Code Sec. 1031
* Sec. 1031 Issues: Exchange of property held for productive use or
investment -- Multi-party exchanges.
This responds to Taxpayer's application for a private letter ruling
dated April 29, 1997. Taxpayer represents the following facts:
P, a foreign corporation, owns the majority of the outstanding stock of
Taxpayer, a U.S. holding company, and X, a U.S. operating company.
Taxpayer owns all the outstanding stock of S1 and S2. Taxpayer, S1 and S2
(as a consolidated group) and X all file U.S. tax returns on a calendar
year basis. X, S1 and S2 each held hotel property for productive use in a
trade or business (the relinquished properties).
On Date 1, X, S1 and S2 transferred their respective hotel properties
to a qualified intermediary, pursuant to section 1.1031(k)-1(g)(4) of the
Income Tax Regulations. <> The qualified intermediary then
transferred the said relinquished properties to W.
On or before Date 2 (within 45 days after the transfer by S1, S2 and X
of their relinquished properties), S1, S2 and X identified replacement
properties in accordance with section 1031(a)(3)(A) of the Internal
Revenue Code. The identified replacement properties are of like kind for
purposes of section 1031.
Before acquiring the replacement property, S1 and S2 will liquidate and
X will merge with Taxpayer. The liquidations of S1 and S2 into Taxpayer
will qualify for nonrecognition of gain or loss under section 332 of the
Code. The merger of X with Taxpayer will qualify as a corporate
reorganization under section 368(a)(1)(A) of the Code.
Following the liquidations of S1 and S2 into Taxpayer and the merger of
X with Taxpayer, Taxpayer will form a separate limited liability company
(LLC), under the laws of State, for each replacement property and will
receive in each case the entire LLC ownership interest. These single-owner
LLCs will not elect pursuant to section 301.7701 of the regulations to be
classified as associations.
Subsequent to the formation of the LLCs and on or before Date 3,
<> the LLCs organized by Taxpayer will each receive one of the
identified like-kind replacement properties. The receipt of the
replacement properties by the LLCs will complete the deferred exchange
transaction which began with the transfer of the relinquished properties
by S1, S2 and X on Date 1.
Under these facts, Taxpayer requests a ruling that it will be treated
as both the transferor of the relinquished properties and the transferee
of the replacement property or properties for purposes of section 1031(a)
of the Code. In addition, Taxpayer also requests a ruling that the
acquisition of each replacement property by a separate LLC that is wholly
owned by Taxpayer will be deemed an acquisition by Taxpayer and will not
violate the requirement under section 1031(a)(1) of the Code that the
like-kind replacement property is to be held for productive use in a trade
or business or for investment.
Section 1031(a)(1) of the Code provides that no gain or loss will be
recognized on the exchange of property held for productive use in a trade
or business or for investment if the property is exchanged solely for
property of a like kind which is to be held either for productive use in a
trade or business or for investment. Under section 1.1031(a)-1(b) of the
regulations relating to the meaning of the term "like kind," real property
is generally considered to be of like kind to all other real property,
whether or not any of the real property involved is improved. However,
under section 1031(a)(3), any property received by the taxpayer (the
"replacement property") will be treated as if it is not of a like kind to
the property transferred (the "relinquished property") if the replacement
property (a) is not identified within 45 days of the taxpayer's transfer
of the relinquished property, or (b) is received after the earlier of (i)
180 days after the taxpayer's transfer, or (ii) the due date of the
taxpayer's return for the year in which the taxpayer's transfer occurred.
Section 381(a) of the Code provides that, in the case of the
acquisition of assets of a corporation by another corporation -- (1) in a
distribution to such corporation to which section 332 (relating to
liquidations of subsidiaries) applies; or (2) in a transfer in which
section 361 applies (relating to nonrecognition of gain or loss to
corporations) applies, but only if the transfer is in connection with a
reorganization described in subparagraph (A), (C), (D), (F) or (G) of
section 368(a)(1), the acquiring corporation shall succeed to and take
into account as of the close of the day of transfer, the items of the
transferor corporation described in section 381(c) subject to certain
conditions and limitations.
Section 332(a) of the Code generally provides that no gain or loss
shall be recognized on receipt by a corporation of property distributed in
complete liquidation of another corporation.
Section 368(a)(1)(A) of the Code provides, in part, that the term
"reorganization" includes a statutory merger or consolidation.
Section 1.381(a)-1(b)(3)(i) of the regulations provides that section
381 does not apply to the carryover of an item or tax attribute not
specified in section 381(c) of the Code. Section 381(c) does not refer to
like kind exchanges under section 1031 of the Code. However, the
legislative history of section 381 explains that "[T]he section is not
intended to affect the carryover treatment of an item or tax attribute not
specified in the section or the carryover treatment of items or tax
attributes in corporate transactions not described in subsection (a). No
inference is to be drawn from the enactment of this section whether any
item or tax attribute may be utilized by a successor or predecessor
corporation under existing law." H.R. Rep. No. 1337, 83rd Cong., 2d Sess.
