OFFICIAL SEAL OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

WASHINGTON, D.C. 20551 

OFFICIAL LETTER HEAD STATIONERY FOR SCOTT G. ALVAREZ, GENERAL COUNSEL 

February 9, 2006 

Debra L. Barbin, Esq. 

Gary Steven Findley & Associates 

1470 North Hundley Street 

Anaheim, California 92806 

Dear Ms. Barbin: 

You have requested the opinion of the Board’s staff, pursuant to 

section 225.27 of the Board’s Regulation Y (12 C.F.R. 225.27), regarding the 

permissibility of certain proposed activities by The Bank Holdings, Reno, 

Nevada. The Bank Holdings, a bank holding company, proposes to acquire a 

subsidiary (the “1031 exchange subsidiary”) that provides services to customers 

seeking to make exchanges of real property pursuant to section 1031 of the 

Internal Revenue Code (“1031 exchange transactions”). 

Section 1031 of the Internal Revenue Code provides a U.S. taxpayer 

with deferral of gain when the taxpayer exchanges his or her property for another 

property of a “like kind.” In a “forward” 1031 exchange transaction, the taxpayer 

first sells his or her existing property and later purchases a replacement property. 

[Begin Footnote 1. In a “reverse” 1031 exchange transaction, the taxpayer first 

purchases a replacement property and later sells his or her property. Your 

proposal does not include the provision of services to customers seeking to 

make reverse 1031 exchange transactions. End Footnote 1.] In order to complete 

a forward 1031 exchange transaction successfully, a taxpayer must satisfy certain 

conditions in section 1031 of the Internal Revenue Code and the U.S. Treasury 

regulations that implement section 1031. For 
- 2 -

example, in a forward 1031 exchange transaction, at the closing of the sale of 

the initial property, the proceeds of the sale must be held by an individual or 

entity otherwise unrelated to the transaction (the “qualified intermediary”). In 

addition, the taxpayer engaging in the forward 1031 exchange transaction may 

not receive the sale proceeds during the period in which a replacement property 

is identified (up to 45 days) and acquired (up to 180 days). The Bank Holdings 

proposes to acquire a subsidiary that will act as a qualified intermediary in 

forward 1031 exchange transactions involving real property. 

The 1031 exchange subsidiary would engage in several activities 

in order to facilitate forward 1031 exchange transactions. First, the subsidiary 

would provide its customer with documents related to the exchange in order to 

ensure that the exchange qualifies as a valid forward 1031 exchange transaction. 

Specifically, the subsidiary would provide a form of exchange agreement, 

assignment agreement, and notice. The exchange agreement is a contract 

between the customer and the subsidiary that, among other features, notes the 

requirements for the successful completion of the transaction. The assignment 

agreement transfers from the customer to the subsidiary certain responsibilities 

for the sale of the initial property and the receipt of sales proceeds in order to 

ensure that the customer does not “constructively receive” the proceeds of the 

initial property sale for tax purposes. These responsibilities may include taking 

transitory title to the initial property and the replacement property as they are 

transferred from seller to buyer. The notice informs the purchaser of the initial 

property that the transaction is part of a forward 1031 exchange transaction in 

order to help establish that the mechanism for the forward 1031 exchange 

transaction was in place at the time of the sale. 

Second, the 1031 exchange subsidiary would invest the proceeds 

of the sale of the initial property on behalf of the customer until the customer 

acquires the replacement property. The proceeds would be invested at the 

discretion of the subsidiary, but would typically be deposited into deposit 

accounts at Nevada Security Bank, Reno, Nevada, the subsidiary commercial 

bank of The Bank Holdings. [Begin Footnote 2. Nevada Security Bank may 

also be a lender with respect to the real properties involved in the 1031 

exchange transaction. Any lending relationship between the bank and the 

customer would depend upon the ability of the customer and the loan transaction 

to meet the bank’s standard underwriting terms and conditions. End Footnote 2.] 

The subsidiary would also transfer the necessary 
- 3 -

funds to the appropriate party to effect the customer’s purchase of the 

replacement property. If the customer does not identify a replacement property, 

or purchase the replacement property, within the required time periods set forth 

in section 1031 of the Internal Revenue Code or U.S. Treasury regulations 

implementing section 1031, the proceeds of the sale of the initial property would 

be transferred to the customer. You have indicated that the subsidiary would act 

in a fiduciary capacity in holding, investing, and disbursing the customer’s funds 

and that a nondepository trust company chartered by the State of Nevada would 

be allowed to engage in the activities of the subsidiary. 

The 1031 exchange subsidiary will not participate in negotiating 

the terms of the real property sale and purchase transactions that constitute the 

forward 1031 exchange transaction and will not assist the customer in locating 

a buyer of the initial property or a seller of the replacement property. 

You contend that the proposed services are permissible nonbanking 

activities for bank holding companies described in section 225.28(b) of 

Regulation Y (12 C.F.R. 225.28(b)). 

In view of all the facts of record, it is my opinion that the proposed 

activities of the 1031 exchange subsidiary are permissible real estate settlement 

services under section 225.28(b)(2)(viii) of Regulation Y (12 C.F.R. 

225.28(b)(2)(viii)); trust company functions under section 225.28(b)(5) of 

Regulation Y (12 C.F.R. 225.28(b)(5)); and financial advisory services, including 

tax planning and tax preparation services, under section 225.28(b)(6) of 

Regulation Y (12 C.F.R. 225.28(b)(6)). [Begin Footnote 3. The Office of the 

Comptroller of the Currency has authorized national banks to provide a 

wide range of services to facilitate customer 1031 exchange transactions. 

See OCC Interpretive Letter No. 880 (December 16, 1999); OCC Corporate 

Decision No. 2001-30 (October 10, 2001). End Footnote 3.] 

This opinion is limited solely to the 1031 exchange facilitation 

activities described above and in your correspondence with Board staff. Any 

material change in the proposed activities could result in a different conclusion 
- 4 -

and should be reported to Board staff. If you have any questions regarding 

this matter, please contact Mark E. Van Der Weide (202/452-2263) or 

Michael Waldron (202/452-2798) of the Board's Legal Division. 

Sincerely, 

[signed Scott G. Alvarez] 

cc: Federal Reserve Bank of San Francisco