[Federal Register Volume 59, Number 76 (Wednesday, April 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9557]
[[Page Unknown]]
[Federal Register: April 20, 1994]
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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 15a
[TD 8535]
RIN 1545-AQ48
Like-kind Exchanges of Property--Coordination With Section 453
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: This document contains final income tax regulations under
section 1031(a)(3) of the Internal Revenue Code of 1986 relating to the
coordination of deferred like-kind exchanges described in section
1031(a)(3) with the installment sale rules of section 453. The final
regulations affect taxpayers who engage in certain like-kind exchanges
of property under section 1031.
DATES: These regulations are effective April 20, 1994.
For dates of applicability, see Secs. 1.1031(b)-2(d) and 1.1031(k)-
1(j)(2) of the regulations.
FOR FURTHER INFORMATION CONTACT: Christopher F. Kane at (202) 622-4950,
not a toll-free call.
SUPPLEMENTARY INFORMATION:
Background
On May 1, 1991, the IRS published in the Federal Register (56 FR
19933) final regulations under section 1031(a)(3) of the Internal
Revenue Code relating to deferred like-kind exchanges. Section
1.1031(k)-1(j)(2) of the regulations, relating to the coordination of
section 1031(a)(3) with the installment sale provisions of section 453,
is reserved. On November 2, 1992, the IRS published a notice of
proposed rulemaking in the Federal Register (57 FR 49432) coordinating
section 1031(a)(3) with the installment sale provisions of section 453.
After consideration of the written comments received regarding the
proposed regulations, the regulations are adopted as amended by this
Treasury decision. This Treasury decision amends Sec. 1.1031(b)-2 of 26
CFR part 1, Income Tax Regulations, adds the text of Sec. 1.1031(k)-
1(j)(2), and amends Sec. 15a.453-1(b)(3)(i) of 26 CFR part 15a.
Technical Background
In a typical deferred exchange, the taxpayer may require the
transferee to secure its promise to acquire replacement property with a
cash funded escrow account or trust. Alternatively, the taxpayer may
retain an intermediary to arrange for the transfer of replacement
property to the taxpayer. Section 1.1031(k)-1(g) provides certain safe
harbors that, if followed, ensure that these arrangements do not cause
the transaction to be treated as a taxable sale rather than a deferred
exchange for purposes of section 1031. Section 453(a) generally
provides that income from an installment sale is taken into account
under the installment method as payments are made. Section 15a.453-
1(b)(3)(i) of the regulations provides that the receipt of an evidence
of indebtedness that is secured directly or indirectly by cash or a
cash equivalent is treated as the receipt of a payment. That section
also provides that a payment includes amounts actually or
constructively received under an installment obligation.
These final regulations provide rules that coordinate the safe
harbor provisions of Sec. 1.1031(k)-1(g) with the installment sale
rules that determine when a taxpayer is in receipt of a payment under
section 453 and Sec. 15a.453-1(b)(3)(i).
Description of Provisions
The final regulations under Sec. 1.1031(k)-1(g) (3) and (4) provide
certain safe harbors under which taxpayers are treated as not being in
actual or constructive receipt of money or other property held in a
qualified escrow account, qualified trust, or by a qualified
intermediary. These final regulations generally adopt the same safe
harbors for the purpose of determining whether a taxpayer is in receipt
of payment under section 453 and Sec. 15a.453-1(b)(3)(i) if, at the
beginning of the exchange period, the taxpayer has a bona fide intent
to enter into a deferred exchange. The qualified escrow account,
qualified trust, or qualified intermediary is disregarded for purposes
of section 453 and Sec. 15a.453-1(b)(3)(i) until the earlier of (a) the
time the safe harbor would otherwise cease to apply for purposes of
section 1031 (e.g., when the taxpayer has the immediate right to
receive the funds held in the qualified escrow account), or (b) the end
of the exchange period. Thus, subject to the other requirements of
sections 453 and 453A and the related regulations, taxpayers who use
the safe harbors of the existing 1031 regulations and meet the
requirements of these final regulations will be entitled to report gain
recognized on the deferred exchange under the installment method.
Several commentators requested that the bona fide intent
requirement be clarified by providing either examples or presumptions.
