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replacement
property prevents the exchange from satisfying the holding requirement
of section 1031. (footnote 528)
In
slightly different factual situations, courts have concluded that
taxpayers have satisfied the holding requirement of section 1031.
For example, a taxpayer's contribution of an undivided interest
in real property to a general partnership immediately following
the receipt of such property by the taxpayer as part of a like-kind
exchange was considered to satisfy the holding requirement. (footnote
529) The court concluded that the taxpayer both intended
to and in fact did continue to hold the acquired property, the
contribution to the partnership being a change in the form of
ownership rather than a liquidation of ownership. Similarly, a
liquidation of a wholly-owned corporation (under old section 333)
followed shortly by an exchange of the property received in liquidation
for like-kind property satisfied the holding requirement when
the plan of liquidation was adopted without an intent by the shareholder
to subsequently exchange the property. (footnote
530) The court held that if a taxpayer owns property
and does not intend to liquidate or to use the property for personal
pursuits, then the property is treated as satisfying the holding
requirement.
More
recently, the IRS concluded in a letter ruling that a taxpayer's
liquidation into its parent company (under section 332), followed
by the parent's merger (under section 368(a)(1)(A)) into another
corporation shortly after taxpayer's receipt of replacement property,
will not affect whether the holding requirement is met. (footnote
531) Based on section 381, the ruling concluded that
for purposes of section 1031(a)(1) there is a carryover of tax
attributes to the acquiring corporation following both a section
332 liquidation and section 368(a)(1)(A) reorganization. Thus,
if the taxpayer (i.e., the surviving corporation after the liquidation
and merger) satisfies the holding requirement, the exchange is
eligible for section 1031 treatment.
Sources
of Complexity
Under
present law, there is significant confusion and uncertainty as
to whether a taxpayer satisfies the holding requirement when property
involved in a like-kind exchange is received by the taxpayer shortly
before, or transferred shortly after, an exchange. The case law
and administrative guidance indicates that alternative analyses
have been used in making the determination of whether the holding
requirement is satisfied. The uncertainty causes complexity for
taxpayers in compliance and can result in unnecessary additional
costs.
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528
See Regals Realty Co. v. Commissioner, 127 F.2d 931 (2 nd Cir.
1942) (intent to sell); Click v. Commissioner, 78 T.C. 225 (1982)
(intent to give as gift); Lindsley v. Commissioner, T.C. Memo
1983-729 (intent to give to charity).
529 Magneson v. Commissioner, 753 F.2d 1490 (9 th Cir. 1985),
aff'g 81 T.C. 767 (1983).
530 Bolker v. Commissioner, 760 F.2d 1039 (9 th Cir. 1985), aff'g
81 T.C. 782 (1983). See also Bonny B. Maloney and Robert S. Maloney
v. Commissioner, 93 T.C. 89 (1989) (providing that an exchange
by a corporation of property for other like kind property followed
by a liquidation under old section 333 satisfies the requisite
requirements of section 1031).
531 PLR 9850001.
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