Scott E. Vincent
Vincent & Fontg L.L.C.
Kansas City

A recent Private Letter Ruling ("PLR") from the IRS, PLR 200718028, held that in the taxpayer's use of a "parking transaction," relinquishing property through a qualified intermediary before expiration of 45 days from the date replacement property is parked satisfies the deferred exchange identification requirement.  The ruling confirms an acceptable approach for identifying relinquished property under Revenue Procedure 2000-37.

FACTUAL BACKGROUND

The IRS outlines the following factual background.  The taxpayer engages in a business that uses the accrual method of accounting on a calendar year basis.  Prior to the transactions in question, taxpayer owned Property A, consisting of improved real property located in City B.

On Date 1, taxpayer and an exchange accommodation titleholder ("EAT") entered into a qualified exchange accommodation arrangement ("QEAA") seeking to arrange an exchange pursuant to Revenue Procedure 2000-37.  Taxpayer assigned EAT its rights to purchase Property C, consisting of improved real property located in City D, and delivered notice of the assignment to the sellers.  Also on Date 1, EAT acquired Property C pursuant to the QEAA.

On Date 2, taxpayer entered into a contract to sell Property A to buyer.  On Date 3, taxpayer entered into an exchange agreement with a qualified intermediary ("QI") for a § 1031 exchange with respect to Property A.  Taxpayer assigned to QI its rights as a seller under the Property A sales contract and gave notice of the assignment to buyer on Date 3.

On Date 4, the Property A sale closed.  Date 5, a Sunday, was two days after Date 4 and 45 days after Date 1, when EAT acquired Property C.  On Date 6, one day later, taxpayer sent EAT a signed document formally identifying Property A and other property as possible relinquished properties in the exchange.

On Date 7, 180 days after Date 1, QI plans to use exchange funds from the sale of Property A to acquire Property C from EAT as replacement property.

APPLICABLE LAW

Section 1031(a)(1) of the IRC provides that no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.  Section 1031(a)(3) provides in part that property is not treated as like-kind property if the property is not identified as the property to be received in the exchange on or before the 45th day after the date a taxpayer transfers the property relinquished in the exchange.

Revenue Procedure 2000-37 provides an IRS safe harbor for the qualification of "replacement property" or "relinquished property" for purposes of § 1031, and the treatment of the EAT as the beneficial owner of such property if the property is held in a QEAA as defined in the revenue procedure.  The safe harbor requires that no later than 45 days after the transfer of qualified indicia of ownership of the replacement property to the EAT, the relinquished property must be properly identified, consistent with the identification principles in the § 1031 regulations.  Replacement property that is received by the taxpayer before the end of the identification period will in all events satisfy these identification requirements.

ANALYSIS AND HOLDING

The IRS notes that property must be identified within 45 days after the EAT acquires replacement property pursuant to a QEAA in order for that property to be eligible for use as relinquished property under the safe harbor rules of Revenue Procedure 2000-37.  For identification of property in a deferred exchange, § 1031 regulations provide that any replacement property received within the 45-day identification period is treated as timely identified for purposes of the safe harbor rules.  The IRS confirms that "applying that principle to a safe-harbor parking transaction under Rev. Proc. 2000-37, relinquishing property through a qualified intermediary before expiration of 45 days from the date that replacement property is parked, satisfies this identification requirement."

Under the facts of the private letter ruling, the taxpayer disposed of Property A through QI less than 45 days following the EAT's acquisition of Property C.  The net proceeds from the sale of Property A were transferred to QI as an exchange accommodator.  As long as QI is a qualified intermediary under the § 1031 regulations, QI can act as a qualified intermediary in a safe harbor parking transaction under Revenue Procedure 2000-37.  

Accordingly, provided QI is a qualified intermediary described in the § 1031 regulations, taxpayer satisfies the identification requirements with respect to its exchange of Property A for Property C in accordance with the Revenue Procedure 2000-37 safe harbor by disposing of Property A through QI within the 45-day identification period.