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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14 May | June | 2015 Commercial Investment Real Estate FINAN CIN G FO CUS Luis Carlos Torres/Thinkstock c CCIMs are often involved in Internal Revenue Code Section 1031 exchanges for their clients and for their own real property interests. While tax-deferred like-kind exchanges were fi rst authorized in 1921, it was the Tax Reform Act of 1986 that reduced the benefi t of preferential capital gains treatment and ignited greater use of tax-deferred exchanges. However, taxpayers should not forget that, under Section 1031, restrictions apply if the exchange is between related parties. If the taxpayer undertakes an exchange with a related party — def ned in IRC to include immediate family, ancestors, lin- eal decedents, and controlled entities — and there is a transfer within two years by either party to the exchange, the exchange is not treated as deferred within IRC Section 1031. In the recent case of North Central Rental & Leasing, discussed below, the taxpayers attempted to place form over substance and tried to avoid the limitations on exchanges among related parties. The Case T e Eighth Circuit Court of Appeals issued its decision in North Central Rental & Leas- ing, LLC vs. U.S., supporting the reasoning that the related party issue in North Central fell within Section 1031 (f); and, because of the relationships and the transfers by the parties, the exchanges did not comply with Section 1031 deferral requirements. T e court described the factual setting for the taxpayers: Butler Machinery Company sells agricul- tural, mining, and construction equip- ment for manufacturers, primarily Cater- pillar, Inc. Prior to 2002, Butler Machinery conducted a rental and leasing business in conjunction with its retail sales busi- ness. In 2002, however, Butler Machinery formed subsidiary North Central to take over Butler Machinery's rental and leasing operations. Although separate entities, Butler Machinery and North Central are closely related and ultimately controlled by the same family. T e court went on to explain the convo- luted like-kind exchange program set up between North Central and Butler. At issue in this case is North Central's like- kind-exchange (LKE) program, which commenced less than two months af er Butler Machinery formed North Central. In a nutshell, the LKE program allowed North Central to trade used equipment for new equipment and, in the process, defer tax recognition of any gains or losses from the transactions. Per the LKE program, North Central sold its used equipment to third parties, and the third parties paid the sales proceeds to a qualif ed interme- diary, Accruit, LLC ('Accruit'). Accruit forwarded the sales proceeds to Butler Machinery, and the proceeds 'went into [Butler Machinery's] main bank account.' At about the same time, Butler Machinery purchased new Caterpillar equipment for 1031 Games Tax-deferred exchanges have different rules for business relatives. by Mark Lee Levine, CCIM, JD, LLM (tax)