Some of the case law that exists for 1031 exchanges came from scenarios that occurred before the 1991 Treasury regulations. They gave greater clarity and safe harbor certainty to deferred exchanges. In this article we are going to talk about a few case examples that outline pure or true reverse 1031 exchanges.
Rutherford Case Example
One case involving cattle that is really interesting is called Bennie D. Rutherford, T.C. Memo 1978-505. In this case from 1978 a taxpayer received the replacement property first and then later was going to transfer the relinquished property to complete the exchange. So they acquired a replacement property first and then were going to dispose of the relinquished property second. A key factor in the court's determination was the written contractual pre-arrangement to swap the properties
In this transaction the taxpayer owned the replacement property before they even had created the relinquished property. Nevertheless the IRS challenged the transaction. However, at the end of the day United States Tax Court held in favor of the taxpayer for what was in effect a pure or true reverse exchange done without a facilitator and done without a qualified intermediary.
Biggs vs. Commissioner
A similar result was held in Biggs vs. Commissioner, 632 F.2d 1171 (5th Cir. 1980) as to real property that was acquired first, before the relinquished property was conveyed; in this case the exchange was also made an express condition of a contract between the parties. As such the transactions were held to be interdependent and that they culminated in an exchange rather than a sale and separate purchase.
In Private Letter Ruling 9823045 and 9814019, the IRS pronounced that the exchange of certain easements (that were received first) was a reverse like-kind exchange and stated that it was a valid like-kind exchange, even though the taxpayer acquired the replacement property (power line easements) first and then subsequently deeded the relinquished property (existing easement) at a later time.
Most tax commentators do not recommend that clients attempt to structure pure reverse exchanges because the safe harbor under Rev. Proc. 2000-37 provides much more certainty.
Start Your 1031 Exchange: If you have questions about true reverse exchanges, feel free to call me at 612-643-1031.
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