Whether a particular taxpayer has a bona fide intent to enter into a
deferred exchange is determined on the basis of all relevant facts and
circumstances. Because the presumptions suggested by commentators would
emphasize certain factors that in many cases should not be
determinative, the final regulations do not contain rules setting forth
presumptions. However, the final regulations clarify that a taxpayer
will be treated as having a bona fide intent only if it is reasonable
to believe, based on all the facts and circumstances as of the
beginning of the exchange period, that like-kind replacement property
will be acquired before the end of the exchange period. In addition,
two examples have been added to the final regulations in which the bona
fide intent requirement is determined to have been satisfied. These
examples are intended to be illustrative only, and do not represent
either the minimum steps required to establish bona fide intent or safe
harbors pursuant to which a bona fide intent will in other contexts be
assumed to exist.
The regulations provide a special rule for deferred exchanges
involving qualified intermediaries. Under this rule, a taxpayer in
receipt of an evidence of indebtedness of the qualified intermediary's
transferee is treated as receiving an evidence of indebtedness of the
transferee of the relinquished property, even though these regulations
generally treat the qualified intermediary as having acquired and
transferred the relinquished property for other purposes. Therefore,
for purposes of section 453 and Sec. 15a.453-1(b)(3)(i), the receipt by
the taxpayer of such an evidence of indebtedness is treated as the
receipt of an evidence of indebtedness of the person acquiring the
relinquished property from the taxpayer and is not considered a payment
under section 453.
One commentator was concerned that the treatment provided by the
special rule terminates at the end of the exchange period even if the
note remains outstanding. The final regulations make clear that this
rule applies beyond the end of the exchange period. Another commentator
suggested that the special rule that treats indebtedness of the
qualified intermediary's transferee as indebtedness of the person
acquiring relinquished property from the taxpayer for purposes of
section 453 and Sec. 15a.453-1(b)(3)(i) should also apply to
simultaneous exchanges under Sec. 1.1031(b)-2. This comment has been
adopted, as reflected in amendments to Sec. 1.1031(b)-2.
Another commentator recommended that the regulations provide that
the distribution of an installment note to the taxpayer at any time by
a qualified intermediary would not terminate the applicability of the
qualified intermediary safe harbor. The Internal Revenue Service and
the Treasury do not believe a special exception to the limitations
contained in Sec. 1.1031(k)-1(g)(4) (ii) and (vi) (relating to the
taxpayer's right to receive or otherwise obtain the benefits of money
or other property held by a qualified intermediary) should be provided
for installment notes. Rather, Sec. 1.1031(k)-1(g)(4)(vii) provides
sufficient flexibility by permitting the receipt of money or other
property (including an installment note) by the taxpayer directly from
a transferee without affecting the applicability of the qualified
intermediary safe harbor. Therefore, this comment has not been adopted.
Another commentator suggested that certain interest payments made
on the installment note during the exchange period be treated as fee
income to the qualified intermediary and not as interest income to the
taxpayer. Section 1.1031(k)-1(h)(2) specifies that interest payments
received by the taxpayer, whether received in cash or property
(including like-kind property), are to be treated as income to the
taxpayer. The determination of whether interest payments retained by a
qualified intermediary should be treated as received by the taxpayer,
and thereby represent income to the taxpayer, is beyond the scope of
this regulation and may be the subject of future guidance.
One commentator requested that the regulations address the timing
of gain recognition in deferred exchanges involving assumptions of
liabilities. The Internal Revenue Service and the Treasury are
currently studying the circumstances under which, and the extent to
which, gain attributable to assumptions of liabilities in like-kind
exchanges (including simultaneous exchanges) should be eligible for
deferral under the installment method. Among other things, this process
will include an examination of the rules proposed under section
453(f)(6) in 1984. Accordingly, this final regulation does not address
these issues.
Two commentators requested that the regulations consider issues
relating to the timing of receipt of income after the end of the
exchange period in cases where the delivery of money or other property
is delayed due to events such as breach of contract or bankruptcy.
