# O

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| ## Comptroller of the Currency                                        |
|                                                                       |
| > Administrator of National Banks                                     |
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Washington, DC 20219

October 6, 2005 **Conditional Approval #706**

###### November 2005

Joseph R. Bielawa, Esq.

Legal Department

J.P. Morgan Chase & Co.

270 Park Avenue, 39^th^ Floor

New York, New York 10017

> Re: J.P. Morgan Property Exchange Inc.; J.P. Morgan Property Holdings
> LLC; and J.P. Morgan Aircraft Holdings Inc. (collectively, the "JPEX
> Entities")
>
> Application Control Number: 2004-ML-01-0004

Dear Mr. Bielawa:

On October 13, 2004, the OCC approved the application of JPMorgan Chase
Bank, New York, New York, to convert to a national banking association,
JPMorgan Chase Bank, N.A. ("Bank"). Pursuant to the OCC's approval, the
OCC permitted the Bank to retain the JPEX Entities for up to two years
pending the OCC's determination of the permissibility of the JPEX
Entities' activities under the National Bank Act. *See* Conditional
Approval No. 658 (October 14, 2004). Based upon the information and
representations you have provided, it is our opinion that the activities
of the JPEX Entities are legally permissible for national banks and
their operating subsidiaries. Therefore, for the reasons discussed below
and subject to the conditions set forth herein, we conclude that the
Bank may continue to conduct the activities engaged in by the JPEX
Entities.

#### I. BACKGROUND

The JPEX Entities offer various services for Customers interested in
engaging in capital gains tax-deferred exchanges of business or
investment property under section 1031 of the Internal Revenue Code, 26
U.S.C. § 1031 ("section 1031"). Such transactions are called like-kind
exchanges. For Customers considering engaging in a like-kind exchange,
the JPEX Entities provide extensive financial and property advisory
services.[^1] These advisory services include reviewing a Customer's
portfolio, advising the Customer on the structure of potential
transactions, and referring the Customer to third-party providers
(*e.g.,* real estate brokers).

Once a Customer has decided to engage in a like-kind exchange, the
nature of the JPEX Entities' services depends upon the type of exchange.
In a *forward* like-kind exchange, the taxpayer will locate a buyer for
the property he wishes to dispose of ("relinquished property") before
finding a suitable property to acquire ("replacement property"). To
qualify for tax-deferred treatment under section 1031, the taxpayer may
contract with a qualified intermediary to facilitate the exchange by
transferring interests in the relinquished property to a third-party,
holding the proceeds from the sale of the relinquished property until
the taxpayer identifies a suitable replacement property, and
transferring interests in the replacement property to the taxpayer. The
JPEX Entities act as qualified intermediary for like-kind exchanges when
a Customer wishes to use this structure to complete the exchange.

A *reverse* like-kind exchange occurs when the replacement property is
identified and must be acquired before the relinquished property can be
sold. In that case, the taxpayer may use an exchange accommodation
titleholder ("EAT") to acquire and hold the replacement property pending
the sale of the relinquished property. The JPEX Entities serve as an EAT
(the "EAT Services") for reverse like-kind exchanges that meet the
requirements of I.R.S. Revenue Procedure 2000-37 (Sept. 15, 2000)
("Revenue Procedure").[^2] The Bank represents that the EAT Services,
and the reverse like-kind exchange transactions for which the EAT
Services are provided, will be conducted in conformance with Revenue
Procedure.[^3]

The JPEX Entities conduct the EAT Services through a single-member
limited liability company ("LLC") formed for each reverse exchange
transaction.[^4] At the request of a Customer and after a full
evaluation -- including a credit risk rating -- of the financial
condition and prospects of the Customer, the JPEX Entities create a
single-member LLC to serve as EAT for the Customer's reverse exchange.
The EAT uses funds provided by the Customer to acquire "qualified
indicia of ownership" in the replacement property.[^5] As a convenience
to the Customer, the Customer's provision of funds to the EAT may be via
a non-recourse loan secured by the replacement property.

The Bank represents that the "qualified indicia of ownership" acquired
by the EAT will be legal title to the business or investment property
that will be the replacement property. However, such legal title
acquired by the EAT will be severely circumscribed. Immediately upon
acquiring such qualified indicia of ownership, the EAT enters into a
lease with the Customer. The lease transfers the rights to occupy, use,
and improve the replacement property to the Customer, and prohibits the
EAT from transferring the qualified indicia of ownership to anyone other
than the Customer. The lease obligates the Customer to pay all taxes on
and costs to maintain the replacement property, and to pay for all
desired improvements on the property. To the extent that the funds
provided by the Customer to the EAT are in the form of a non-recourse
loan, the Customer's lease payments will offset exactly the EAT's cost
of carrying that financing.

