Excerpt from Practical US/Domestic Tax Strategies by J. Gregg Miller, Timothy B. Anderson, Laura Warren and Michelle M. Parten (Pepper Hamilton LLP)
What happens when you engage in a tax-free section 1031 exchange and your qualified intermediary (QI) declares bankruptcy while holding the proceeds from the sale of your property? According to a Virginia bankruptcy court, unless the exchange agreement is drafted properly, the transaction proceeds held by the QI may become part of its bankruptcy estate, resulting in you becoming a general unsecured creditor.
This was the case for an exchanger with proceeds held in segregated bank accounts of LandAmerica 1031 Exchange Services, Inc. (LandAmerica), acting as its QI, at the time LandAmerica filed for bankruptcy. The court concluded that the language of the exchange agreement disclaimed any interest of the exchanger in the proceeds and held that the use of segregated bank accounts did not give rise to a trust. Thus, the proceeds were treated as part of LandAmerica’s bankruptcy estate.
Under Section 1031 of the Code, no gain or loss is recognized when property is exchanged solely for like-kind property. While this exchange of property may take place simultaneously, the Code allows taxpayers to defer the acquisition of the replacement property for 180 days from the transfer of the relinquished property, which is known as a forward exchange. In forward exchanges, taxpayers typically assign the contract for the sale of their relinquished property to an entity known as a QI, which receives the proceeds and uses them to purchase the replacement property on behalf of the exchanger.
Read More about Alternatives to Using a QI to Avoid Risks Related to Section 1031 (free)
Tuesday, June 2, 2009
Addressing Risks of Intermediaries Filing for Bankruptcy in Section 1031 Exchanges
Wednesday, February 18, 2009
Excerpt from WorldTrade Executive's Practical US/International Tax Strategies by Jonathan A. Sambur, Kenneth Klein, Patricia Anne Rexford, John T. Hildy and Rafic H. Barrage (Mayer Brown)
On December 24, 2008, the US Treasury and the IRS released final, temporary and proposed regulations relating to the application of the subpart F foreign base company sales income (FBCSI) rules to contract manufacturing arrangements.
These regulations finalized certain of the proposed regulations relating to this subject that were originally released on February 27, 2008. Also issued were temporary and proposed regulations that modify other of the February 27 proposed regulations. The text of the newly proposed regulations is the same as the corresponding temporary regulations.
Read More on These Regulations (free)
