Sec. 1031 Parking Arrangements

June 20, 2019

Providing counsel on Sec. 1031 exchanges can be challenging for many reasons. One reason why this can be challenging is because there’s a lot of uncertainty regarding the contours of Sec. 1031 requirements. The parking arrangements in a reverse 1031 like kind exchange, for instance, gave rise to a veritable bevy of litigation.

The Sec. 1031 industry is still relatively new. There is not that much litigation on the mechanics of these transactions. And even though litigation can be costly for those involved, it’s actually helpful for those who do business later on. Litigation is a dispute over whether a legal requirement (or “element”) has been met. And the more disputes there be, the clearer will be our understanding of how we can comply with Sec. 1031 requirements. Litigation helps us define “like-kind,” for instance. This is also true for the “held for” requirement. The more cases we have on the holding requirement, the better we will be able to fulfill this requirement. The section (k) Treasury Regulations are a direct response to litigation and were intended to provide even greater structure and clarity.

Reducing Parking Arrangement Litigation

Today, we’ll go over an IRS revenue procedure which discusses reverse exchanges. In place of litigation, this document gives some clarity to the structure of these exchanges. In a way, the IRS has stepped in and issued this document as a kind of substitute for litigation. Revenue Procedure 2000-37 is among the more significant IRS procedural documents concerning Sec. 1031 exchanges. This procedure was later amended by a subsequent procedural document, but many of its core provisions remain intact. We will cover the core aspects of this revenue procedure and highlight its importance.

Reminder: Revenue Procedures are Not Law 

Before we dive in to the specifics of this document, we should remind readers that this revenue procedure is not law. The IRS is not saying that the contents of Revenue Procedure 2000-37 are legally binding. The purpose of this document is to give a tentative structure to something which is uncertain. And this tentative structure provides a means to avoid costly litigation. This benefits not just taxpayers but also the IRS. If the IRS did challenge a transaction covered by this or another procedural document, it could lose. And this would result in significant losses of time and other resources. In other words, if you follow Rev. Proc. 2000-37 to the letter, this doesn’t mean that the transaction is sound from a legal perspective. It only means that the IRS will not challenge its legal validity. And for nearly every taxpayer, this is enough. 

Rev. Proc. 2000-37 Safe Harbors

Revenue Procedure 2000-37 gives structure to reverse exchanges by approving “parking arrangements.” Parking arrangements are methods to temporarily hold title to property. One rule in Sec. 1031 holds that the taxpayer may not own the property which it intends to exchange into. In other words, if you own a property, you cannot sell another property and then “buy” the property you already own as an exchange. Parking arrangements comply with this rule by providing temporary ownership to a third party. Rev. Proc. 2000-37 provides a “safe harbor” for taxpayers who follow its instructions for structuring these parking transactions. The instructions are:

  • The taxpayer may gain the benefit of the “safe harbor” as long as the parked property is held under a qualified exchange accommodation arrangement 
  • The target property (i.e. the replacement property or relinquished property) must be parked with an “exchange accommodation titleholder,” or EAT 
  • The taxpayer must enter into a specialized contractual agreement in order to park the property with the EAT 
  • This specialized contractual agreement is referred to as a “qualified exchange accommodation agreement” 
  • This QEAA contract must be finalized no more than 5 days after the EAT has taken qualified indicia of ownership of the parked property 
  • The taxpayer has 45 days to identify either the relinquished property to be sold or the replacement property to be acquired 
  • The taxpayer has 180 days to complete the whole exchange, the same time window given under the section (k) regulations which apply to deferred exchanges  

These are the main provisions of 2000-37. Essentially, taxpayers can perform reverse exchanges, as long as they conform to the structure outlined in the document. This timeline of this structure mirrors the timeline given in the section (k) regulations for traditional deferred exchanges. This gives some level of uniformity to Sec. 1031 exchanges. 

Complex Transactions

This is a lot of information to take in. We know that. Reverse exchanges are quite complex. Most facilitators will charge substantially higher rates to assist you in conducting one of these transactions. It’s very common for taxpayers to hire a tax attorney who is familiar with Revenue Procedure 2000-37 (and the other relevant documents) for additional counsel. There can be many potential legal issues which come about through these transactions. No two transactions are ever completely the same, and even the slightest difference could potentially give rise to litigation. The best way to look at it is that the IRS is an opportunistic organization. If the IRS thinks that you’ve done something running afoul of these instructions, it could challenge your transaction. And the IRS likely will do this if it assumes it can win. 

Call Us About Parking Arrangements!

The attorneys at Mackay, Caswell & Callahan, P.C., are fully aware of how the IRS conducts its business and are here to help. If you’re thinking about a reverse exchange, we strongly recommend that you reach out for extra counsel. It’s better to hire an attorney for a small assignment than having your transaction collapse for want of good advice. Reach out and one of our top New York City tax attorneys will get back to you right away. 

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