14 7 T.C. No . 5

UNITED STAT ES TAX COURT

ESTATE O F GEORGE H. BARTEL L, JR. DECEASED, GEORGE DAVID BARTELL AND JEAN LOUISE BARTELL BARBER, CO-PER SONAL REPRESENTATIVES AND ESTAT E OF ELIZABET H BARTELL, DECEASED, GE ORGE DAVID BARTELLAND JEAN LOU ISE BARTELL BARBER , CO-PERSONAL REPRESENTATIVES, ET AL ., Pet it io ne rs v. 1 COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 2 27 09 -0 5, 2 28 29 -0 5, Fi le d Au gu st10 , 20 16
.

22 89 1- 05
.
In19 99 , BD, a dru gs to re ch ai n, en te redin to anag reem en t t o pu rch as e p ro pe rty L fro m a th irdpa rty. In an ti ci pa ti on of s tru ctur in g anex ch an ge trans act io n u nd er I.R.C . sec . 10 31 to faci li tate acqui si
ti onof L, BD l at er as si gn edit s ri gh ts inth e p ur ch as e ag reem en t t o th ird -p arty

ex ch an ge faci li ta to r EPC an d e nt ereda furth er ag reem en t with EPC . Thatsec on d a gr eem en t p ro vi de d fo r EPC t o p ur ch as e L an d fo r BD to ha ve a ri gh t t o a cqui re L fro m EPC fo r a s ta te d p eri od an d p ric e. EPC so pu rch as edL onAug us t 1 , 20 00 , with b an k
Cas es of t he fol lo win g p et it io ne rs are co ns ol id at edhe rewi th : Geo rg e D. 1 an d J un e M. Ba rte ll , do ck etNo. 2 28 29 -0 5, an d Dav idH. andJea n B . Barb er, do ck etNo. 2 28 91 -0 5.- 2 -

fin an ci ng gu aran te edby BD, acqu iri ng ti tl e to L at tha t t im e. BD th en m an ag edth e co ns tru ct io n o f a dru gs to re o n L u si ng pro ceed s fr om th e afo rem en ti on edfin an ci ng an d, upo n s ub st an ti al co m pl et io n o f th e co ns tru ct io n i n J un e 2 00 1, l eas edth e st or e fro m EPC fro m

th atti m e un ti l t it le to L was tran sf

erre d fr om

EPC to BD on Decem

be r 31 , 20 01
. Inlat e 2 00 1, BD co nt ract edto sel l i ts ex is ti ng pro pe rty E to a fo urthpa rty. BD nex t en te redanex ch an ge ag reem en t wi thin te rm ed iary SS an d a ss ig ne d t o S S it s ri gh ts un de r th e sa le ag reem en t an d un de r th e ear li er ag reem en t wi th EPC. SS s ol d E, ap pl ie d t he pro ceed s o f th atsal e to th e acqui si ti onof L, an d h adth e ti tl e to L tran sferr edto BD on Decem

be r 31 , 20 01
. Held : BD’s d is po si ti on of E an d a cqui si ti on of L i n 2 00 1 qu al ifi es forno nr eco gn it io n t reat m en t p ur su an t t o I.R .C. se c. 10 31 as a li ke -k in d e xc ha ng e, as EPC is tre at edas t he own er o f L du rin g t he pe rio d i t h el d t it le to th e p ro pe rty. A ld ers on v. Co m m is si on er, 3 17 F.2 d 7 90 (9t h C ir. 1 96 3) , rev ’g 38 T.C. 21 5 (1 96 2) , andBig gs v. Co m m is si on er, 6 9 T.C. 9 05 (19 78 ), aff’d, 6 32 F.2d11 71 (5t h C ir. 19 80 ), fo ll owe d.

Ro be rt J . Chi co in e an d J oh n M arkCo lv in , forpe ti ti on ers . Ile saB. McAu li ffe andW il li am A. McCarth y , forres po nd en t.
GALE, Ju dg e: Res po nd en t d et erm in edth e fo ll owi ng de fic ie nc ie s an d pe na lt ie s wi thres pe ctto pe ti ti on ers ’ Fed eral in co m e ta x:- 3 -

Peti ti on ers Year Defi ci en cy Est at e o f Geo rg e H. Bart el l, J r., etc . 20 01 $2 31 ,00 1 Geo rg e D. andJu ne M. Bart el l 20 01 16 7,8 98 20 02 14 ,21 6 Dav idH. andJea n B . Barb er 20 01 49 ,60 4 20 02 19 ,70 7 20 03 5,0 91 The se cas es ha ve be enco ns ol id at edforpu rp os es of t ria l, b rie fin g, an d op in io n. Un le ss ot he rwis e in di cat ed , all sec ti on refe ren ces are t o t he Int ern al Rev enue Co de of 1 98 6, as am en de d a ndineffe ctfor th e y ears at i ss ue , andall Ru le refe ren ces are t o t he Tax C ou rt Rul es of P ract ic e an d P ro cedur e. The pri nc ip al is su e fo r de ci si on is whethe r a p ro pe rty tran sa ct io n un de rtake n b y

th e Barte ll Drug Co . (Bart el l Dru g) , an S co rp or at io n o wne d b y pe ti ti on ers , qu al ifi edforno nr eco gn it io n t reat m en t p ur su an t t o s ect io n 1 03 1 a s a li ke -k in d e xc ha ng e. 2 FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d a re s o fo un d. Th e st ip ul at io ns , with a cco m

pa nyin g e xh ib it s, ar e in co rp or at edhe rei n b y th is refe ren ce. At the ti m e th e p et it io ns were fi le d, al l p et it io ne rs were re si de nt s o f W as hi ng to n S tate . Fi na l d is po si ti on of p et it io ne rs ’ reque stfora pr ot ect iv e o rd er u nd er Ru le 2 10 3 a ndanev id en ti ary di sp ut e are th e subjec t o f se pa rat e o rd ers .- 4 -

Pet it io ne rs an d B art el l Dru g Bart el l Dru g o wne d a ndop erat eda ch ai n o f ret ai l dru gs to res du rin g t he y ears at i ss ue an d h adbe endo in g s o i n S eat tl e, W as hi ng to n, an d s urro un di ng area s fo r m or e th an10 0 years. Own ers hi p o f th e co m pa ny has rem ai ne d i n t he Bart el l fam il y si nc e it s fo un di ng in18 90 . Duri ng th e y ears at i ss ue , all sh ares inBart el l Dru g wer e h el d b y

pe ti ti on ers Geor ge H. Bart el l, J r., an d h is two ch il dr enGeor ge 3 D. Bart el l an d J eanB. Barb er. The for eg oi ng fam il y

m em be rs serve d o n the co m

pany’ s b oa rdof d ire ct or s in va rio us cap aci ti es an d a s o ffi cers du rin g t he pe rio d u nd er co ns id erat io n. J ean B. Barb er (s om et im es Jea n B arb er) s erv edas c hi ef fi na nc ia l o ffi cer o f Barte ll Dru g, as well as s ecre tary an d adi rect oronth e b oardth ro ug ho utth atpe rio d. Inco nduc ti ng it s re ta il bu si ne ss , Bart el l Dru g o wne d s om e o f th e p ro pe rti es in whi chit s s to res op erat edan d l eas edot he rs . Befo re the 19 80 s, m os t o f Barte ll Dru g’s s to res were i n s ho pp in g c en te rs an ch or edby gro cery sto res , gen eral ly in a st rip -m al l fo rm atwith t he dru gs to re s pa ce s it edbe twee n t wo o th er m erch an ts . Dev el op ers of t ho se cen te rs wou ldtypic al ly app ro ach Bart el l Dru g, o ffer in g s pa ce in analr eady -p lann edco m pl ex .
Geo rg e H. Bart el l, J r., di edinearl y 20 09 aft er the fil in g o f th e cas e at 3 do ck etNo. 2 27 09 -0 5. Hi s es ta te was s ub st itut edas apa rty-pet it io ne r.- 5 -