Because section 1031(a)(3) requires deferred exchanges to be completed
by the end of the exchange period, the safe harbors from the
constructive receipt rules provided by Sec. 1.1031(k)-1(g) (3) and (4)
have no application after that period. Whether a taxpayer is in receipt
of money or other property held in a qualified escrow account or
qualified trust or by a qualified intermediary after the end of the
exchange period is determined under general principles of federal
income tax law. Therefore, the final regulations do not provide
specific guidance regarding the timing of receipt of income where
delivery of the money or other property held in a qualified escrow
account or a qualified trust, or by a qualified intermediary is delayed
beyond the end of the exchange period.
Several additional comments were received pertaining to issues that
may arise when an installment note is used in a deferred like-kind
exchange. Commentators suggested that guidance be provided on the tax
consequences of making the installment note payable to a qualified
intermediary. Commentators also wanted to know the consequences of a
qualified intermediary's disposition of a note to a third party during
the exchange period. Commentators requested guidance on the treatment
of principal payments made on an installment note during the exchange
period. One commentator requested guidance on the tax consequences of a
reversion to the transferee of cash held in a qualified escrow account
or qualified trust followed by the transferee's issuance of an
installment note to the taxpayer at the end of the exchange period.
Commentators also suggested that the final regulations address the
treatment of issues arising from deferred exchanges of multiple assets.
The issues raised by these comments are broader than the scope of
these regulations. Resolution of these issues would affect not only
deferred like-kind exchanges spanning more than one tax year, but also
such exchanges taking place within one tax year. In addition, these
issues may also involve the character of income rather than the timing
of the receipt of income. Therefore, the final regulations do not
address these comments. However, the Internal Revenue Service will take
these issues into consideration in issuing further guidance in this
area.
Finally, under these regulations, taxpayers may choose to apply the
safe harbors retroactively to transfers of property occurring on or
after May 16, 1990. However, if taxpayers reported gain that qualifies
for installment method reporting under these regulations in the year
they transferred the relinquished property, they in effect elected out
of the installment method. In the preamble to the proposed regulations,
the Internal Revenue Service requested comments on whether the Service
should publish a revenue procedure providing simplified procedures
under which those taxpayers who elected out of the installment method
could use the installment method in reporting gain on those
transactions. Because commentators expressed only minimal interest in
this revenue procedure, the Service will not issue such a revenue
procedure or similar guidance.
Special Analyses
It has been determined that these regulations are not a significant
regulatory action as defined in EO 12866. Therefore, a regulatory
assessment is not required. It has also been determined that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the
Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these
regulations, and, therefore, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Internal Revenue Code, the
notice of proposed rulemaking published in the Federal Register on
November 2, 1992 (57 FR 49432) was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small businesses.
Drafting Information
The principal author of these regulations is Christopher F. Kane of
the Office of Assistant Chief Counsel (Income Tax and Accounting),
Internal Revenue Service. However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Parts 1 and 15a
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendment to the Regulations
Accordingly, 26 CFR parts 1 and 15a are amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.1031(b)-2 is amended as follows:
1. Paragraph (b) is revised.
2. Paragraphs (c) and (d) are added.
3. The added and revised provisions read as follows:
Sec. 1.1031(b)-(2) Safe harbor for qualified intermediaries.
* * * * *
(b) In the case of simultaneous exchanges of like-kind properties
involving a qualified intermediary (as defined in Sec. 1.1031(k)-
1(g)(4)(iii)), the receipt by the taxpayer of an evidence of
indebtedness of the transferee of the qualified intermediary is treated
as the receipt of an evidence of indebtedness of the person acquiring
property from the taxpayer for purposes of section 453 and
Sec. 15a.453-1(b)(3)(i) of this chapter.
(c) Paragraph (a) of this section applies to transfers of property
made by taxpayers on or after June 10, 1991.
(d) Paragraph (b) of this section applies to transfers of property
made by taxpayers on or after April 20, 1994. A taxpayer may choose to
apply paragraph (b) of this section to transfers of property made on or
after June 10, 1991.
Par. 3. In Sec. 1.1031(k)-1, the text of paragraph (j)(2) is added
to read as follows:
Sec. 1.1031(k)-1 Treatment of deferred exchanges.