The EAT continues to hold qualified indicia of ownership until the
Customer can arrange for the sale of the relinquished property, a period
not to exceed 180 days. When the Customer is prepared to sell the
relinquished property, an exchange is effected: the relinquished
property is transferred from the Customer to the third-party purchaser,
and the replacement property is transferred from the EAT to the
Customer. In the event the Customer fails to arrange the timely sale of
the relinquished property, a mutual "put" and "call" arrangement ensures
that the replacement property is nonetheless immediately transferred to
the Customer.[^6]

The proceeds from the sale of the relinquished property flow first to
the JPEX Entities to cover the JPEX Entities' fee and any expenses
associated with the EAT Services, including repaying any non-recourse
financing provided by the Customer to the EAT. The agreement between the
JPEX Entities and the Customer contains guarantees and indemnities by
the Customer that ensure that, should these proceeds be insufficient to
cover such expenses, the Customer will provide the necessary additional
funds. Any remaining proceeds then flow to the Customer.

Finally, the Bank represents that, because the EAT is acting solely as
the Customer's agent for all purposes except for federal income tax
purposes, the activities of the EAT qualify for agency accounting under
GAAP. Therefore, the assets of the EAT are held separate from the assets
of the JPEX Entities and the Bank, are not reflected on any of their
balance sheets, and are not subject to claims of their creditors.[^7]

#### II. DISCUSSION

#####  A. Legal Analysis

A national bank "may conduct in an operating subsidiary activities that
are permissible for a national bank to engage in directly either as part
of, or incidental to, the business of banking, as determined by the OCC,
or otherwise under other statutory authority." 12 C.F.R. § 5.34(e). The
OCC previously has approved many of the activities offered by the JPEX
Entities. Financial and real estate investment advisory services are
permissible for national banks and their operating subsidiaries,[^8] and
the referral of Customers to third-party providers is a permissible
finder activity.[^9] Additionally, the OCC has approved national banks'
and their subsidiaries' serving as qualified intermediary for like-kind
exchanges.[^10]

In Corporate Decision 2001-30, the OCC permitted an operating subsidiary
to serve as an EAT for reverse like-kind exchanges, provided that the
qualified indicia of ownership acquired in the replacement property
constituted a form of ownership less than full legal title.[^11]
Therefore, the activities of the JPEX Entities are permissible, and the
sole remaining issue is whether the acquisition of severely
circumscribed legal title to real estate in those reverse exchanges
involving real estate is prohibited by 12 U.S.C. § 29 ("section 29").
With respect to the acquisition of real estate, Corporate Decision
2001-30 concluded that acquisition of the proposed qualified indicia of
ownership -- a contractual right to purchase -- was not prohibited by
section 29. The Bank now requests that we permit the JPEX Entities, when
serving as an EAT, to acquire the above-described severely circumscribed
legal title in the replacement property. For the reasons below, we
believe that under the specific facts presented by this case the
acquisition of such a circumscribed interest is not prohibited by
section 29.

Through its agreement with the Customer, the JPEX Entities assign away
virtually all of the rights and responsibilities of ownership of the
replacement property: the EAT may not occupy, use, or enjoy the
property; the EAT may not freely transfer its interest in the property;
the EAT does not share in any appreciation or depreciation in value of
the replacement property; the Customer must pay all taxes on and costs
to maintain the property; and, the Customer must pay for all desired
improvements to the property. The JPEX Entities may only hold this
circumscribed interest in the property for a short period of time and
must have policies and procedures in place to dispose of the property if
the Customer defaults.

After assigning away these rights and responsibilities of ownership, the
JPEX Entities hold only bare legal title to the replacement property.
The GAAP accounting rules further circumscribe this interest. Because
the activities of the EAT qualify for agency accounting, the assets of
the EAT are held separate from the assets of the JPEX Entities and the
Bank, are not reflected on any of their balance sheets, and are not
subject to claims of their creditors. Thus, it is the Customer, and not
the EAT, that holds legal title for accounting purposes. We conclude
that this type of interest in the replacement property by the EAT does
not implicate section 29.[^12]

This position is supported by the fact that the JPEX Entities'
circumscribed interest in the replacement property would not be
inconsistent with any of the purposes underlying the restrictions of
section 29.[^13] The contractual relationship created between the LLC
(as an EAT) and the Customer governs the transfer of the replacement
property and essentially guarantees that the JPEX Entities will not lose
money on the transaction or profit if property values escalate.
Therefore, the risk remains with the Customer, and the JPEX Entities
cannot be said to be speculating in real estate. And the JPEX Entities
will hold the interest in the property for no longer than 180 days, so
they cannot be said to be holding large amounts of real estate in
mortmain.