Inth e en su in g d ecad es , ho wev er, two k ey , andto so m e d eg ree i nt erre la te d, de ve lo pm en ts affe ct edth e b us in es s m od el forret ai l dru gs to res . Firs t, g ro cery st or es be ga n i nc lu di ng ph arm aci es withi n t he ir s to res . Thatin no va ti on bo th reduc edth e at tra ct iv en es s o f th e g ro cery-anc ho redcen te rs forco m pe ti ng drug st or es an d p ro m

pt edgro cery sto res to have de ve lo pe rs res tri ctlea si ng to su ch
co m pe ti ti ve m erch an ts . Seco nd , W al gr eenCo . (W al gr een s) , a na ti on al dru gs to re ch ai n, i nt ro du cedon a m as si ve sca le an d t o n ot ab le su cces s a s to re fo rm atth at sh ift edth e p arad ig m

fordru g re ta il in g. Th e em ph as is be cam e fre es tand in g c orne r lo cat io ns with driv e-thr ou gh ph arm aci es . W al gr een s en te redth e Sea tt le area m ark etinth e ear ly to m id -1 99 0s , at wh ic h p oi ntBart el l Dru g c am e und er in crea si ng pre ss ur e. The n at io na l ch ai ns W al gr een s, Ri te AidCo rp ., andSafe way , In c., be cam e in crea si ng ly infl ue nt ia l an d B art el l Dru g’s ch ie f co m pe ti to rs inth e m ark et . Giv enth e fo reg oi ng , Bart el l Dru g m an ag em en t fa cedth e p ro sp ectof the gr owi ng ob so le sc en ce o f it s re ta il lo cat io ns an d s ou gh t t o fo rm ul at e a s tra te gy to up da te it s p ortfo li o o f own edan d l eas edpro pe rti es . The ch an ge d b us in es s cl im at e ge ne ral ly requ ire d B art el l Dru g t o u nd ert ak e d ev el op m en t o f ne w si te s i ts el f in
or de r to op enfree st an di ng st or es . Suc h apro ject o fte n n eces si ta te d asi gn ifi can tl y gr eat er fi na nc ia l co m

m it m en t, fre qu en tl y

en co m pa ss in g l an d a cqui si ti on an d/ or- 6 -

bu il di ng co ns tru ct io n c os ts , th anth atin vo lv edinm erel y oc cupyin g asp ace b ui lt by a th ird -p arty

de ve lo pe r. Add it io na ll y , th e p ro pe rti es own edby Barte ll Drug at th atjun ctur e g en eral ly hadve ry lo w bas es , su chth atou tri gh t s al e co ul d p ro du ce si gn ifi can t t ax ab le ga in
. Inth e ear ly to m id -1 99 0s , Jea n B arb er was in tro du cedto th e co nc ep t o f
se ct io n 1 03 1 e xc ha ng es th ro ug h h er h us ba nd , a real est at e b ro ke r. Fol lo win g furth er i nv es ti ga ti on an d c on su lt at io n wi th pro fes si on al advi se rs , th e Barte ll Drug bo ardof d ire ct or s ad op te d a s a p ol ic y an d aut ho riz edm an ag em en t t o p ur su e a st rat eg y of e m pl oyin g s ect io n 1 03 1 e xc ha ng es to up da te th e co m pa ny’ s re al est at e po rtf ol io an d a cqui re n ew st or e lo cat io ns . Thatde ci si on was m ad e in 19 98 an d
was fol lo wedby four su chex ch an ge s. Inex ecu ti ng th e se ct io n 1 03 1 e xc ha ng es , Bart el l Dru g wo rk edwith S ect io n 10 31 Serv ic es , Inc ., a cor po rat io n t ha t p ro vi de d qua li fie d i nt erm ed iary servi ces to ta xp ay ers , anda rel at edco rp or at io n, Ex ch an ge Struc tures , Inc . Exch an ge Stru ctur es , intu rn , setup who ll y own edli m it edli ab il ity

co m pa ni es to serve as ex ch an ge in te rm ed iarie s i n s uc h t ran sa ct io ns . One s uc h l im it edli ab il ity co m pa ny was EPC Two, LLC (EPC Two ), a W as hi ng to n S ta te en ti ty hav in g Ex ch an ge Stru ctur es as i ts so le m em be r. As d is cu ss edhe rei na fte r, EPC Two s erv edas t he
ex ch an ge in te rm ed iary

inth e tr an sa ct io n a t i ss ue .- 7 -

Agr eem en t To Purch as e th e Ly nn woo d P ro pe rty Bart el l Dru g h adop erat eda sm al l s to re i n Lynnwo od , W as hi ng to n, s in ce the
m id -1 98 0s . Thatst or e was ina po or ly m ai nt ai ne d s tri p m al l. By 19 99 on ly a few y ears rem ai ne d o n t he ex is ti ng lea se forth e Lynn woo d s to re, an d B art el l Dru g was in te res te d i n c on si de rin g o th er p ro pe rti es . The co m pa ny’ s re al est at e m an ag er be ga n l oo ki ng in to po te nt ia l s it es . At th e ti m e, itwas ru m or edth atW al gr een s was al so sco ut in g l oc at io ns inth e Lynn woo d a rea, o ne of wh ic h was li ke wis e at tra ct iv e to Bart el l Dru g. Tha t p ro pe rty was a rec y cl in g c en te r, own edby Mil dr edM. Horto n, acro ss 4 th e st reetfro m

Bart el l Dru g’s ex is ti ng Ly nn woo d s to re. On Ap ril 1, 1 99 9, Ba rte ll Dru g’s re al est at e m an ag er h adanin it ia l m eet in g wi th Mi ldredHort on an d h er at to rn ey reg ard in g t he pro pe rty. Furthe r ne go ti at io ns fol lo wed , andas t he y pr oc eed edBart el l Dru g o rd ereda fi rs t co m m it m en t fo r ti tl e in su ran ce fo r th e si te (h erei na fte r th e Ly

nn woo d p ro pe rty), effect iv e Apr il 21 , 19 99 . The co m m it m en t id en ti fie d M il dr edHort on as “ Sel le r” an d B art el l Dru g a s “ Bu y er/ Bo rro wer” an d

“ Pro po se d In sured ”. Bart el l Dru g a ls o c on ta ct edanen gi ne eri ng firm ab ou t
Mi ldredM. Horto n o wne d t he pro pe rty bo th inhe r in di vi du al cap aci ty and 4 as tru st ee o f a t es tam en tary tru stest ab li sh edun de r he r de ceas edhu sb an d’s wi ll
. Fo r si m pl ifi cat io n, M il dr edM. Horto n a ndMi ldredM. Horto n, Tru st ee, wil l b e refe rredto , witho utdi st in ct io n, as Mi ldredHort on .- 8 -

pr ov id in g abo un da ry

an d t op og rap hi c su rv ey

of t he Ly nn woo d p ro pe rty, andth e firm res po nd edwith apro po sa l d at edApri l 2 3, 1 99 9. The sal e n eg ot ia ti on s cu lm in at edon May 7, 19 99 , with t he ex ecu ti on by Mi ldredHort on as “ Sel le r” an d B art el l Dru g a s “ Bu y er” o f a Rea l Es ta te Purch as e an d S al e Agr eem en t (s al e ag reem en t). Th e sa le ag reem en t re ci te d ato ta l p ur ch as e pr ic e o f $1 ,89 8,6 40 , payabl e in cas h at cl os in g, an d s etforth a cl os in g d at e o f Aug us t 1 , 20 00 . In ad di ti on , th e sa le ag reem en t s pe ci fie d aser ie s o f st ep s an d de ad li ne s t o o ccu r in th e in te rim, rel at in g t o due di li ge nc e, ti tl e, su rv ey , in sp ect io ns , anden vi ro nm en ta l re po rts , as wel l as requi rem en ts forpe rio di c earn es t m on ey

paym en ts to ta li ng $1 00 ,00 0 t o b e d ep os it edby Barte ll Drug in
es cro w. The s al e ag reem en t al so co nt ai ne d t he fol lo win g c laus e: 14 .5 Sect io n 1 03 1 Ex ch an ge . Buyer andSel le r ag ree t o re as on ab ly co op erat e wit h e ach ot he r to acco m pl is h a ny exch an ge un de r Sect io n 1 03 1 o f th e In te rn al Rev enue Co de , in cl ud in g pe rm it ti ng ass ig nm en t o f th is Agre em en t t o a n e xc ha ng e faci li ta to r; p ro vi de d t ha t the co op erat in g p arty is pu t t o n o li ab il ity or e xp en se inco nn ect io n t he rewi th
. Afte r ex ecu ti on of the sal e ag reem en t, Ba rte ll Drug be ga n t o u nd ert ak e th e st ep s co nt em

pl at edth erei n andrel at edact io ns aim edat f in al iz in g t he acqui si ti on an d c on st ru ct io n o f a dru gs to re o n t he Ly nn woo d p ro pe rty. Barte ll Drug ord ereda se co ndco m

m it m en t fo r ti tl e in su ran ce ef fect iv e May

18 , 19 99 , th atm od ifi ed- 9 -

cert ai n l is te d e xc ep ti on s n otpe rti ne nthe re. InJu ly 199 9 M il dr edHort on an d Bart el l Dru g a gr eedto ex te ndth e p eri odforth e co m pany to c om

pl et e it s in sp ect io n o f th e Lynn woo d p ro pe rty, so a s t o a ll ow s uf fic ie ntti m e fo r refi ni ng bu il di ng an d s it e p lans . Then , as the ex te nd edin sp ect io n p eri oddre w to a cl os e, Bart el l Dru g b eg anrem is si on of t he st ip ul at edearn es t m on ey paym en ts by six ch eck s d at edSep te m