* * * * *
(j) * * *
(2) Coordination with section 453--(i) Qualified escrow accounts
and qualified trusts. Subject to the limitations of paragraphs (j)(2)
(iv) and (v) of this section, in the case of a taxpayer's transfer of
relinquished property in which the obligation of the taxpayer's
transferee to transfer replacement property to the taxpayer is or may
be secured by cash or a cash equivalent, the determination of whether
the taxpayer has received a payment for purposes of section 453 and
Sec. 15a.453-1(b)(3)(i) of this chapter will be made without regard to
the fact that the obligation is or may be so secured if the cash or
cash equivalent is held in a qualified escrow account or a qualified
trust. This paragraph (j)(2)(i) ceases to apply at the earlier of--
(A) The time described in paragraph (g)(3)(iv) of this section; or
(B) The end of the exchange period.
(ii) Qualified intermediaries. Subject to the limitations of
paragraphs (j)(2) (iv) and (v) of this section, in the case of a
taxpayer's transfer of relinquished property involving a qualified
intermediary, the determination of whether the taxpayer has received a
payment for purposes of section 453 and Sec. 15a.453-1(b)(3)(i) of this
chapter is made as if the qualified intermediary is not the agent of
the taxpayer. For purposes of this paragraph (j)(2)(ii), a person who
otherwise satisfies the definition of a qualified intermediary is
treated as a qualified intermediary even though that person ultimately
fails to acquire identified replacement property and transfer it to the
taxpayer. This paragraph (j)(2)(ii) ceases to apply at the earlier of--
(A) The time described in paragraph (g)(4)(vi) of this section; or
(B) The end of the exchange period.
(iii) Transferee indebtedness. In the case of a transaction
described in paragraph (j)(2)(ii) of this section, the receipt by the
taxpayer of an evidence of indebtedness of the transferee of the
qualified intermediary is treated as the receipt of an evidence of
indebtedness of the person acquiring property from the taxpayer for
purposes of section 453 and Sec. 15a.453-1(b)(3)(i) of this chapter.
(iv) Bona fide intent requirement. The provisions of paragraphs
(j)(2) (i) and (ii) of this section do not apply unless the taxpayer
has a bona fide intent to enter into a deferred exchange at the
beginning of the exchange period. A taxpayer will be treated as having
a bona fide intent only if it is reasonable to believe, based on all
the facts and circumstances as of the beginning of the exchange period,
that like-kind replacement property will be acquired before the end of
the exchange period.
(v) Disqualified property. The provisions of paragraphs (j)(2) (i)
and (ii) of this section do not apply if the relinquished property is
disqualified property. For purposes of this paragraph (j)(2),
disqualified property means property that is not held for productive
use in a trade or business or for investment or is property described
in section 1031(a)(2).
(vi) Examples. This paragraph (j)(2) may be illustrated by the
following examples. Unless otherwise provided in an example, the
following facts are assumed: B is a calendar year taxpayer who agrees
to enter into a deferred exchange. Pursuant to the agreement, B is to
transfer real property X. Real property X, which has been held by B for
investment, is unencumbered and has a fair market value of $100,000 at
the time of transfer. B's adjusted basis in real property X at that
time is $60,000. B identifies a single like-kind replacement property
before the end of the identification period, and B receives the
replacement property before the end of the exchange period. The
transaction qualifies as a like-kind exchange under section 1031.
Example 1. (i) On September 22, 1994, B transfers real property
X to C and C agrees to acquire like-kind property and deliver it to
B. On that date B has a bona fide intent to enter into a deferred
exchange. C's obligation, which is not payable on demand or readily
tradable, is secured by $100,000 in cash. The $100,000 is deposited
by C in an escrow account that is a qualified escrow account under
paragraph (g)(3) of this section. The escrow agreement provides that
B has no rights to receive, pledge, borrow, or otherwise obtain the
benefits of the cash deposited in the escrow account until the
earlier of the date the replacement property is delivered to B or
the end of the exchange period. On March 11, 1995, C acquires
replacement property having a fair market value of $80,000 and
delivers the replacement property to B. The $20,000 in cash
remaining in the qualified escrow account is distributed to B at
that time.
(ii) Under section 1031(b), B recognizes gain to the extent of
the $20,000 in cash that B receives in the exchange. Under paragraph
(j)(2)(i) of this section, the qualified escrow account is
disregarded for purposes of section 453 and Sec. 15a.453-1(b)(3)(i)
of this chapter in determining whether B is in receipt of payment.