##### B. Risk Assessment / Safety and Soundness Review

The foregoing analysis established that the activities performed by the
JPEX Entities are part of the business of banking and so are within the
activities authorized for national banks under 12 U.S.C. § 24(Seventh).
Moreover, the acquisition of a severely circumscribed interest in real
property as part of a reverse like-kind exchange transaction, as
described above, is not prohibited by 12 U.S.C. § 29. However, for a
particular bank to permissibly engage in these activities, the bank must
have the systems and controls, and the general capacity, to conduct the
activity in compliance with applicable law and in a safe and sound
manner.

The Bank has that capacity with respect to the JPEX Entities'
activities. The Bank has been providing the various like-kind exchange
services, through the JPEX Entities, since the conversion and for
several years before that time. The JPEX Entities have developed and
implemented satisfactory policies and procedures to ensure that adequate
documentation is maintained on file to support the credit review and
approval process for each transaction; to ensure that all like-kind
exchange transactions in which the JPEX Entities participate as comply
with 26 U.S.C. § 1031 and that all reverse like-kind exchanges in which
the JPEX Entities participate as an EAT comply with Revenue Procedure
2000-37; and to ensure that the JPEX Entities dispose of property in a
timely manner should the Customer default on a transaction.

In the Bank's assessment of the risks involved in the EAT Services, the
Bank identified the potential liability for environmental risks incident
to the holding of real estate. The JPEX Entities have implemented
satisfactory policies, procedures, and controls designed to mitigate the
potential environmental risk, including policies and procedures that
include specific guidelines for reviewing these risks in proposed
transactions and obtaining approvals for the acceptance of such
transactions.

The Bank recognizes the importance of the activities of the JPEX
Entities, when acting as an EAT, qualifying for agency accounting under
GAAP accounting rules. The Bank has obtained an accounting opinion that
the proposed EAT Services will qualify for agency accounting under GAAP.

With these risk mitigation measures, the Bank believes it can ensure
that the activities of the JPEX Entities are conducted in a safe and
sound manner.

#### III. Conclusion

Based upon the foregoing, and the representations and commitments made
in the application and by the Bank's representatives, we find that the
activities of the JPEX Entities are permissible for national banks and
their operating subsidiaries and, therefore, the Bank is legally
authorized to retain the JPEX Entities,[^14] subject to the following
conditions:

(1) The JPEX Entities at all times must maintain, to the satisfaction of
    its examiner-in-charge, the risk mitigation policies, procedures,
    and controls described in the previous section.

(2) At all times, the EAT Services conducted by the JPEX Entities must
    qualify for agency accounting under GAAP.

Please be advised that the above conditions of this approval shall be
deemed to be "conditions imposed in writing by the agency in connection
with the granting of any application or other

request" within the meaning of 12 U.S.C. § 1818(b)(1).[^15]

Our conclusion is based upon the information and representations you
have provided. A material change in the facts may result in a different
conclusion. If you have any questions, please contact Steven Key, Senior
Attorney, Bank Activities & Structure Division, at (202) 874-5300.

Sincerely,

/s/

#### 

Julie L. Williams

First Senior Deputy Comptroller

And Chief Counsel

[^1]: In addition, J.P. Morgan Aircraft Holdings Inc., provides
    qualified intermediary services for exchanges of aircraft. J.P.
    Morgan Property Exchange Inc., and J.P. Morgan Property Holdings LLC
    provide both qualified intermediary services for all other business
    and investment properties and exchange accommodation services for
    all business and investment properties, including real estate.

[^2]: The Revenue Procedure provides a safe harbor for certain reverse
    like-kind transactions. If a transaction satisfies the requirements
    of Revenue Procedure, then the I.R.S. will not challenge deferred
    tax treatment for that transaction.

[^3]: The Revenue Procedure requires that the EAT must hold "qualified
    indicia of ownership" of the replacement property from the date of
    acquisition of the property by the EAT until the property is
    transferred to the taxpayer. The Revenue Procedure sets forth time
    frames for "safe harbor" reverse like-kind transactions. The most
    important timing requirement is that the EAT must transfer the
    replacement property to the taxpayer within 180 days of acquiring
    the qualified indicia of ownership. Thus, these "safe harbor"
    exchanges will last no longer than six months. Finally, the Revenue
    Procedure sets forth a number of permissible legal or contractual
    arrangements into which the taxpayer and the EAT may enter without
    affecting the tax-deferred nature of the transaction. Among the
    relevant provisions, (i) the EAT may also serve as a qualified
    intermediary for the exchange; (ii) the taxpayer may guarantee some
    or all of the obligations of the EAT, including secured or unsecured
    debt incurred to acquire the property, or indemnify the EAT against
    cost or expenses; (iii) the taxpayer may loan or advance funds to
    the EAT or guarantee a loan or advance to the EAT; (iv) the taxpayer
    may manage the property, supervise improvements of the property, or
    act as a contractor; (v) the taxpayer and the EAT may enter into an
    agreement that the taxpayer will reimburse the EAT for any variation
    in the value of the relinquished property.

