Code Sec. 1031


26 CFR 1.1031(a)-1: Property held for productive use in trade or business
or for investment.

	Nonrecognition of gain or loss from exchange of interest in Illinois
land trust. A taxpayer's interest in an Illinois land trust constitutes
real property which may be exchanged for other real property without
recognition of gain or loss under section 1031 of the Code, provided the
requirements of that section are otherwise satisfied.


REV. RUL. 92-105

ISSUE

	Does a taxpayer's interest in an Illinois land trust constitute real
property which may be exchanged for other real property without
recognition of gain or loss under section 1031 of the Internal Revenue
Code?


FACTS

	A, an individual, created an Illinois land trust, described in section
8.31 of chapter 29 of the Illinois Annotated Statutes (Smith-Hurd 1990),
under which A was the beneficiary. The purpose of the Illinois land trust
was to hold title to Blackacre, which is Illinois real property that A has
held for investment purposes. Under Illinois state law, a beneficiary's
interest in an Illinois land trust is characterized as personal property,
the beneficiary or any person designated by the beneficiary has the
exclusive power to direct or control the trustee in dealing with the title
to the property in the land trust, and the beneficiary has the exclusive
control of the management of the property and the exclusive right to the
earnings and proceeds from the property.

	To create the Illinois land trust, A executed two instruments: (1) a
deed in trust; and (2) a land trust agreement. These instruments named T,
a domestic corporation, as trustee.

	Under the deed in trust, A transferred legal and equitable title in
Blackacre to T, subject to the provisions of the accompanying land trust
agreement. Pursuant to the deed in trust, any person dealing with T would
take any interest in Blackacre free and clear of the claims of A.

	The land trust agreement entered into between A and T authorized T, in
return for an annual fee, to execute deeds, mortgages, or otherwise deal
with the legal title of Blackacre at the direction of A. Under the land
trust agreement, A retained the exclusive control of the management,
operation, renting, and selling of Blackacre, together with the exclusive
right to the earnings and proceeds from Blackacre. A also retained the
right to assign A's interest in the Illinois land trust. Under the land
trust agreement, A was required to file all tax returns, pay all taxes,
and satisfy any other liabilities with respect to Blackacre. The land
trust agreement precluded T from disclosing that A was the trust
beneficiary unless directed to do so by A in writing. No other agreement
regarding Blackacre existed between A and T.

	A subsequently entered into a written agreement with X, a domestic
corporation, for an exchange of properties. Under the agreement, A agreed
to transfer A's interest in the Illinois land trust to X, and X agreed to
transfer Whiteacre to A. Whiteacre is real property owned by X and is of a
like kind to Blackacre. Pursuant to the agreement, A exchanged A's
interest in the Illinois land trust for Whiteacre. Thereafter, A held
Whiteacre for investment purposes.


LAW AND ANALYSIS

	Section 1031(a)(1) of the Code provides that no gain or loss is
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 that is to be held either for productive use in a
trade or business or for investment.

	Section 1031(a)(2) of the Code provides that section 1031(a)(1) does
not apply to any exchange of specified types of property. In particular,
section 1031(a)(2)(E) provides that section 1031(a)(1) does not apply to
any exchange of certificates of trust or beneficial interests.

	Section 301.7701-4(a) of the Procedure and Administration Regulations
provides that the term "trust" as used in the Code refers to an
arrangement created by a will or by an inter vivos declaration whereby
trustees take title to property for the purpose of protecting or
conserving it for the beneficiaries under the ordinary rules applied in
chancery of probate courts. Generally, an arrangement is treated as a
trust under the Code if it can be shown that the purpose of the
arrangement is to vest in trustees responsibility for the protection and
conservation of property for beneficiaries who cannot share in the
discharge of this responsibility.

	The purpose of the Illinois land trust created by A was to vest legal
and equitable title in a "trustee." However, under applicable Illinois
law, the deed in trust, and the land trust agreement, A retained sole
authority and responsibility for dealing directly with Blackacre for all
purposes other than the transfer of title. A retained the direct right to
manage and control Blackacre, the direct right to collect any rent or
sales proceeds from Blackacre, and the direct obligation to pay any taxes
and liabilities relating to Blackacre.

	Because T's only responsibility was to hold and transfer title at the
direction of A, a trust (as defined in section 301.7701-4(a) of the
regulations) was not established. Moreover, there were no other agreements
between A and T (or between A and any other person) that would cause the
overall arrangement to be classified as a partnership (or any other type
of entity) for federal income tax purposes. Cf. Rev. Rul. 64-220, 1964-2
C.B. 335. Instead, T was a mere agent for the holding and transfer of
title to Blackacre, and A has retained direct ownership of Blackacre for
federal income tax purposes.

	Accordingly, A's transfer of A's interest in the Illinois land trust
holding title to Blackacre in exchange for Whiteacre was an exchange of
the underlying real property, not an exchange of a certificate of trust or
beneficial interest (under section 1031(a)(2)(E) of the Code) for
Whiteacre. Blackacre is like-kind property to Whiteacre, and provided the
requirements of section 1031 are otherwise satisfied, this exchange will
qualify for nonrecognition of gain or loss under section 1031.


HOLDING

	A taxpayer's interest in an Illinois land trust constitutes real
property which may be exchanged for other real property without
recognition of gain or loss under section 1031 of the Code, provided the
requirements of that section are otherwise satisfied. This holding is not
applicable if an arrangement involving an Illinois land trust creates an
entity (such as a partnership).

	Several states in addition to Illinois, including, for example,
California, Florida, Hawaii, Indiana, North Dakota, and Virginia, have
laws that statutorily or judicially sanction arrangements that are similar
to the Illinois land trust arrangement described herein. The holding in
this revenue ruling also applies to an interest in a similar arrangement
created under the laws of any state, pursuant to which (1) the trustee has
title to real property, (2) the beneficiary (or a designee of the
beneficiary) has the exclusive right to direct or control the trustee in
dealing with the title to the property, and (3) the beneficiary has the
exclusive control of the management of the property, the exclusive right
to the earnings and proceeds from the property, and the obligation to pay
any taxes and liabilities relating to the property.


DRAFTING INFORMATION

	The principal author of this revenue ruling is John M. Fischer of the
Office of Assistant Chief Counsel (Income Tax and Accounting). For further
information regarding this revenue ruling, contact Mr. Fischer on (202)
622-4950 (not a toll-free call).

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