Accordingly, B's receipt of C's obligation on September 22, 1994,
does not constitute a payment. Instead, B is treated as receiving
payment on March 11, 1995, on receipt of the $20,000 in cash from
the qualified escrow account. Subject to the other requirements of
sections 453 and 453A, B may report the $20,000 gain in 1995 under
the installment method. See section 453(f)(6) for special rules for
determining total contract price and gross profit in the case of an
exchange described in section 1031(b).
Example 2. (i) D offers to purchase real property X but is
unwilling to participate in a like-kind exchange. B thus enters into
an exchange agreement with C whereby B retains C to facilitate an
exchange with respect to real property X. On September 22, 1994,
pursuant to the agreement, B transfers real property X to C who
transfers it to D for $100,000 in cash. On that date B has a bona
fide intent to enter into a deferred exchange. C is a qualified
intermediary under paragraph (g)(4) of this section. The exchange
agreement provides that B has no rights to receive, pledge, borrow,
or otherwise obtain the benefits of the money held by C until the
earlier of the date the replacement property is delivered to B or
the end of the exchange period. On March 11, 1995, C acquires
replacement property having a fair market value of $80,000 and
delivers it, along with the remaining $20,000 from the transfer of
real property X to B.
(ii) Under section 1031(b), B recognizes gain to the extent of
the $20,000 cash B receives in the exchange. Under paragraph
(j)(2)(ii) of this section, any agency relationship between B and C
is disregarded for purposes of section 453 and Sec. 15a.453-
1(b)(3)(i) of this chapter in determining whether B is in receipt of
payment. Accordingly, B is not treated as having received payment on
September 22, 1994, on C's receipt of payment from D for the
relinquished property. Instead, B is treated as receiving payment on
March 11, 1995, on receipt of the $20,000 in cash from C. Subject to
the other requirements of sections 453 and 453A, B may report the
$20,000 gain in 1995 under the installment method.
Example 3. (i) D offers to purchase real property X but is
unwilling to participate in a like-kind exchange. B enters into an
exchange agreement with C whereby B retains C as a qualified
intermediary to facilitate an exchange with respect to real property
X. On December 1, 1994, pursuant to the agreement, B transfers real
property X to C who transfers it to D for $100,000 in cash. On that
date B has a bona fide intent to enter into a deferred exchange. The
exchange agreement provides that B has no rights to receive, pledge,
borrow, or otherwise obtain the benefits of the cash held by C until
the earliest of the end of the identification period if B has not
identified replacement property, the date the replacement property
is delivered to B, or the end of the exchange period. Although B has
a bona fide intent to enter into a deferred exchange at the
beginning of the exchange period, B does not identify or acquire any
replacement property. In 1995, at the end of the identification
period, C delivers the entire $100,000 from the sale of real
property X to B.
(ii) Under section 1001, B realizes gain to the extent of the
amount realized ($100,000) over the adjusted basis in real property
X ($60,000), or $40,000. Because B has a bona fide intent at the
beginning of the exchange period to enter into a deferred exchange,
paragraph (j)(2)(iv) of this section does not make paragraph
(j)(2)(ii) of this section inapplicable even though B fails to
acquire replacement property. Further, under paragraph (j)(2)(ii) of
this section, C is a qualified intermediary even though C does not
acquire and transfer replacement property to B. Thus, any agency
relationship between B and C is disregarded for purposes of section
453 and Sec. 15a.453-1(b)(3)(i) of this chapter in determining
whether B is in receipt of payment. Accordingly, B is not treated as
having received payment on December 1, 1994, on C's receipt of
payment from D for the relinquished property. Instead, B is treated
as receiving payment at the end of the identification period in 1995
on receipt of the $100,000 in cash from C. Subject to the other
requirements of sections 453 and 453A, B may report the $40,000 gain
in 1995 under the installment method.
