facilitator in these cases could have held, and in fact did hold, title to the replacement property, we are satisfied that the transaction qualifies for section 1031 treatment under existing caselaw principles.
This case the perfect example of why STEC concentrates on safe harbor exchanges. While the case as it now stands resulted in a victory for the taxpayer...
1. The transaction initially closed in August of 2000, sixteen years ago.
2. This case was tried 10 years ago and the tax court just released its decision.
3. It likely isn't resolved yet as there is a very good probability that the IRS will appeal.
4. If that occurs, the taxpayer and the QI may not know where this transaction stands for almost two decades after closing.
5. Investors don't typically hold Internal Revenue Code Section 1031 property that long.