In this issue – Recapping 2014
In this issue we recap the Cases and Rulings in 2014 that touched on 1031 Exchanges.
Improvements on Property Owned by a Related Party
A not infrequent scenario is the Taxpayer selling real estate and wanting to construct improvements on property they already own. This is not permitted under the regulations. However, in February we saw the third ruling allowing, as replacement property, construction of leasehold improvements on property owned by a related party. PLR 201408019 (2/21/2014)
The IRS allowed multiple potential Exchangers to enter into parking transactions for the same replacement property. PLR 201416006 (4/18/2014)
There were two cases that, while not 1031 related, touch on an issue that frequently comes up in 1031 discussions – whether land is investment (1031 eligible) or inventory (not 1031 eligible). A sale of land generated ordinary income instead of capital gain income due the level of development activities relative to the land. Boree v. Commissioner, TC Memo 2014-85 (5/12/2014) A civil engineer was held taxable at ordinary income rates on the sale of land he tried to develop for 12 years. Allen v. USA (USDC ND CA) (May 28, 2014)
Son as 1031 Intermediary
The exchange was disallowed in which the Taxpayer used his son, an attorney, as his intermediary. As a related party Son is a disqualified partyand may not provide accommodation services for Dad. His license to practice law did not create an exception. Frank J. Blangiardo v. Commissioner, TC Memo, 2014-110 (6/9/2014)
Son as Tenant
Son resided in the replacement property without paying rent. A Minnesota state tax court disallowed the exchange. Johnson vs. C.I.R., 2014 WL 2965410 (MN Tax Ct., 6/20/14) In the last few years we have seen similar cases where the courts have determined that the property is being held forpersonal use purposes rather than investment purposes. Revenue Procedure 2008-16 provides guidance regarding rental income and personal use of dwelling units.
Qualified Intermediary Negligence
A title company affiliated exchange company was found negligent for failing to use a reasonable standard of care in structuring a regular delayed exchange when an improvement exchange was necessary. Kreisers Inc. et al. v. First Dakota Title Limited Partnership et al., 2014 S.D. 56 (S.D. 2014). This case illustrates the truth that exchanges are not just fill-in-the-blanks paperwork. Working with a company that takes time to structure is critical to the success of an exchange.
Agent Negligent Misrepresentation
Utilizing the services of Agent, Taxpayer acquired a property in 2000 in a 1031 exchange. In 2010 using Agent to sell the property, Taxpayer asked Agent whether they could avoid the capital gain tax. Agent advised that this was not possible due to the previous exchange. After getting a $75k tax bill Taxpayer sued Agent. The court dismissed most claims against Agent but let stand a claim of “negligent misrepresentation.” The court stated that where an agent, experienced in a specific type of transaction, makes a representation to the taxpayer, the taxpayer is not unreasonable in relying upon the representation. Coon v. Wood, 2014 WL 4647713 (USDC DC) (Sept. 18, 2014)