Are Related-Party Acquisitions in Anticipation of Exchange Technically and Theoretically Valid?
Journal of Taxation, Vol. 120, No. 52, 2014
22 Pages Posted: 5 Mar 2014 Last revised: 22 May 2014
Date Written: March 4, 2014
The purposes of Section 1031(a) (the general nonrecognition provision) and Section 1031(f) (the provision governing related-party exchanges) suggest that a related party’s acquisition of replacement property in anticipation of transferring it to an exchanger should not trigger the operation of Section 1031(f)(4). Nonetheless, related party transactions are subject to close scrutiny under sham transaction, substance-over-form, and anti-abuse doctrines. A District Court’s failure to recognize the distinctions among laws governing such transactions makes the decision a prime candidate for a more enlightened approach by the Eighth Circuit on appeal. This article examines the purposes and applications of Sections 1031(a) and 1031(f) and reveals that the District Court erred by applying a Section 1031(a) analysis to a transaction that came within Section 1031(f). It illustrates that an exchange should qualify for Section 1031 nonrecognition if a related party acquires property in anticipation of an exchange and transfers it to the exchanger. If the related party or exchanger is a sham entity or if the related party is the exchanger’s agent, however, the transaction may fail to qualify for Section 1031 nonrecognition. Because the District Court failed to appreciate this distinction, its opinion leaves something to be desired.
Keywords: Section 1031, section 1031(f), related-party exchanges, North Central, acquisition in anticipation of exchange, exchange program
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