Example 4. (i) D offers to purchase real property X but is
unwilling to participate in a like-kind exchange. B thus enters into
an exchange agreement with C whereby B retains C to facilitate an
exchange with respect to real property X. C is a qualified
intermediary under paragraph (g)(4) of this section. On September
22, 1994, pursuant to the agreement, B transfers real property X to
C who then transfers it to D for $80,000 in cash and D's 10-year
installment obligation for $20,000. On that date B has a bona fide
intent to enter into a deferred exchange. The exchange agreement
provides that B has no rights to receive, pledge, borrow, or
otherwise obtain the benefits of the money or other property held by
C until the earlier of the date the replacement property is
delivered to B or the end of the exchange period. D's obligation
bears adequate stated interest and is not payable on demand or
readily tradable. On March 11, 1995, C acquires replacement property
having a fair market value of $80,000 and delivers it, along with
the $20,000 installment obligation, to B.
(ii) Under section 1031(b), $20,000 of B's gain (i.e., the
amount of the installment obligation B receives in the exchange)
does not qualify for nonrecognition under section 1031(a). Under
paragraphs (j)(2) (ii) and (iii) of this section, B's receipt of D's
obligation is treated as the receipt of an obligation of the person
acquiring the property for purposes of section 453 and Sec. 15a.453-
1(b)(3)(i) of this chapter in determining whether B is in receipt of
payment. Accordingly, B's receipt of the obligation is not treated
as a payment. Subject to the other requirements of sections 453 and
453A, B may report the $20,000 gain under the installment method on
receiving payments from D on the obligation.
Example 5. (i) B is a corporation that has held real property X
to expand its manufacturing operations. However, at a meeting in
November 1994, B's directors decide that real property X is not
suitable for the planned expansion, and authorize a like-kind
exchange of this property for property that would be suitable for
the planned expansion. B enters into an exchange agreement with C
whereby B retains C as a qualified intermediary to facilitate an
exchange with respect to real property X. On November 28, 1994,
pursuant to the agreement, B transfers real property X to C, who
then transfers it to D for $100,000 in cash. The exchange agreement
does not include any limitations or conditions that make it
unreasonable to believe that like-kind replacement property will be
acquired before the end of the exchange period. The exchange
agreement provides that B has no rights to receive, pledge, borrow,
or otherwise obtain the benefits of the cash held by C until the
earliest of the end of the identification period, if B has not
identified replacement property, the date the replacement property
is delivered to B, or the end of the exchange period. In early
January 1995, B's directors meet and decide that it is not feasible
to proceed with the planned expansion due to a business downturn
reflected in B's preliminary financial reports for the last quarter
of 1994. Thus, B's directors instruct C to stop seeking replacement
property. C delivers the $100,000 cash to B on January 12, 1995, at
the end of the identification period. Both the decision to exchange
real property X for other property and the decision to cease seeking
replacement property because of B's business downturn are recorded
in the minutes of the directors' meetings. There are no other facts
or circumstances that would indicate whether, on November 28, 1994,
B had a bona fide intent to enter into a deferred like-kind
exchange.
(ii) Under section 1001, B realizes gain to the extent of the
amount realized ($100,000) over the adjusted basis of real property
X ($60,000), or $40,000. The directors' authorization of a like-kind
exchange, the terms of the exchange agreement with C, and the
absence of other relevant facts, indicate that B had a bona fide
intent at the beginning of the exchange period to enter into a
deferred like-kind exchange. Thus, paragraph (j)(2)(iv) of this
section does not make paragraph (j)(2)(ii) of this section
inapplicable, even though B fails to acquire replacement property.
Further, under paragraph (j)(2)(ii) of this section, C is a
qualified intermediary, even though C does not transfer replacement
property to B. Thus, any agency relationship between B and C is
disregarded for purposes of section 453 and Sec. 15a.453-1(b)(3)(i)
of this chapter in determining whether B is in receipt of payment.
Accordingly, B is not treated as having received payment until
January 12, 1995, on receipt of the $100,000 cash from C. Subject to
the other requirements of sections 453 and 453A, B may report the
$40,000 gain in 1995 under the installment method.
Example 6. (i) B has held real property X for use in its trade
or business, but decides to transfer that property because it is no
longer suitable for B's planned expansion of its commercial
enterprise. B and D agree to enter into a deferred exchange.
Pursuant to their agreement, B transfers real property X to D on
September 22, 1994, and D deposits $100,000 cash in a qualified
escrow account as security for D's obligation under the agreement to
transfer replacement property to B before the end of the exchange
period. D's obligation is not payable on demand or readily tradable.