be r 1, 1 99 9, thr ou gh Jan ua ry 31 , 20 00
. Bart el l Dru g l ik ewis e co nt inue d p rep arat io ns for th e co ns tru ct io n o f a drug st or e o n t he Ly

nn woo d p ro pe rty. O n J anuary 5, 2 00 0, Ba rte ll Drug ap pl ie d t o th e Ci ty of Lynn woo d fo r a b ui ld in g p erm itfor th e si te . Thatap pl ic at io n l is te d Bart el l Dru g a s ap pl ic an t an d M il dr edHort on as o wne r of th e subjec t re al est at e. Bart el l Dru g a ls o e ng ag eda tr affi c en gi ne eri ng firm to pe rfo rm

a tr affi c stud y

an d
rev ie w of s it e acc es s, an d t ha t fi rm in vo ic edBart el l Dru g fo r th e work o n Feb ru ary 15 , 20 00
. Stru ctur in g a ndFin an ci ng th e Lynn woo d P ro pe rty Purc ha se Mea nwh il e, Bart el l Dru g s ou gh t t o p ro gr es s o n s tru ctur in g a ndfin an ci ng th e sa le tra ns act io n. Atso m e p oi ntno t cl earl y di sc lo se d i n t he reco rd , bu t b efo re Mar ch20 00 , Bart el l Dru g app ro ach edSect io n 1 03 1 S erv ic es ab ou t the po ss ib il ity of em pl oyin g a n e xc hang e in co nn ect io n wi th th e Ly nn woo d p ro pe rty. At tha t ti m e, th e co m

pa ny ant ic ip at edrel in qu is hi ng anol de r st or e in Whi te Cen te r, in- 10 -

Kin g C ou nt y , W as hi ng to n, fo r th e ex ch an ge . By Marc h o f 20 00 itha d b een ag reedth atEPC Two wo ul d t ak e ti tl e to th e Lynn woo d p ro pe rty witha vi ew to effe ct in g asec ti on10 31 ex ch an ge . Sim ul tane ou sl y , Bart el l Dru g h adbe en worki ng with KeyBank Nat io na l As so ci at io n (Ke yBan k) instru ctur in g am ul ti
co m po ne ntcred itpa ck ag e p ert ai ni ng to bo th ne w bo rro win g fa ci li ti es an d
ex te ns io ns or r en ewal s o f ex is ti ng lo an s, t ot al in g app ro xi m at el y $1 5 m il li on . One
co m po ne ntof t ha t p ack ag e was a $4 m il li on faci li ty ide nt ifi edas atra ns act io n lo anin te nd edto fin an ce the acqui si ti on of l an d fo r an d c on stru ct io n o f th e n ew st or e in Ly

nn woo d. Th e p ack ag e was ap pr ov edby K eyBan k o n F eb ru ary 29 , 20 00
. KeyBan k’s co m

m it m en t l et te r fo r th e fu ll pa ck ag e, da te d M arch1, 2 00 0,
an d s en t t o B art el l Dru g, d es cri be d t he bo rro wer o f th e $ 4 m il li on lo anas “ The Bart el l Dru g C om

pa ny or anen ti ty suc h a s EPC TW O LLC accep tabl e to th e b an k with agu aran ty pro vi de d b y The B art el l Dru g C om

pa ny” andth e p ur

po se as “ to fin an ce the acqui si ti on of l an d a ndco ns tru ct io n o f a n ew st or e in Ly nn woo d, WA.
un de r th e b en efi ts of 1 03 1 t ax -fre e ex ch an ge .” The c omm it m en t l et te r co nd it io ne d th e fi nanc in g i n t he ful l p ack ag e upo n B art el l Dru g’s co ve na ntto m ai nt ai n a tang ib le ne t wo rth of n otles s tha n $ 50 m il li on . KeyBan k m ad e anex cep ti onto it s ge ne ral lo anpo li cy

inex te nd in g t he fin an ci ng witho utBart el l Dru g h av in g t o- 11 -

pr ov id e anau di te d fi na nc ia l s ta te m en t. In st ead , KeyBan k was wil li ng to m ak e th e lo anon th e b as is of B art el l Dru g’s fi na nc ia l s tre ng th , lo ng op erat in g h is to ry , m an ag em en t t eam , andna m e rec og ni ti on . The l oa n was no t s ecured
. On M arch 13 , 20 00 , th e Barte ll Drug bo ardof d ire ct or s au th or iz ed
m an ag em en t t o p ro ceedinob ta in in g the faci li ti es , andJea n B arb er co un te rs ig ne d th e co m mit m en t l et te r on th atda te . EPC Two, in tu rn , onMarc h 1 7, 2 00 0 (i n co nju nc ti on with t he lo ando cum en ta ti on de ta il edin fra) , exe cu te d ali m it ed li ab il ity co m pa ny bo rro win g re so lu ti on au th or iz in g t he en ti ty to b orro w fro m an d to si gn pro m is so ry

no te s i n fa vo r of

KeyBan k. On M arch 17 , 20 00 , KeyBan k a s “ Len de r” an d EPC Two b y Exch an ge Stru ctur es , it s s ol e m em

be r, as “ Bo rro wer” ex ecu te d aBu si ne ss Loan Agre em en t in th e p rin ci pa l am ou ntof $ 4 m il li on . The l oa n was stru ctur edas ali ne of c red it
an d re qu ire d t ha t a g ua ran ty by Bart el l Dru g b e fu rn is he d b efo re the di sb ur se m en t of an y lo anpro ceed s. EPC Two si m ul tane ou sl y

ex ecu te d i n fa vo r of

KeyBan k a pr om is so ry

no te inth e p rin ci pa l am ou ntof $ 4 m il li on an d t hr ee Lo nd on Int erb an k Offere d R at e ad de nd a d es ig na ti ng th e p ert in en t v ari ab le in te res t ra te sch edul e, as well as adi sb ur se m en t re qu es t an d aut ho riz at io n fo r th e fu nd s. Th e d is bu rs em en t reque streci te d t he sp eci fic purp os e o f th e lo anas b ei ng to “ fin an ce co ns tru ct io n o f
ne w st or e inLy

nn woo d” . At th e sa m e ti m e, Bart el l Dru g s ig ne d aco rp or at e- 12 -

res ol ut io n t o g ua ran te e an d c orres po nd in g c omm erci al gu aran ty of th e $ 4 m il li on no te m ad e b y

EPC Two. On Ap ril 4, 2 00 0, Se ct io n 1 03 1 S erv ic es sen t t o B art el l Dru g an e ng ag em en t le tt er fo r pe rfo rm an ce o f in te rm ed iary servi ces inco nn ect io n wi thth e se ct io n 1 03 1
ex ch an ge co nt em

pl at edforth e Lynn woo d p ro pe rty. L ik ewis e, on th e sa m e d at e EPC Two s en t an en ga ge m en t l et te r fo r pe rfo rm an ce o f “rev ers e wareh ou si ng ”
se rv ic es for

th e ex ch an ge . The l et te rs ge ne ral ly dis cu ss edfees , trans act io na l ag reem en ts an d d oc um en ts , fin an ci ng , andesc ro w pro cedur es , with the EPC Two le tt er ad vi si ng inpa rti cu lar:

2. We tak e ti tl e to th e Rep la cem en t Pr op erty with fu nd s l oane d by y ouan d/ ora th irdparty len de r ob ta in edby y ou . Any lo an to u s fro m a th ir d pa rty len der must be no n rec ou rs e to us, a lth ou gh yo u m ay pers on al ly gu ar an tee th e lo an . W e p ro vi de y ouwith a no n re co ur se no te an d d eedof t ru stto sec ur e y ou r lo anto us . W e le as e th e Rep la cem en t Pr op erty to y oudurin g t he wareh ou se pe rio d. Youare re qu ire d u nd er the lea se to ob ta in li ab il ity an d p ro pe rty in su ran ce, n am in g u s as “ ad di ti on al in su red ”, to pa y th e p ro pe rty ta xe s, an d t o l oa n u s an y

fun ds ne ces sa ry

to m ak e m ortg ag e pa ym en ts . The ba si c in te rm ed iary

fee fo r a s tand ardtwo -p ro pe rty exch an ge was s etat $1 ,50 0, an d 0 .5% o f th e v al ue of the pro pe rty was s pe ci fie d a s the ch arg e fo r wareh ou si ng ina rev ers e ex ch an ge . Und er co ve r of a le tt er d at edApri l 1 7, 2 00 0, Bart el l Dru g re tu rn edth e co un te rs ig ne d e ng ag em en t l et te r. Thatlet te r rea d:- 13 -

