Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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LEGAL BRIEFS Nervous TIC f 18 November | December | 2012 Should you be worried about the future of tax-deferred exchanges? by Mark Lee Levine, CCIM, JD, LLM (tax) For many years I have written articles on the implications if tenant-in-common interests are determined to be securities. One such concern is whether TIC interests can be employed in tax-deferred exchanges. Historically, a taxpayer might have exchanged TIC interests per Internal Revenue Code Section 1031, but such a decision depended, in part, on whether the TIC interest would constitute a security. If a property is held to be a security, it will not qualify for a tax- deferred exchange under IRC Section 1031. T us, a court decision ruling that a TIC, even though it is real estate, constitutes a security, is a very important exchange issue. In July, the Montana Supreme Court determined that a TIC is a security — a decision that may have ramifi cations for commer- cial real estate investors and advisers who have participated in tax- deferred exchanges where TIC interests are involved. What Is a Security? According to the Securities Act of 1933, a security can constitute notes, stocks, evidence of indebtedness, and a number of other items, including what has turned out to be the very important label of an "investment contract." T e term investment contract was created in the 1933 statute, but not defi ned until 1946 when the U.S. Supreme Court decided the case of SEC v. W.J. Howey Co. T at ruling created the Howey test of the four necessary elements for an investment contract: an investment of money or other property; a common enterprise; an intent to make a profi t; and the intent to use the expertise of someone other than the investor. Redding Case T e most recent TIC securities decision is from the Montana Supreme Court case of Billie L. Redding v. Montana First Judicial District Court. Billie Redding, an elderly widow who had worked on the family ranch for most of her life, sold the ranch in 2004 for $3.3 million. To avoid tax liability on the sale, Redding was guided to enter into a tax-deferred exchange transaction. Redding relied on the advice of her long- time accountant who was a shareholder in the accounting fi rm Anderson Zur Muehlenn & Co., P.C. He guided Redding to invest in TIC interests in a separate entity known as DBSI Housing. Redding purchased four TIC inter- ests in 2004, via a tax-deferred exchange. T e Redding interests were brokered by Acquiron, a subsidiary of Anderson ZurMuehlenn. She paid about $4.6 million for the TIC interests, contributing her real estate equity position of approximately $2.2 million and assuming debt of about $2.4 million. Ultimately, DBSI collapsed, and in 2008, it fi led for bankruptcy. A receiver determined that there was a Ponzi scheme involved. Aſt er the DBSI collapse, Redding brought action Commercial Investment Real Estate PicsFive/Veer