Code Sec. 1031
* Sec. 1031 Issues: Exchange of property held for productive use or
investment.
This letter responds to your request for a private letter ruling, dated
May 16, 1997, submitted on behalf of Taxpayer. Taxpayer, a State A limited
partnership, requests a ruling that the receipt of several parcels of real
property (each parcel is a "Replacement Property", collectively, the
parcels are the "Replacement Properties") by an entity owned by Taxpayer
will be treated as the receipt of real property directly by the Taxpayer
for purposes of qualifying the receipt of such Replacement Property for
nonrecognition of gain under section 1031 of the Code.
FACTS
Taxpayer, a State A limited partnership, uses the accrual method for
maintaining its accounting books and for preparing its federal income tax
returns. The Taxpayer's taxable year ends on December 31. The Taxpayer's
partners are LLC, a State A limited liability company, and GP a general
partnership organized in State B.
Taxpayer's business operations consist of the ownership and leasing of
a single parcel of improved land. The improvements to the land consist of
a commercial office building and related structures. The land and
improvements are leased to a single lessee under a long-term lease.
Collectively, the land and building are referred to as the "Relinquished
Property".
The Relinquished Property serves as security for the Taxpayer's
indebtedness. Under the terms of the indebtedness, Taxpayer is required to
hold only the Relinquished Property.
Taxpayer has determined that it is in its partners' best interests to
dispose of the Relinquished Property. Taxpayer has identified a party
interested in acquiring the Relinquished Property. Each Replacement
Property will be subject to indebtedness ("Replacement Indebtedness")
secured by that Replacement Property. Taxpayer wishes to acquire each
Replacement Property subject to its Replacement Indebtedness. The terms of
each Replacement Indebtedness require that, for such indebtedness to be
taken subject to as part of an exchange, the Replacement Property securing
such Replacement Indebtedness must be acquired by a single asset entity.
Taxpayer proposes to achieve its business objectives by engaging in the
following actions:
(1) Taxpayer will transfer title to the Relinquished Property directly
to a qualified intermediary (within the meaning of section
1.1031(k)-1(g)(4) of the Income Tax Regulations).
(2) Taxpayer will form a separate entity (a "Replacement Entity") to
take title to each Replacement Property to be received in the exchange.
Accordingly, Taxpayer will form one such entity for each of the
Replacement Properties.
(3) Each Replacement Entity will receive title to its designated
Replacement Property directly from the qualified intermediary as part of
the overall exchange.
(4) Each Replacement Entity will be a "business entity" that is a
"domestic eligible entity" within the meaning of section 301.7701-2 and 3
of the regulations.
(5) Taxpayer will be the sole owner of the ownership interests in each
Replacement Entity.
(6) Each Replacement Entity will either: (i) file a timely and proper
election to be disregarded as an entity separate from its owner pursuant
to section 301.7701-3 of the regulations, or (ii) will not file any
election pursuant to section 301.7701-3(c) regarding its classification
and will instead rely on the default classification rule for single owner
entities pursuant section 301.7701-3(b)(1)(ii).
(7) Each Replacement Entity will hold its Replacement Property either
for productive use in a trade or business or for investment, in each case,
within the meaning of section 1031 of the Code.
(8) Neither Taxpayer nor any Replacement Entity will be a bank as
defined in section 581 of the Code.
(9) Taxpayer has represented that the exchange of the Relinquished
Property for the Replacement Properties will comply with the requirements
of section 1.1031(k)-1 of the regulations relating to the qualification of
such exchange for nonrecognition of gain or loss under section 1031(a) of
the Code.
LAW AND ANALYSIS
Section 1031(a)(2) of the Code provides that no gain or loss shall be
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 which is to be held either for productive use in a
trade or business or for investment. Section 1031(a)(2) excludes from
eligibility for nonrecognition treatment any exchange of interests in a
partnership, stock, or certificates of trust or beneficial interest.
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
Replacement Entity will be disregarded as an entity separate from its
owner for federal tax purposes, the assets of each Replacement Entity will
be treated as assets of the Taxpayer.
CONCLUSION
Taxpayer's receipt of the Replacement Properties by the Replacement
Entities will be treated as the receipt of real property directly by the
Taxpayer for purposes of qualifying the receipt of such Replacement
Property for nonrecognition of gain under section 1031 of the Code.
Except as specifically ruled above, no opinion is expressed as to the
federal tax treatment of the above transactions under other provisions of
the Code and regulations that may be applicable. No opinion is expressed
as to the tax treatment of any conditions existing at the time of or
effects resulting from the transaction that are not specifically covered
by the above ruling. A copy of this letter ruling should be attached to
the appropriate federal income tax returns for the taxable years in which
the transactions described herein are consummated.
This letter ruling is directed only to the taxpayer who requested it.
Section 6110(j)(3) of the Code provides that it may not be used or cited
as precedent.
Assistant Chief Counsel
(Income Tax & Accounting)
By ____
David L. Crawford
Branch Chief, Branch 5
