Code Section 1031 Swap-and-Drops Thirty Years after Magneson
8 Pages Posted: 1 Feb 2016
Date Written: January 29, 2016
Thirty years have passed since the Ninth Circuit decided Magneson, granting section 1031 nonrecognition to an exchange of property that preceded the exchangers’ immediate contribution of the replacement property to a partnership. The Magneson opinion establishes that a person can satisfy the section 1031 holding and use requirements, even though the person receives property with the intent to transfer to another entity tax free. A handful of cases, at both the federal and state levels, confirm the holding in Magneson and show that its scope extends beyond the facts in that case. This article reviews Magneson and the cases that have followed. It also considers some of the theoretical issues raised by Magneson, such as whether the type of state-law entity could affect the application of Magneson, and concludes that those issues should not affect the application of the principal holding in Magneson — a valid section 1031 exchange can precede a contribution of property to a tax partnership, regardless of its state-law form.
Keywords: Section 1031 exchange, drop and swap exchanges, drop and swap exchanges, Bolker, Magneson, 1031 and proximate business transactions
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