Michael K. Phillips was a speaker and one of the expert faculty members at the National Real Estate Development Center (NRDC) "1031 Tax Strategies Conference". The NRDC conference was held in San Francisco, California on September 18 and 19, 2006.

Topics included an analysis of recent IRS rulings and tax court cases affecting 1031 exchanges. In his comprehensive survey of the latest rulings and cases, Mr. Phillips addressed the meaning of "like-kind" property including the case of Peabody Natural Resources Company v. Commissioner, 126 T.C. No. 14 (2006) (exchange of gold mine for coal mines subject to long-term coal supply contracts was held to be a like-kind exchange). He also discussed TAM 200602034 (very restrictive like-kind standard applied to exchanges of intangible personal property, including patents, trademarks and trade names, unregistered intellectual property, such as designs, trade secrets and software). The TAM also addressed foreign intangibles and the failure to make specific identification of intangible replacement property.

Other recent guidance on the like-kind issue included final regulations changing the Product Classes for depreciable tangible personal property to six-digit North American Industry Classification System (NAICS) codes in lieu of the defunct SIC codes (T.D. 9202); exchanges of FCC licenses held to be of like kind, including FCC radio and television licenses but excluding network affiliation rights (see PLRs 200532008, 200224004 and 20035005); exchanges of old growth timberlands for reproduction timberlands and mere cutting of timber following related-party exchange was not a "disposition" in 2-year period under Section 1031(f) (PLR 200541037); real property located in U.S. Virgin Islands, Guam and Northern Mariana Islands treated as like kind to real property located in the U.S. under temporary regulations T.D. 9194, but property in other U.S. possessions or otherwise located outside the 50 states and District of Columbia is not of like kind to real property located within U.S. under Section 1031(h); and exchanges of stock in cooperative apartments for real estate was ruled to be of like kind where stock in cooperative apartments was viewed as equivalent to interest in real estate under New York law (PLR 200631012).

Mr. Phillips also examined the "qualified use" of property including Rev. Proc. 2005-14. The Rev. Proc. provides very favorable rules for the interaction of the Section 121 exclusion of gain ($250,000 single, $500,000 joint) for a principal residence with Section 1031 (applicable only to rental, business or investment property, and not the taxpayer's current personal residence). Rev. Proc. 2005-14 may apply to a single exchange of property with different uses at different times (e.g., when property is a principal residence for 2 years, then rented for 2 years and then exchanged, the Section 121 exclusion may applies, cash or other boot may be taken to the extent of the exclusion, and the balance of the gain may be deferred by acquiring rental or other investment property under Section 1031). The rules may also apply to multiple uses of property at the same time (e.g., where the taxpayer lives in one unit as his principal residence and rents two units, an allocation is made based on square footage or other reasonable method, and Sections 121 and 1031 are applied to the respective portions of the property).

Mr. Phillips discussed a related issue concerning the "holding period" for property under Section 1031 including PLR 200521002. In the ruling, an irrevocable testamentary trust received the replacement property and subsequently distributed it to the beneficiaries shortly after the exchange. The IRS ruled that the subsequent distribution did not disqualify the Section 1031 exchange by the trust where the exchange was "independent" of the impending trust termination. The facts were considered distinquishable from Rev. Rul. 75-292 where replacement property was immediately transferred by an individual to a corporation after an exchange in a "prearranged transaction" and Rev. Rul. 77-337 where a taxpayer liquidated a corporation and immediately did an exchange in a "prearranged transaction". In both of these Revenue Rulings, the IRS held that the exchange did not qualify because the property was not "held" for a qualified purpose.

Mr. Phillips analyzed recent rulings and cases dealing with related party exchanges including Teruya Bros v. Commissioner, 124 T.C. 45 (2005). This was the first case decided under Section 1031(f) and the court held that the taxpayer’s exchanges with a 62.5% owned corporation were fully taxable under Section 1031(f)(4) since the related corporation sold the taxpayer’s replacement properties and received the cash. However, recent IRS rulings confirm that Section 1031(f) may be avoided if the related party does its own separate Section 1031 exchange into other property instead of receiving the sales proceeds. Both parties must then hold their replacement properties for 2 years. In PLR 200616005, the taxpayer’s exchange for replacement property owned by a related party was not disallowed where the related party did its own Section 1031 exchange into other property to be held for 2 years by the related party. The new PLR is consistent with PLR 200440002 which also gave a favorable ruling for a similar related party exchange.

Mr. Phillips noted one new exception to the otherwise strict and inflexible time limitations for identification (45 days) and receipt of replacement property (180 days). This exception was created as a result of 9-11 and Katrina. Extensions of time to identify and receive replacement property may be allowed for 120 days with respect to property in an area affected by a Presidential declared disaster or a terroristic or military action under Rev. Proc 2005-27. The extension of time is only allowed in narrow circumstances and only in accordance with an IRS Notice or other guidance.

Finally, Mr. Phillips discussed recent IRS rulings that have ruled favorably on certain TIC arrangements where the arrangements substantially complied with Rev. Proc. 2002-22 (PLRs 200625009, 200625010, 200513010). The IRS also allowed an exchange of real estate for an interest in a Delaware Statutory Trust owning real estate where the trust was considered a "grantor trust" and other conditions were met under Rev. Rul. 2004-86. The IRS issued Rev. Proc. 2004-51 which expressly limits certain reverse exchanges under the safe harbor of Rev. Proc. 2000-37. The new Rev. Proc. especially limitis build-to-suit or other improvement exchanges where the taxpayer owned the replacement property land within 180 days of the transfer to an exchange accommodation titleholder.

Michael K. Phillips was one of the Northern California Faculty Members and Expert Speakers at the California Continuing Education of the Bar (CEB) program:

TAX-DEFERRED REAL PROPERTY EXCHANGES

The prgram provided 3 hours of credit for MCLE and taxation specialization.

Whether you want to exchange raw land for income-producing property, trade low-income rentals for ones in a better neighborhood, or swap fully-appreciated property for property that is undervalued, this program provided the essential information needed to make sure that the transaction meets all the requirements of a tax-deferred real property exchange.

The conference analyzed forward and reverse deferred exchanges, multi-party exchanges, build to suit exchanges, TICs, parking arrangments, and exchanges involving multiple sales or acquisitions. The conference also discussed structuring the exchange of property owned by partnerships; why, when and how the “reverse” exchange structure should be used; and other tax-advantaged solutions for disposing of real estate.

The expert speakers analyzed and discussed the intricate maze of substantive tax law that governs exchanges and provided many practice tips to avoid the pitfalls in this complex area of the law.

The conference assumed some familiarity with the tax consequences of real property dispositions but no “hands on” experience in handling exchanges.

Program Highlights:
Qualifying property
Excluded property
Nontax considerations
Tax considerations/disadvantages
Multiple party exchanges
Refinancing before and after an exchange
Exchanges of property owned by a partnership
Exchange of tenancy-in-common interests
Deferred tax exchanges
Partially taxable exchanges
Reverse and construction exchanges
Related party exchanges
Multiple sales and/or acquisitions
Qualified intermediaries
Qualified accommodation agreements
Role of ancillary parties

The dates and times for the conference were:

November 3 Friday 1:15 pm to 4:30 pm
Sheraton Grand Hotel See Reader Board 1230 J Street
Sacrament, CA

November 17 Friday 1:15 pm to 4:30 pm
Hotel Nikko Monterey Room 222 Mason St.
San Francisco, CA