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 Private Letter Ruling 2000-111025

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Chicago Deferred Exchange - This telephone transcript was provided from Thomas Standen from North American Loan Servicing, 800-646-3445.

 A private letter ruling that was released on March 20, 2001
Just by way of background you may recall that in September of 2000 the IRS issued a revenue procedure, Revenue Procedure 2000-37, which provided a safe harbor format for parking arrangements to avoid the problem of Reverse §1031 Exchanges. You may recall that a concept of an Exchange Accommodation Titleholder (“EAT”) was put into place whereby the EAT could acquire the replacement property for example, hold on to it for up to six months to give the taxpayer a chance to sell the relinquished property, and then do an exchange. Under that Revenue Procedure 2000-37 there were certain guidelines and limitations that were put in place, but if you followed those, the Revenue Procedure provided a safe harbor. The transaction would not be challenged by the IRS.

 At the time the safe harbor came out in September
The IRS also issued a Technical Advice Memorandum (“TAM”) involving a parking arrangement outside of the safe harbor. The IRS took a rather strict approach in that TAM and essentially said that the transaction would not qualify although it’s clear that if the taxpayer would have followed and probably could have followed the guidelines of the Revenue Procedure they could have qualified under the safe harbor.

 Following that, there was a case by the name of DeCleene...
that came down, which also was viewed at least by the IRS as a parking arrangement type case. The tax court held for the government in that case and denied the exchange.
This past Monday there was a private letter ruling released by the IRS in which an accommodation party apparently held onto property for up to 18 months. I’m saying apparently because we can’t exactly tell what all the facts were from the ruling, but it sounds like the accommodation party, which was unrelated to the taxpayer, held onto the property for about 18 months, the replacement property. During that period the taxpayer apparently had an option to purchase the property from the accommodation party.

The ruling said that the purchase price for that property by the taxpayer if it exercised the option would be equal to the cost that the accommodation party paid at least if the option were exercised during that 18 month period. The ruling also said that at the end of that 18 month period the accommodation party could sell the property and it appears that any loss or deficiency that would have been realized from the sale of that property would have been made up and reimbursed by the taxpayer.

 The taxpayer also provided all the funding either directly or indirectly
Directly because there was an actual loan that was made to the accommodation party. Indirectly because the taxpayer guaranteed a third party loan to the accommodation party. The taxpayer also directly provided environmental indemnities to the third party lender.

Despite all of those factors, which were pretty similar to the factors that were set forth in the technical advice memo, which was adverse, the letter ruling was a favorable letter ruling for the taxpayer. Now superficially it sounds like that may be good news, but there is little doubt in my mind and I think probably most practitioners would concur on this that that letter ruling probably has a very short useful life. It was issued under circumstances in which there was some disarray in change of personnel in the national office. The people that issued that letter ruling were pretty much on their last days there. They are not currently the people that are in charge of the 1031 group in the national office.

 The current administration in the national office...
is a much more conservative group. I have no doubt that when they realized, the people that are in charge now, that when they realized that this private letter ruling is inconsistent, presumably inconsistent with the tech advice memo that they issued prior to that and inconsistent with their own policy, it seems likely, certainly at least to me, that that letter ruling will be revoked. One cannot make much out of that letter ruling.

Posted: 6/1/2001 4:20:15 PM

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