Are Related-Party Acquisitions in Anticipation of Exchange Technically and Theoretically Valid?
Bradley T. Borden
Brooklyn Law School
Alan S. Lederman
Kelly E. Alton
Nationwide Exchange Services
March 4, 2014
Journal of Taxation, Vol. 120, No. 52, 2014
Brooklyn Law School, Legal Studies Paper No. 299
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.
Number of Pages in PDF File: 22
Keywords: Section 1031, section 1031(f), related-party exchanges, North Central, acquisition in anticipation of exchange, exchange program
Date posted: March 5, 2014 ; Last revised: May 22, 2014