A135 (1954). See also section 1.381(a)-1(b)(3)(i) of the regulations (to
the same effect). In other words, Congress did not intend the tax
attributes listed in section 381(c) of the Code to be the exclusive list
of attributes available for carryover. The legislative history further
reveals that the purpose of section 381 is to put into practice the policy
that "economic realities rather than ... such artificialities as the legal
form of the reorganization" ought to control in the question of whether a
tax attribute from an acquired corporation is to be carried over to the
acquiring one. Section 381 was enacted "to enable the successor
corporation to step into the 'tax shoes' of its predecessor corporation
without necessarily conforming to artificial legal requirements which
[then existed at the time of its enactment] under court-made law." See S.
Rep. No. 1622, 83rd Cong., 2d Sess. 52 (1954).
The special treatment of like-kind exchanges under section 1031 of the
Code has been explained primarily on two grounds. First, a taxpayer making
a like-kind exchange has received property similar to the property
relinquished and therefore has not "cashed out" of the investment in the
relinquished property. In addition, administrative problems may arise with
respect to valuing property which is exchanged solely or primarily for
similar property. See, e.g., Staff of the Joint Committee of Taxation,
General Explanation of the Revenue Provisions of the Deficit Reduction Act
of 1984, 98th Cong., 2d Sess. 244-5 (1984); Starker v. United States, 602
F.2d 1341, 1352 (9th Cir. 1979).
The policy concerns which gave rise to section 1031 of the Code are no
less applicable when the acquiring corporation, following liquidation
under section 332 or a reorganization under section 368(a)(1), receives
like-kind replacement property in exchange for relinquished property
transferred by a liquidated or an acquired corporation prior to the
liquidation or the reorganization. Accordingly, we conclude that for
purposes of section 1031(a)(3) there is a carryover of tax attributes
following both a section 332 liquidation and a section 368(a)(1)(A)
reorganization. Thus, the intervening liquidations and reorganization,
under the facts of this case, do not prevent the receipt of the
replacement property by Taxpayer through nonelecting LLCs, as discussed
above, from being treated as received in exchange for the relinquished
property.
Section 301.7701-2(c)(2) of the regulations provides that, in general,
a business entity that has a single owner and is not a corporation (as
defined in section 301.7701-2(b)) is disregarded as an entity separate
from its owner for federal tax purposes unless the entity elects to treat
itself as an association for federal tax purposes. Because each
wholly-owned, nonelecting LLC will be disregarded as an entity separate
from its owner (i.e., Taxpayer) for federal tax purposes, the assets of
the wholly-owned LLCs will be treated as assets of Taxpayer.
Based on the facts presented above, we rule that:
(1) Taxpayer will be treated as both the transferor of the relinquished
properties and the transferee of the replacement property for purposes of
section 1031(a) of the Code;
(2) The acquisition of the replacement property by each nonelecting
LLC, wholly-owned by Taxpayer, will be deemed an acquisition by Taxpayer;
and
(3) The transaction will not violate the requirement under section
1031(a)(1) that the like-kind replacement property "is to he [sic] held
either for productive use in a trade or business or for investment" merely
because the replacement property is received by one or more wholly-owned,
nonelecting LLCs.
No opinion is expressed as to the application of any other provision of
the Code or the regulations to the transaction at issue or as to the tax
treatment of any conditions existing at the time of, or effects resulting
from, the transaction described which are not specifically covered in the
above ruling. In particular, we express no opinion on whether the
liquidations of S1 and S2 will qualify under section 332 of the Code or
whether the merger of X with Taxpayer qualifies as a reorganization
described under section 368(a)(1)(A).
A copy of this letter should be attached to the federal income tax
return for the year in which the transaction in question occurs. This
ruling is directed only to Taxpayer(s) who requested it. Section
6110(j)(3) of the Code provides that it may not be cited as precedent.
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1/ Section 1.1031(k)-1(g) of the regulations sets up four safe harbors,
the use of which will prevent actual or constructive receipt of money or
other property for purposes of section 1031 of the Internal Revenue Code.
Paragraph (g)(4) provides that one of these safe harbors is the qualified
intermediary. Paragraph (g)(4)(iii) defines a qualified intermediary as a
person who (A) is not the taxpayer or a disqualified person, and (B)
enters into a written agreement with the taxpayer (the exchange agreement)
and as required by the exchange agreement, acquires the relinquished
property from the taxpayer, transfers the relinquished property, acquires
the replacement property and transfers the replacement property to the
taxpayer.
2/ Date 3 is a date within 180 days after the transfer of the
relinquished properties and before the due date of Taxpayer's return for
the year of transfer.
Sincerely yours,
Assistant Chief Counsel
(Income Tax & Accounting)
by: ____
David L. Crawford
Chief, Branch 5
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