Enc lo se d a re the ex ecu te d war eh ou si ng an d e xc ha ng e le tt ers . I hav e ta lk edto Key

Ban k a ndth ey

ha ve no pro bl em

with i ss ui ng a si de le tt er t o m ak e th e n ew lo anno n- reco ur se to EPC II. Howe ve r, th e ba nkcan no t d o t hi s u nt il th ey rece iv e anex ecu te d c op y of t he Exc ha ng e an d C oo pe rat io n Ag reem en t. I h av e ta lk edto Dan P ep pl e, ou r at to rn ey , andask edhi m to dra ft thi s d oc um en t. On ce we h av e th atdo cu m en t co m

pl et ed , I wil l co nt actKey Ban k t o g etth e Loan Agr eem en t m od ifi ed
. As p rep arat io ns forclo si ng on th e Lynn woo d p ro pe rty pro ceed ed , a co rp or at e res ol ut io n d at edJu ly 13, 2 00 0, was ex ecu te d i n wh ic h i t was rep res en te d th atth e Barte ll Drug bo ardof d ire ct or s i n apre vi ou s m eet in g h el d M arch 13 , 20 00 , hadres ol ve d, i nt er al ia : (1 ) to en te r in to a se ct io n 1 03 1 e xc ha ng e tra ns act io n wi th Sect io n 1 03 1 S erv ic es to res ul t i n the pu rch as e o f a ret ai l drug st or e in Ly

nn woo d, Wash in gt on , and(2) to ass ig n B art el l Dru g’s ri gh ts un de r th e May 7, 1 99 9, s al e ag reem en t wi th Mi ldredHort on to Sect io n 1 03 1 S erv ic es . On J ul y 26 , 20 00 , EPC Two s en t t o the ti tl e in su ran ce co m pa ny escro w in st ru ct io ns co nc ern in g, an d v ari ou s d oc um en ts to be ex ecu te d b y th e p art ie s i n co nn ect io n wi th , th e cl os in g. Dur in g 2 00 0 a nd20 01 , EPC Two was a si ng le purp os e en ti ty form edforth e ex cl us iv e p ur

po se of p ro vi di ng servi ces to Bart el l Dru g. Itwas adi sr eg ard ed
en ti ty for Fed eral in co m e ta x p ur po se s atall ti m es rel ev an t t o t he se cas es (it s s ol e m em be r be in g Ex ch an ge Serv ic es , Inc .), an d i t h adno ass et s dur in g 2 00 0 a nd- 14 -

20 01 ot he r th an , as m or e fu ll y di sc us se d h erei na fte r, a ri gh t t o a cqui re the Ly nn woo d p ro pe rty andth enti tl e to th e Lynn woo d p ro pe rty, sub ject t o v ari ou s co nt ractua l t erm s g ov ern in g the pro pe rty’ s d is po si ti on . Rea l Es ta te Acqu is it io n andExch an ge Co op erat io n Ag reem en t On J ul y 31 , 20 00 , Bart el l Dru g a ndEPC Two en te redin to a Rea l Es ta te Acqui si ti on an d Ex ch an ge Co op erat io n Ag reem en t (R EAECA) with re sp ectto th e Ly nn woo d t ran sa ct io n. Th ro ug h t he REAECA, Bart el l Dru g a ndEPC Two (ref erre d t o a s SP E inth e REAECA) co nt ract edto co op erat e in effe ct in g a n ex ch an ge of c urren t p ro pe rty (i.e., pr op erty curren tl y own edby Barte ll Drug bu t t o be rel in qu is he d) forrep la cem en t p ro pe rty. T he do cu m en t s etforth th e co nt ract in g pa rti es ’ rig ht s an d re sp on si bi li ti es inth aten de av or . The cu rren t p ro pe rty was id en ti fie d a s o f th atti m e as th e Whit e Cen te r si te , andth e rep la cem en t p ro pe rty as th e n ew Lynn woo d p ro pe rty. T he REAECA add res se d a cqui si ti onan d o wne rs hi p of th e rep la cem en t p ro pe rty, inc lu di ng ass ig nm en t o f th e ex is ti ng pu rch as e ag reem en t, fi na nc in g, co ns tru ct io n o f im pr ov em en ts , andlea si ng ; d is po si ti on of th e cu rren t p ro pe rty thr ou gh co op erat io n i n a n e xc ha ng e v iaa qu al ifi ed in te rm ed iary

(i.e ., Sect io n 1 03 1 S erv ic es ); a ndtra ns fer o f th e rep la cem en t p ro pe rty to Bart el l Dru g, i nc lu di ng th e p ur ch as e p ric e at te nd an t the ret o.- 15 -

As re ga rd s ac qu is it io n o f th e Lynn woo d p ro pe rty, Barte ll Drug ass ig ne d a nd EPC Two ac cep te d t he rig ht s an d o bl ig at io ns un de r th e May 7, 1 99 9, s al e ag reem en t wi th Mi ldredHort on . The REAECA th ensp eci fie d t ha t EPC Two

“ sh al l ac qu ire ti tl e to ” th e rep la cem en t p ro pe rty andth en“ sh al l caus e to be
co ns tru ct edon ” th e rep la cem en t p ro pe rty certa in im pr ov em en ts “pu rs ua ntto pl an s an d s pe ci fic at io ns ap pr ov edby Barte ll an d u nd ert ak enby a gen eral co nt ract oran d
subc on tra ct or s ap pr ov edby Barte ll ”. To tha t en d, the REAECA pro vi de d t ha t t o fi na nc e th e acqui si ti on of a nd
co ns tru ct io n o f th e im

pr ov em en ts to th e si te , EPC Two wo ul d b orro w fun ds fro m anag reedlen de r an d wo ul d h av e n o o bl ig at io n t o b eco m e li ab le foran y pa ym en ts orto adva nc e an y

fun ds inex ces s o f th os e so bo rro wedor f un ds supp li edby the qu al ifi edin te rm ed iary

fro m th e sa le of t he curren t p ro pe rty. Sim il arl y , EPC Two
was to ha ve no res po ns ib il ity : (1 ) “ to in ve st ig at e, rev ie w or o th erwi se in qu ire in to th e n atur e o f an y

workforwhi chpaym en t i s re qu es te d, i t b ei ng ex pr es sl y ag reed th atSPE’s res po ns ib il ity

is so le ly to d is bu rs e fu nd s o n re qu es t b y Bart el l” ; o r (2 ) “ to rev ie w, supe rv is e, in sp ector o th erwi se be co m e in vo lv edinth e co ns tru ct io n” of t he im

pr ov em en ts . The REAECA als o s ti pu la te d t ha t upo n s ub st an ti al co m pl et io n o f th e im pr ov em en ts , EPC Two was requi redto lea se th e rep la cem en t p ro pe rty to B art el l- 16 -

Dru g. Th e le as e was to be a tr ip le ne t l eas e an d was to “pr ov id e fo r ren ta l equa l t o al l d eb t s erv ic e p ay ab le un de r an y an d a ll ” lo anag reem en ts with re sp ectto th e rep la cem en t p ro pe rty. If Barte ll Drug th enele ct edto go forwardwith a n e xc ha ng e o f th e cu rren t pr op erty , th atpro pe rty woul d b e so ldto a th irdpa rty thr ou gh th e qua li fie d in te rm ed iary , with t he in te rm ed iary ha vi ng be enass ig ne d B art el l Dru g’s ri gh ts un de r su cha sa le co nt ractan d re cei vi ng th e p ro ceed s the reo f. Bart el l Dru g wo ul d
ne xtass ig n t o t he qu al ifi edin te rm ed iary it s ri gh ts an d o bl ig at io ns un de r th e REAECA, whi chin cl ud eda ri gh t t o a cqui re the rep la cem en t p ro pe rty. At Ba rte ll Dru g’s d ire ct io n, the qu al ifi edin te rm ed iary wou ldth enrem itto EPC Two the pr oc eed s fr om

th e sa le of the curren t p ro pe rty up to anam ou ntno t i n e xc es s o f th e

“ Purch as e Pri ce” o f th e rep la cem en t p ro pe rty. T o c om pl et e th e ex ch an ge , th e qu al ifi edin te rm ed iary

wou lddi rectEPC Two t o d eedth e rep la cem en t p ro pe rty to Bart el l Dru g. Per the REAECA, th e “ Purch as e Pri ce” f orth e rep la cem en t p ro pe rty was equa l t o i ts “ Fai r Marke t Val ue ”. “ Fai r Marke t Val ue ”, in tu rn , was d efi ne d:

“ Fai r Marke t Val ue ” o f th e Rep la cem en t Pr op erty sh al l m eanth e fai r m ark etva lu e d et erm in edby an ap pr ai sa l co nduc te d b y a na ti on al ly reco gn iz edreal est at e ap pr ai se r as m ay be ag reedto by Barte ll an d SPE * * * ; p ro vi de d, h owe ve r, th atif the Rep la cem en t Pr op erty is pu rch as edfro m

