Related-Party Like-Kind Exchanges

Abstract

Related-party exchanges under section 1031 raise many technical, theoretical, and policy issues. Unfortunately, this topic has not received attention commensurate with the challenges it presents. This Article fills that void to a significant extent. The Article begins with a discussion of the purpose of section 1031 and then demonstrates how related-party exchanges could frustrate that purpose if not properly governed. The Article then discusses the history of section 1031(f), the related-party exchange rules. Many students of section 1031(f) realize that it derived from section 453(e), which governs installment sales to related parties. The Article therefore discusses the development of section 453(e) and how it informs the analysis of section 1031(f). After laying that groundwork, the Article describes section 1031(f) and analyzes IRS and court interpretations of its coverage. Following that, the Article explores an enigma within an enigma, the non-tax-avoidance exception in section 1031(f)(2)(C). Despite a 2005 Tax Court decision construing that exception, the scope of section 1031(f)(2)(C) remains unclear. The Article considers several viable interpretations of the scope of the non-tax-avoidance exception. Finally, the Article discusses procedural issues that section 1031(f) raises and presents tax planning considerations involving related-party exchanges.

Keywords: section 1031, like-kind exchange, tax-free exchange, related-party exchange, section 1031(f), tax-free swap