Malulani and the Entrenchment of Mechanical Analysis of Related-Party Exchange Rules
7 Pages Posted: 10 May 2017
Date Written: May 9, 2017
The Tax Court’s decision in Malulani is the latest in a series of cases that deny section 1031 nonrecognition to taxpayers who acquire replacement property from related parties. The exchanger in each of the cases transferred relinquished property an unrelated party and acquired replacement property from a related party in an exchange facilitated by a qualified intermediary. The Tax Court disposed this case using a mechanical mathematical analysis that compared the amount of tax actually paid by the related party to the amount of tax that the exchanger would have paid on a hypothetical taxable sale of its relinquished property. Concluding that the actual tax liability was less than the hypothetical tax liability, the Tax Court held that the transaction came within section 1031(f)(4), which prohibits nonrecognition for transactions designed to skirt the prohibited related-party exchange rules. The Tax Court disregarded the exchanger’s qualitative arguments that the transaction was not designed to avoid the rules. The Article argues that the case sends a message to taxpayers that courts and the IRS will apply mechanical mathematical analysis to determine whether section 1031(f) applies to deny section 1031 nonrecognition.
Keywords: Section 1031 exchange, related-party exchange, section 1031(f)(4)
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