SPE withi n t wen ty-fou r (2 4) m on th s af te r th e d at e o n- 17 -

whi chSPE acqui redth e Rep la cem en t Pr op erty , th enth e “ Fai r Marke t Valu e” s ha ll be de em edto equa l i ts “ Acqui si ti on Co st ” as he rei na fte r de fin ed
. The refe ren cedde fin it io n o f “ Acqui si ti on Co st ” fo ll owe d:

“ Acqui si ti on Co st ” sh al l m eanth e su m of ( i) t he purch as e p ric e p ai d by SPE to th e Sel le r to acqui re the Rep la cem en t Pr op erty ; (i i) a ll sa le s, tran sf

er o r si m il ar t ax es , andall ch arg es an d c lo si ng co st s p ai d by SPE inco nn ect io n wi th it s p ur ch as e o f th e Rep la cem en t Pr op erty ; (ii i) a ll in te res t an d s ta te d fe es (in cl ud in g p re-p aym en t fe es in co nn ect io n wi th m an da to ry pre -p aym en ts ) un de r th e Cre di t Agr eem en ts whi chare n otpa idas r en t p ur su an t t o t he Leas e, (i v) th e co stof c on st ru ct io n o f al l Im pr ov em en ts whi chare p ai d b y SPE, an d (v ) an y an d a ll un rei m

bu rs edco st s, l iabi li ti es an d e xp en se s o f an y ki ndin cu rredby SPE in c on ne ct io n wi th th e acqui si ti on , own ers hi p an d o pe rat io n o f th e Rep la cem en t Pr op erty an d t he co m

pl et io n o f th e Exc ha ng e ex cep t fo r “ Exc lu de d C os ts ” as de fin ed* * * The REAECA add it io na ll y in co rp or at edEPC Two’s en ti tl em en t t o re cei ve fro m Bart el l Dru g t he .5% fee setforth inth e p rev io us ly des cri be d Ap ril 4, 2 00 0, l et te r fro m EPC Two. Two i nd em

ni ty pro vi si on s wer e se t fo rth inth e REAECA. One was a ge ne ral in de m

ni fic at io n c laus e whe reb y Bart el l Dru g a gr eedto in de m ni fy an d
sa ve EPC Two an d/ orKeyBan k “ ha rm le ss fro m all lo ss , cos t, d am ag es , exp en se s an d a tt orne y s’ fees su ffer edor i nc urred ” as a res ul t o f an y cla im , in ve st ig at io n, pr oc eed in g, o r su itinco nn ect io n wi th th e o wne rs hi p o r ex ch an ge of t he rep la cem en t p ro pe rty “ ex cep t t o t he ex te nt* * * [t ha t p arty ] is li ab le forsu chlo ss- 18 -

as a res ul t o f it s g ro ss ne gl ig en ce, wil lfu l m is co nduc t o r br each of i ts ob li ga ti on s un de r” the REAECA. The o th er p ro vi si on was asp eci fic en vi ro nm en ta l re le as e an d i nd em

ni ty m an da ti ng th atBart el l Dru g i nd em ni fy an d h ol d h arm le ss EPC Two
an d/ orKeyBan k fo r an y

cla im s i n c on ne ct io n wi th co nt am in at io n o f th e cu rren t
an d re pl acement p ro pe rti es by any ha zard ou s s ub st an ce. Oth er m at te rs pe rta in in g t o s ecurity were l ik ewis e d oc um en te d dur in g t hi s pe rio d. Co nt em

po ran eo us ly w ith e nt ry

in to th e REAECA, EPC Two o n J ul y 31 , 20 00 , exe cu te d ade edof tru ston th e Lynn woo d p ro pe rty for the be ne fitof B art el l Dru g. Th e d eedof t ru stsec ur edBart el l Dru g wi thres pe ctto EPC Two’s ob li ga ti on s u nd er the REAECA, whi chwas e xp res sl y refe ren cedth erei n, as well
as an y li ab il ity pa idby Barte ll Drug un de r th e p ro vi si on s o f it s g ua ran ty of pa ym en t o n t he KeyBan k l oa n. Effe ct iv e Aug us t 1 , 20 00 , KeyBan k a s “ Len de r”
an d EPC Two as “ Bo rro wer” ex ecu te d a n am en dm en t t o t he $4 mil li on pro m is so ry no te . The am en dm en t re nd eredth e n ot e “ ex pr es sl y no nr eco ur se to Bo rro wer” an d st ip ul at edth atall pa y

m en ts th ereund er were to be m ad e “ on ly from th e in co m e an d p ro ceed s fr om

th e Bo rro wer’s in te res t i n t he Rep la cem en t Pr op erty an d Im pr ov em en ts to be acqui redwith t he pro ceed s o f th e lo an s( s) ev id en cedby the Pro m is so ry

Not e”.- 19 -

Cl os in g o n t he Ly

nn woo d P ro pe rty Cl os in g o n t he Ly

nn woo d p ro pe rty too k p la ce o n Au gu st1, 2 00 0. Th e fi na l
se ll in g p ric e, in co rp or at in g a ny pert in en t am en dm en ts to th e May 7, 1 99 9,
co nt ract , was $ 1,8 78 ,64 0. Vario us ot he r ch arg es an d e xp en se s wer e al so set tl ed 5 th ro ug h t he esc ro w pro ces s, an d EPC Two rec ei ve d o utof t he esc ro w $9 ,49 3 i n pa ym en t o f a “ W areh ou si ng Leas e Fee ”. On tha t d at e, a s ta tu to ry warran ty deed 6
co nv ey in g t he Ly

nn woo d p ro pe rty from

gra nt orMi ldredHort on to gra nt ee EPC Two was reco rd ed . The d eedof t ru ston th e p ro pe rty from EPC Two i n fa vo r of Bart el l Dru g was als o re co rd edon Aug us t 1 , 20 00 . A fin al ti tl e in su ran ce p ol ic y on a fee s im

pl e in te res t i n t he Ly

nn woo d p ro pe rty, dat edAug us t 1 , 20 00 , was is su edto EPC Two as th e n am edin su red
. Co ns tru ct io n o f th e Lynn woo d S to re W ork o n t he ne w pro pe rty its el f adva nc edon Aug us t 1 , 20 00 , with the
co m m en cem en t o f si te de m ol it io n a ndth e cl eari ng of e xi st in g s it e d eb ris . J.R. Abb ot t Co ns tru ct io n, In c. (J .R. Abb ot t), i nv oi cedBart el l Dru g fo r th e d em ol it io n The $2 0,0 00 reduc ti on inth e sa le pri ce fr om th e am ou ntst at edinth e 5 May 7, 19 99 , sal e ag reem en t ap pa ren tl y res ul te d fr om

anad de ndum

to th e sa le ag reem en t s ou gh t b y

Mi ldredHort on pe rta in in g t o t he rem ov al of p ers on al pr op erty fro m th e si te . Thi s $ 9,4 93 .20 pay

m en t equa ls 0.5 % of the ori gi na l $ 1,8 98 ,64 0 c on tra ct 6 pu rch as e p ric e fo r th e Ly nn woo d p ro pe rty.- 20 -

an d c le ari ng onAug us t 3 1, 2 00 0, an d B art el l Dru g p ai d d ire ct ly the $6 1,6 90 .23 du e in earl y

Sep te m be r of 20 00 . Bart el l Dru g was subs eque nt ly reim bu rs edth at
am ountth ro ug h aco ns tru ct io n draw fro m th e KeyBan k l oa n. As th e p ro ject
m ov edin to th e p ha se of s to re co ns tru ct io n, Ba rte ll Drug m an ag edth e p ro ces s. Fo r in st an ce, thr ou gh ou t the fol lo win g m on th s B art el l Dru g was en ga ge d i n ap pl y in g fo r an d o bt ai ni ng ap pr op ria te pe rm it s an d b on di ng to en ab le th e work t o pr oc eed . In Se pt em

be r of 20 00 , Bart el l Dru g app li edto th e Ci ty of Lynn woo d fo r a p ub li c works pe rm it . On Dece m be r 20 , 20 00 , th e Ci ty of Lynn woo d i ss ue d t o Bart el l Dru g t he bu il di ng pe rm itwhi chha d b eenap pl ie d fo r in Jan ua ry of t ha t y ear, as no te d s up ra. 7 Perf orm an ce b on ds were re qu ire d b y th e Ci ty of Lynn woo d fo r th e co ns tru ct io n o f th e dru gs to re. EPC Two e xe cu te d two co m m erci al su rety

bo nd ap pl ic at io ns da te d J anua ry 5, 2 00 1, i n fa vo r of

th e Ci ty of Lynn woo d. Ba rte ll Dru g s ig ne d t ho se ap pl ic at io ns as t hi rd -p arty in de m ni to r. Two p erfo rm an ce b on ds were i ss ue d fo r th e co ns tru ct io n l is ti ng “ EPC TW O, LLC c/o BARTELL DRUG COMP ANY” as “ Pri nc ip al ” an d Tra ve le rs Cas ua lty an d S ecu rit y