[^4]: In a reverse like-kind exchange transaction, the EAT first may
    acquire and hold an interest in either the replacement property or
    the relinquished property. For simplicity, we discuss only reverse
    transactions in which the EAT first acquires an interest in the
    replacement property. The same legal analysis applies to
    transactions in which the EAT first acquires an interest in the
    relinquished property.

[^5]: The Customer typically borrows the funds he provides to the EAT.
    If the Bank or one of its affiliated banks lends the necessary funds
    to the Customer, then the lending bank will comply with its
    commercial real estate lending standards, including obtaining an
    appraisal of the property.

[^6]: In the event that the Customer defaults leaving the Bank holding
    the replacement property, the Bank represents that it will have
    policies and procedures in place to dispose of the property in a
    timely fashion.

[^7]: *See* Financial Accounting Standards Accounting Board ("FASB")
    Interpretation No. 46 (revised December 2003), "Consolidation of
    Variable Interest Entities."

[^8]: *See, e.g.,* Interpretive Letter No. 880, *reprinted in*
    \[1999-2000 Transfer Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-373
    (Dec. 16, 1999).

[^9]: *See, e.g.,* Corporate Decision No. 2003-10 (June 27, 2003);
    Interpretive Letter No. 824, *reprinted in* \[1997-1998 Transfer
    Binder\] Fed. Banking L. Rep. (CCH) ¶ 81-273 (Feb. 27, 1998).

[^10]: Corporate Decision No. 2001-30, (Oct. 10, 2001) (approving
    operating subsidiary to serve as qualified intermediary). While most
    like-kind exchanges are completed with a qualified intermediary,
    Internal Revenue Service regulations identify alternate means by
    which an exchange may be completed. For example, instead of a
    qualified intermediary, the taxpayer may use a qualified trust. 26
    C.F.R. § 1.1031(k)-1(g)(3). The OCC has approved a national bank's
    serving as trustee for such a qualified trust, provided the bank
    possesses trust powers. *See* Interpretive Letter No. 394,
    *reprinted in* \[1988-1989 Transfer Binder\] Fed. Banking L. Rep.
    (CCH) ¶ 85,618 (Aug. 24, 1987). Although a qualified intermediary
    and a qualified trust both play the same general role -- assisting
    in the completion of a successful like-kind exchange -- they execute
    that role in a different manner. In Corporate Decision No. 2001-30,
    we concluded that the activities of a qualified intermediary are
    akin to the custodial and safekeeping functions that national banks
    traditionally have performed for their customers. National banks do
    not need trust powers to offer these escrow and safekeeping
    services. *E.g.*, Conditional Approval No. 267 (Jan. 12, 1998).
    Therefore, the JPEX Entities may serve as a qualified intermediary
    even if they do not have trust powers.

[^11]: Corporate Decision No. 2001-30, *supra* (acquisition as EAT of an
    interest in property that does not encompass the full right to
    possess, use, and convey).

[^12]: *See* *id.*, *supra*; Interpretive Letter No. 966, *reprinted in*
    \[Current Transfer Binder\] Fed. Banking Law. Rep. (CCH) ¶ 81-489
    (May 12, 2003) (noting that severely restricted nature of interest
    acquired in customer's relocating employees' residential real estate
    arguably did not implicate section 29).

[^13]: For example, the Supreme Court in *Union National Bank v.
    Matthews*, 98 U.S. 621, 626 (1878), stated that the three purposes
    underlying section 29 were "to keep the capital of the banks flowing
    in the daily channels of commerce; to deter them from embarking in
    hazardous real estate speculations; and to prevent the accumulation
    of large masses of such property in their hands, to be held, as it
    were, in mortmain."

[^14]: ^?^ This approval, and the activities and communications by OCC
    employees in connection with the filing, do not constitute a
    contract, express or implied, or any other obligation binding upon
    the OCC, the United States, any agency or entity of the United
    States, or any officer or employee of the United States, and do not
    affect the ability of the OCC to exercise its supervisory,
    regulatory, and examination authorities under applicable law and
    regulations. The foregoing may not be waived or modified by any
    employee or agent of the OCC or the United States.

[^15]: ^?^ Because our review of the JPEX Entities was conducted as a
    continuation of our review of the Bank's original conversion
    application, our decision here constitutes an addendum to
    Conditional Approval No. 658 (October 14, 2004), our decision on the
    original conversion application.