The agreement provides that B is not required to accept any property
that is not zoned for commercial use. Before the end of the
identification period, B identifies real properties J, K, and L, all
zoned for residential use, as replacement properties. Any one of
these properties, rezoned for commercial use, would be suitable for
B's planned expansion. In recent years, the zoning board with
jurisdiction over properties J, K, and L has rezoned similar
properties for commercial use. The escrow agreement provides that B
has no rights to receive, pledge, borrow, or otherwise obtain the
benefits of the money in the escrow account until the earlier of the
time that the zoning board determines, after the end of the
identification period, that it will not rezone the properties for
commercial use or the end of the exchange period. On January 5,
1995, the zoning board decides that none of the properties will be
rezoned for commercial use. Pursuant to the exchange agreement, B
receives the $100,000 cash from the escrow on January 5, 1995. There
are no other facts or circumstances that would indicate whether, on
September 22, 1994, B had a bona fide intent to enter into a
deferred like-kind exchange.
(ii) Under section 1001, B realizes gain to the extent of the
amount realized ($100,000) over the adjusted basis of real property
X ($60,000), or $40,000. The terms of the exchange agreement with D,
the identification of properties J, K, and L, the efforts to have
those properties rezoned for commercial purposes, and the absence of
other relevant facts, indicate that B had a bona fide intent at the
beginning of the exchange period to enter into a deferred exchange.
Moreover, the limitations imposed in the exchange agreement on
acceptable replacement property do not make it unreasonable to
believe that like-kind replacement property would be acquired before
the end of the exchange period. Therefore, paragraph (j)(2)(iv) of
this section does not make paragraph (j)(2)(i) of this section
inapplicable even though B fails to acquire replacement property.
Thus, for purposes of section 453 and Sec. 15a.453-1(b)(3)(i) of
this chapter, the qualified escrow account is disregarded in
determining whether B is in receipt of payment. Accordingly, B is
not treated as having received payment on September 22, 1994, on D's
deposit of the $100,000 cash into the qualified escrow account.
Instead, B is treated as receiving payment on January 5, 1995.
Subject to the other requirements of sections 453 and 453A, B may
report the $40,000 gain in 1995 under the installment method.
(vii) Effective date. This paragraph (j)(2) is effective for
transfers of property occurring on or after April 20, 1994. Taxpayers
may apply this paragraph (j)(2) to transfers of property occurring
before April 20, 1994, but on or after June 10, 1991, if those
transfers otherwise meet the requirements of Sec. 1.1031(k)-1. In
addition, taxpayers may apply this paragraph (j)(2) to transfers of
property occurring before June 10, 1991, but on or after May 16, 1990,
if those transfers otherwise meet the requirements of Sec. 1.1031(k)-1
or follow the guidance of IA-237-84 published in 1990-1, C.B. See
Sec. 601.601(d)(2)(ii)(b) of this chapter.
PART 15a--TEMPORARY INCOME TAX REGULATIONS UNDER THE INSTALLMENT
SALES REVISION ACT
Par. 4. The authority citation for part 15a is revised to read as
follows:
Authority: 26 U.S.C. 453(i) and 7805.
Par. 5. In Sec. 15a.453-1, paragraph (b)(3)(i) is amended by adding
a sentence, after the current first sentence, after the current third
sentence, and after the current fourth sentence, respectively, to read
as follows:
Sec. 15a.453-1 Installment method reporting for sales of real property
and casual sales of personal property.
* * * * *
(b) * * *
(3) Payment--(i) In general. * * * For special rules regarding the
receipt of an evidence of indebtedness of a transferee of a qualified
intermediary, see Secs. 1.1031(b)-2(b) and 1.1031(k)-1(j)(2)(iii) of
this chapter. * * * For a special rule regarding a transfer of property
to a qualified intermediary followed by the sale of such property by
the qualified intermediary, see Sec. 1.1031(k)-1(j)(2)(ii) of this
chapter. * * * For a special rule regarding a transfer of property in
exchange for an obligation that is secured by cash or a cash equivalent
held in a qualified escrow account or a qualified trust, see
Sec. 1.1031(k)-1(j)(2)(i) of this chapter. * * *
* * * * *
Approved: March 16, 1994.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-9557 Filed 4-19-94; 8:45 am]
BILLING CODE 4830-01-U