Co m pa ny of

All pe rm it s i ss ue d b y

th e Ci ty of Lynn woo d i n t he reco rdli stBart el l Dru g 7 as “ App li can t” an d M il dr edHort on as “ Owner ”, reg ard le ss of t he da te of ap pl ic at io n a nd/o r ap pr ov al
.- 21 -

Am eri ca as “ Surety ” an d wer e si gn edonJan ua ry 8, 2 00 1, o nl y

by Barte ll Drug
an d fi le d wi th th e Ci ty of Lynn woo d. 8 Bart el l Dru g s el ect edJ.R. Ab bo tt , th e sa m e fi rm th atha d p erfo rm edth e de m ol it io n, as th e co ntract orfor th e co ns tru ct io n. A co nt ractforth e work o n the
ne w dru gs to re d at edJan ua ry 8, 2 00 1, was ex ecu te d b etween“ EPC Two L.L.C. c/ o THE BARTELLDRUG COMPANY” as “ Owner ” an d J .R. Abb ot t as

“ Co nt ract or ”. Bo th EPC Two an d B art el l Dru g s ig ne d t he do cu m en t v iasi gn atur e bl oc ks lab el ed“ OW

NER”. All requi si te bu il di ng an d s im il ar p erm it s fo r co ns tru ct io n o f th e dru gs to re were is su edto Bart el l Dru g. One ke y co m po ne ntof t he dru gs to re p ro ject was si te acce ss . Bart el l Dru g be li ev edth atha vi ng two dri ve way acce ss po in ts was c rit ic al , bu t ap pl ic ab le go ve rn m en ta l re gu la ti on s wo ul d h av e li mit edth e Lynn woo d p ro pe rty to o ne curb
cu t. Acco rd in gl y , Bart el l Dru g wo rk edclo se ly w ith t he Cit y of Lynnwo odto fo rm ul at e aneas em en t p lan i nv ol vi ng th e dru gs to re s it e an d the ad jacen t co rn er lo t. Tho se ne go ti at io ns cu lm in at edinanAgre em en t fo r Jo in t Acc es s Ag reem en t [s ic ] da te d J un e 1 5, 2 00 1, b etweenEPC Two an d B art el l Dru g a s g ran to rs an d the Ci ty of Lynn woo d a s g ran te e. The a gr eem en t o pe ne d wi th th e fo ll owi ng reci ta ls : A per fo rm an ce b on d p rep aredpre vi ou sl y , dat edDecem be r 28 , 20 00 , and 8 li st in g B art el l Dru g a s “ Pri nc ip al ” was ap pa ren tl y no t i n p ro pe r fo rm

an d n ot rel ie d upo n t o m eetth e b on di ng ob li ga ti on forth e Ly nn woo d s it e.- 22 -

A. EPC Two LLC h ol ds ti tl e to th e rea l p ro pe rty (th e “ Bart el l Parc el ”) * * * an d Th e Barte ll Drug Co m pa ny ho ld s the be ne fic ia l in te res t i n t he Bart el l Parcel . Bart el l ap pl ie d t o t he Cit y fora bu il di ng pe rm itto de ve lo p t he Bart el l Pa rcel
. B. As a c on di ti on to th e is su an ce o f a b ui ld in g p erm it , th e Ci ty requi redBart el l t o a gr ee t o g ran t ac ces s ea se m en ts infav orof t he ad jacen t p arce l * * * The ag reem en t the n wen t o n t o d es cri be th e subjec t ea se m en ts an d was ex ecu te d by bo thEPC Two an d B art el l Dru g. As co ns tru ct io n p ro gr es se d, p eri od ic pa ym en ts forth e work wer e typi cal ly
m ad e in th e fo ll owi ng m an ne r: (1 ) J.R . Abb ot t wo ul d s en d an i nv oi ce t o B art el l Dru g; (2) a Bart el l Dru g e m pl oyee wou ldsen d wri tt enauth or iz at io n t o EPC Two fo r reque st in g aco ns tru ct io n draw fro m th e KeyBan k l oa n i n the am ou ntof t he in vo ic e; (3) EPC Two wo ul d s en d wri tt enau th or iz at io n t o KeyBan k fo r di sb ur se m en t o f fu nd s fr om th e co ns tru ct io n l oa n t o b e p ai d b y wire tra ns fer t o J.R . Abb ot t; (4) KeyBan k wo ul d p ay J.R. Ab bo ttth e am ou ntsp eci fie d i n the EPC Two au th or iz at io n. Du rin g t he pe rio d fr om Feb ru ary th ro ug h J ul y

20 01 , si x s uc h pa ym en ts were m ad e. Vari ou s o th er ex pe ns es , in cl ud in g tho se in cu rredaft er the $4 m il li on lo anwas d ep le te d, wer e p ai d b y Bart el l Dru g d ire ct ly. A pro m is so ry no te da te d J ul y

6, 2 00 1, was ex ecu te d b y EPC Two i n fa vo r of

Bart el l Dru g i n the
am ountof $ 24 8,5 62 .33 , with re sp ectto at l eas t a p orti onof t he ex pe ns es so pa id
.- 23 -

The no te bo re n o i nt eres t fo r th e fi rs t 1 80 da y s, an d t he reaf te r was to be ar i nt eres t at7% p er an nu m . Co m pl et io n a ndLeas in g o f th e Ly nn woo d S to re As the co ns tru ct io n p ha se cam e to a cl os e, EPC Two a s l an dl or d andBart el l Dru g a s t en an t en te reda le as e ag reem en t fo r th e Lynn woo d p ro pe rty andne w st or e eff ect iv e Ju ly 11, 2 00 1. Th e le as e te rm was fo r 24 m on th s b eg in ni ng Ju ne 1, 20 01 . The ren t o bl ig at io n was su m m ari zedat t he ou ts etof t he lea se as f ol lo ws: The in it ia l n etren t o f th e Leas e sh al l b e $ 9,4 93 .00 , whi chha s b een pr ev io us ly pai d b y

Tena nt . As of

th e Co m m en ce Dat e, ne t m on th ly ren t s ha ll be $2 ,00 0.0 0 p er m on th , with ato ta l n etren t u nd er the lea se no t t o e xc eed$1 9,4 13 .00 . “ Net” ren t s ha ll m eanth e am ou ntof r en t owi ng by T en an t af

te r of fs et s fo r an y

in te res t o wedby L an dl or d t o Ten an t re late d t o t he Prem is es . * * * Subs eque ntpro vi si on s s etforthfurth er d et ai ls , e.g.: Ten an t m ay

off se t the ren t o win g wi th pa ym en ts du e Ten an t u nd er th atcert ai n No te pa y ab le by L an dl or d t o Ten an t o f ev enda te he rewi th . Tenan t s ha ll als o b e res po ns ib le forpaym en t o f al l u ti li ti es , ta xe s an d i ns ur an ce o f th e Pre m is es , as s etforth be lo w. As ad di ti on al Ren t, Ten an t s ha ll m ak e al l p aym en ts du e fro m Land lo rdon th e Loa n se cu redby the Prem is es to th e ap pl ic ab le len de r. * * * The $1 9,4 13 am ou ntha d b eenex pl ai ne d b y anEPC Two o ffi cer i n afacs im il e acco m panyin g t ran sm is si on of adra ft o f th e le as e wit h t he co m m en t: “ The $1 9,4 13 ‘ cap ’ is .5% o f th e $ 2,0 04 ,06 6.9 6 s pe nton Ly nn woo d t o d at e p lu s i ts acqui si ti on co stof $ 1,8 78 ,64 0.”- 24 -

Co ns is te ntwith t he REAECA, th e le as e al so in co rp or at edin de m ni fic at io n cl au se s i n fa vo r of

EPC Two, o ne ge ne ral an d o ne sp eci fic al ly focu se d o n en vi ro nm en ta l h azar ds . In the form er, t en an t ag reedto ho ldlan dl or d h arm le ss ag ai ns t al l l iabi li ti es ari si ng fro m act s o r omiss io ns of t en an t o r vi si to rs to th e pr em is es . In the lat te r, te na ntun de rto okto in de m ni fy lan dl or d a ga in stall cla im s rel at edto ha zard ou s m at eri al s b ro ug htto or u se d o n t he pre m is es . On J ul y 18 , 20 01 , th e Ci ty of Lynn woo d i ss ue d acert ifi cat e o f oc cupa nc y fo r th e n ew Bart el l dru gs to re. InAug us t o f 20 01 , J.R. Ab bo ttsen t t o B art el l Dru g anap pl ic at io n a ndcert ifi cat io n fo r pa ym en t fo r $9 3,7 44 .05 rem ai ni ng du e o n the pr ojec t. A co nd it io na l re le as e an d wai ve r of li enrig ht s fo r th e p ro

ject, s uc h a s an y ap pl ic ab le m ech an ic ’s or s im il ar l ie n, co nt in ge ntup on pa ym en t o f th e $ 93 ,74 4.0 5,
was in cl ud edwith t he in vo ic e. Bart el l Dru g p ai d t he reque st edam ou ntby check da te d Au gu st24 , 20 01
. Agr eem en t To Sel l the Ever et t Pr op erty Mea nwh il e, Bart el l Dru g was als o p ro ceed in g wi th st ep s d ire ct edto wardth e pr op erty to be rel in qu is he d i n the ex ch an ge . In Au gu st20 00 Bart el l Dru g h ad acqui reda ret ai l dru gs to re i n Ev eret t, Wash in gt on(Eve ret t p ro pe rty), as p artof a
se ct io n 1 03 1 e xc ha ng e in vo lv in g t he sal e o f an ot he r pr op erty . Thattra ns act io n was acco m

pl is he d t hr ou gh Sect io n 1 03 1 S erv ic es , anda st atut ory warran ty deed- 25 -

fro m EPC Two t o B art el l Dru g was reco rd edon Decem be r 27 , 20 00 . In the sp rin g of 20 01 , Jea n B arb er re qu es te d fr om KeyBan k asi x- m on th ex te ns io n o n t he term of th e $ 4 m il li on Ly

nn woo d p ro pe rty loa n (o th erwi se expi rin g M ay 15 , 20 15 ). KeyBan k d oc um en ta ti on ex pl ai ni ng th e reque st , pre pa redMay 15, 2 00 1, s tate d: [T]he n ew Lynn woo d s to re u nd er co ns tru ct io n, an d wh ic h i s b ei ng fin an cedby thi s l oa n, i s n ow ap pr ox im at el y 80 % co m

pl et edan d wi ll no t b e fi ni sh edan d re ady forcu st om ers un ti l the m on th of J ul y . In ad di ti on , m an ag em en t n eed s ex trati m e aft er co m pl et io n o f th e Ly nn woo d S to re t o d et erm in e th e m os t ap pr op ria te rep aym en t s ource - ei th er fro m

sal e/ le as eb ackof t he co m pa ny’ s Whi te Cen te r St or e as or ig in al ly plann edor f

ro m th e sa le of t he ex is ti ng Ever ett St or e, whi chm ay

or m ay no t b e le as edba ckde pe nd in g o n m an ag em en t’s ne go ti at io ns onacqui si ti on of ane w Evere ttSto re s it e. The n ew m atur ity da te of t hi s l oa n wi ll affo rdm an ag em en t m or e th anad equa te ti m e to m ak e th e b es t ec on om ic an d s tra te gi c d eci si onforrep aym en t. Bart el l’s co nt in ue s t o p ro du ce ex cel le ntfin an ci al res ul ts . For t he y ear 20 00 , * * * The reque stwas app ro ve d, an d am od ifi cat io n a gr eem en t o f th e KeyBan k l oa n, da te d M ay

16 , 20 01 , was ex ecu te d b y EPC Two. On o r ab ou t Se pt em

be r 21 , 20 01 , Bart el l Dru g e nt eredin to a pu rch as e ag reem en t t o s el l the Ever et t p ro pe rty to Wil li am an d Th eres a Eng . The tra ns act io n was stru ctur edas asal e-l eas eb ack , andaft er a s eri es of a m en dm en ts ne go ti at edbe twee n B art el l Dru g a ndth e Eng s dur in g S ep te m be r an d Oct ob er, the
se ll in g p ric e was st ip ul at edat $ 4,3 00 ,25 0. Am on g o th er p ro vi si on s, the pu rch as e- 26 -

ag reem en t i nc lu de d asel le r ex ch an ge claus e st at in g: “ Bu y er ag rees to co op erat e sh ou ldSel le r el ectto sel l the pro pe rty as p artof ali ke -k in d e xc ha ng e und er IR C Sect io n 1 03 1. Se ll er’s co nt em pl at edex ch an ge sh al l n otim po se up on Buy er an y ad di ti on al li ab il ity

or f in an ci al ob li ga ti on ”. By m id -Oct ob er o f 20 01 , ho wev er, Barte ll Drug ha d re cei ve d t wo o ffer s t o pu rch as e th e Lynn woo d p ro pe rty tha t wo ul d h av e en ab le d t he co m pa ny to u se th e si te ina sa le -le as eb ackarrang em en t. Co ns eque nt ly, Bart el l Dru g m an ag em en t reque st edfro m

KeyBan k a n a dd it io na l ex te ns io n o f th e co ns tru ct io n l oa n t o ne go ti at e th atpo ss ib il ity . KeyBan k a cced edto th e reque stan d aco nc om it an t
m od ifi cat io n a nd/o r ex te ns io n a gr eem en t d at edOcto be r 17 , 20 01 , was ex ecu te d b y EPC Two. OnNov em

be r 28 , 20 01 , ho wev er, the Bart el l Dru g b oa rdof d ire ct or s ap pr ov edth e sa le of t he Ever et t s to re, o bs erv in g t ha t the “pr oc eed s wi ll be us edto pu rch as e o urst or e in Ly

nn woo d”
. Exc hang e Agr eem en t On Dec em

be r 17 , 20 01 , Bart el l Dru g a s “ Exc ha ng or ” an d S ect io n 1 03 1 Serv ic es as “ In te rm ed iary ” ex ecu te d a n e xc ha ng e ag reem en t fo r th e ex ch an ge of rel in qu is he d p ro pe rty, ide nt ifi edas t he Ever et t p ro pe rty, for re pl acement p ro pe rty, id en ti fie d a s the Ly

nn woo d p ro pe rty, in a t ran sa ct io n i nt en de d “ to qu al ify for t ax de ferr edtre atm en t u nd er I.R.C . Sect io n 1 03 1” . The ex ch an ge ag reem en t p ro vi de d- 27 -

fo r th e p ur ch as e ag reem en t wi thth e Eng s an d fo r Barte ll Drug ’s rig ht s und er the REAECA to be ass ig ne d t o S ect io n 1 03 1 S erv ic es . Sect io n 1 03 1 S erv ic es wou ld th entra ns fer the rel in qu is he d p ro pe rty to t he Eng s, ac qu ire th e rep la cem en t pr op erty fro m EPC Two, an d t ran sf

er the rep la cem en t p ro pe rty to B art el l Dru g. The se tra ns fers were t o b e acc om pl is he d t hr ou gh a di rectde ed in g m ech an is m , i.e.,
co nv ey an ce o f ti tl e b etweenBart el l Dru g a ndth e und erl y in g b uyer or s el le r at Sect io n 1 03 1 S erv ic es ’ di rect io n. Th e p ur ch as e p ric e fo r th e rel in qu is he d p ro pe rty wou ldbe pa idto Sect io n 1 03 1 S erv ic es an d u se d b y Sect io n 1 03 1 S erv ic es to acqui re the rep la cem en t p ro pe rty from EPC Two. Barte ll Drug ag reedto in de m ni fy Sect io n 1 03 1 S erv ic es fro m all lo ss inge ne ral an d fr om an y cla im s rel at edto ha zard ou s m at eri al s i n p art ic ul ar. By let te r da te d l ik ewis e Dece m be r 17 , 20 01 , Sect io n 1 03 1 S erv ic es sen t t o Bart el l Dru g, t o t he co m

pa ny’ s at to rn ey , andto th e es cro w age ntforth e Ly nn woo d t ran sa ct io n asubs ti tu te ex hi bi t fo r th e REAECA. The ex hi bi t id en ti fie d t he Ever et t p ro pe rty as the rel in qu is he d p ro pe rty for the ex ch an ge . Two furth er l et te rs of t he same dat e were s en t b y Sect io n 1 03 1 S erv ic es to th e es cro w ag en t fo r th e ap pr oa ch in g c lo si ng s, tran sm it ti ng th e ex ch an ge in te rm ed iary ’s in st ru ct io ns to esc ro w forth e rel in qu is he d a ndrep la cem en t p ro pe rty, resp ect iv el y .- 28 -

Cl os in g o f th e Exc ha ng e Fi na li zat io n o f th e tr an sf

ers of t he Ever et t an d Lynnwo odpro pe rti es to ok pl ace b etweenDecem

be r 26 , 20 01 , andJan uary 3, 2 00 2. OnDecem

be r 26 , 20 01 , Bart el l Dru g e xe cu te d an a ss ig nm en t o f th e p ur ch as e ag reem en t fo r th e Eve ret t pr op erty , andSect io n 1 03 1 S erv ic es pro vi de d n ot ifi cat io n o f th atass ig nm en t t o th e Eng s. Inco nju nc ti on th erewi th , Bart el l Dru g a ls o e xe cu te d asp eci al warran ty de edco nv ey in g t he Ever et t p ro pe rty to e nt it ie s m an ag edby the Eng s. Th e d eed
was reco rd edon Decem

be r 28 , 20 01
. On Dec em

be r 27 or 2 8, 2 00 1, EPC Two ex ecu te d ast atut ory warran ty deed
co nv ey in g t he Ly

nn woo d p ro pe rty to B art el l Dru g, an d t he de edwas re co rd edon Decem be r 31 , 20 01 . On Ja nu ary 3, 2 00 2, Bart el l Dru g e xe cu te d a n a ss ig nm en t o f 9 th e REAECA to Sect io n 1 03 1 S erv ic es . Sect io n 1 03 1 S erv ic es ha d p rev io us ly on Decem be r 17 , 20 01 , pro vi de d n ot ic e o f th e as si gn m en t t o EPC Two. Thro ug h t he res pe ct iv e es cro w pro ces se s, s al e o f th e Eve ret t p ro pe rty pr ov id eda ne t am ou ntaft er ch arg es of $ 4,1 32 ,75 2.0 9, wh ic h was ap pl ie d t owa rd pu rch as e o f th e Lynn woo d p ro pe rty. From th atba lanc e, ch arg es pa idou t o f th e es cro w in cl ud ed$1 0,2 49 .81 rem it te d t o Ex ch an ge Struc tu res as “ Fi na l Re nt Altho ug h t he pe rti ne ntsi gn atur e is da te d “ 1/ 3/ 01 ”, th e d oc um en t re fers to 9 th e p art ie s’ hav in g e xe cu te d t he ex ch an ge ag reem en t, wh ic h d idno t o ccu r un ti l Decem be r 17 , 20 01
.- 29 -

Paym en t” an d $ 1,5 00 rem it te d t o S ect io n 1 03 1 S erv ic es as “ Exc ha ng e Fee ”. An
ex ces s p aym en t o f $1 28 ,19 4.0 5 was du e fro m th e b uyer, to be furni sh edby Barte ll Dru g und er the ex ch an ge ag reem en t, t o c om pl et e th e tr an sa ct io n. Tax Rep orti ng an d Ex am in at io n Fo r 20 01 an d p rio r y ears , Bart el l Dru g fi le d wi th th e IRS Fo rm s 1 12 0S , U.S. In co m e Tax Return fo r anS Co rp or at io n. In cl ud edwith t he 20 01 return was a Fo rm 88 24 , Lik e-Ki ndExch an ge s, ad dr es si ng th e tr an sf ers of t he Ever et t an d Ly nn woo d p ro pe rti es . Bart el l Dru g re po rte d t ha t the pro pe rty reli nqui sh edinth e subjec t ex ch an ge ha d b eenacqui redon Aug us t 1 , 20 00 , andha d b eentra ns ferr ed to an ot he r pa rty onDecem be r 28 , 20 01 . The co m

pa ny furthe r rep orte d t ha t l ik eki ndpro pe rty was actua ll y rece iv edon Jan ua ry

2, 2 00 2. Th e fai r m ark etva lu e o f th e p ro pe rty recei ve d was sh own as $ 4,1 34 ,59 2 a ndth e b as is of t he pro pe rty giv en up as $ 1,3 29 ,72 9, fo r a d eferredga in of $ 2,8 04 ,86 3. Sch edul es K-1, Sh areh ol de r’s Sh are o f In co m e, Cred it s, Deduc ti on s, et c., were p rep aredforeachof B art el l Dru g’s s ha reh ol de rs , i.e., Geo rg e H. Bart el l, J r., Geo rg e D. Bart el l, an d J eanB. Barb er, s et ti ng forth hi s o r he r res pe ct iv e sh ares of Bart el l Dru g’s i te m s o f in co m e an d d educ ti on . Peti ti on ers fil edFo rm s 1 04 0, U.S. In di vi du al Inc om e Tax Return, fo r 20 01 an d s ub se qu en t years atis su e ref le ct in g, in te r al ia , am ou nt s fl owi ng th ro ug h fr om Bart el l Dru g’s co rp or at e returns . The- 30 -

ga in real iz edfro m

th e sa le of t he Ever et t p ro pe rty, hav in g b eentre at edas d eferred by Barte ll Drug , was n otrep orte d b y th e in di vi du al pe ti ti on ers . Inearl y 20 04 , th e IRS co m

m en cedanex am in at io n o f Barte ll Drug ’s 20 01
co rp or at e return. Th atau di t cu lm in at edina Fo rm 57 01 , Not ic e o f Pro po se d Adju st m en t, d at edDecem be r 10 , 20 04 , andco rres po nd in g F orm 88 6A, Exp lana ti on of I te m s. Th e si ng le ad jus tm en t p ro po se d was th e d is al lo wan ce o f ta x de ferr al tre atm en t u nd er s ect io n 1 03 1 fo r th e $ 2,8 04 ,86 3 re po rte d a s re al iz edin th e li ke -k in d e xc ha ng e in vo lv in g t he Ly nn woo d andEver et t p ro pe rti es . The
no ti ces of d efi ci en cy

un de rlyin g t he in st an t ca se s fo ll owe d, as th e res ul tant in crea se inco rp or at e in co m e fl owe d t hr ou gh to th e p ers on al returns of t he sh areh ol de rs . OPINION I. Bu rd enof P ro of As a g en eral rul e, th e Co m m is si on er’s d et erm in at io ns are p res um edco rrec t,
an d t he tax pa y er b ears th e b ur de n o f pr ov in g e rro r th erei n. Ru le 14 2( a); W el chv. Helv eri ng , 29 0 U.S. 1 11 , 11 5 (1 93 3) . Howev er, s ect io n 7 49 1( a)(1 ) m ay sh iftth e bu rd ento th e Co m

m is si on er wi th res pe ctto factua l i ss ue s af fect in g l iabi li ty for t ax whe re the tax pa y er i nt ro du ces cred ib le ev id en ce, b utth e p ro vi si onop erat es on ly whe re the tax pa y er es tabl is he s tha t h e h as co m pl ie d u nd er s ect io n 7 49 1( a)(2 ) with- 31 -

al l s ub st an ti at io n re qu ire m en ts , has m ai nt ai ne d a ll requi redreco rd s, an d h as co op erat edwith re as on ab le reque st s fo r witne ss es , in fo rm at io n, d oc um en ts , m eet in gs , andin te rv ie ws. See H.R. Con f. Rep t. No . 10 5- 59 9, at23 9- 24 0 (1 99 8) , 19 98 -3 C.B. 7 47 , 99 3- 99 4. Pet it io ne rs ass ertth atth ey ha ve m etth e rec or d re te nt io n, co op erat io n, an d in tro du ct io n o f cre di bl e ev id en ce re qu is it es fora sh iftof t he bu rd enof p ro of
. Res po nd en t ar gu es to th e co nt rary. Non ethe le ss , we fin d i t u nn eces sa ry to de ci de whe th er the bu rd ensh ou ldbe sh ift edun de r se ct io n 7 49 1( a). As wi ll be de ta il ed in fra, the cru x o f th e p art ie s’ di sa gr eem en t as to th e o ut co m e o f th es e cas es li es no t in di ffer en t v ie ws as to whatto okpl ace b utindi ffer en t p os it io ns as t o wh at st an da rdor t es t s ho ul d b e ap pl ie d i n a na lyzin g wh ethe r th os e ev en ts ge ne rat ed ta xabl e in co m e fo r pe ti ti on ers . The rel ev an t fa ct s ar e subs tant ia ll y th os e g le an ed fro m th e d oc um en tary

reco rd , th e b ul k o f whi chha s b eenst ip ul at ed . Tog ethe r with asm al l n um

be r of ad di ti on al do cu m en ts off eredat tria l, the se m at eri al s af fo rd th e Co urt a l arg el y

un co nt ro ve rte d v ie w of wh athapp en ed . Once the m or e le ga l o r th eo ret ic al qu es ti on indi sp ut e is an swe red , th e rec or d i s n otev en ly w ei gh te d a nd is su ffi ci en t fo r th e Co urt t o re nd er a d eci si on on th e m eri ts ba se d upo n a pr ep on de ran ce o f th e ev id en ce, wit ho utreg ardto th e b ur de n o f pr oo f. Becaus e th ere i s n o “ ev id en ti ary ti e” h ere, the bu rd enof p ro of ne edno t b e res ol ve d. Se e- 32 -

Bl od ge ttv. Co m

m is si on er, 3 94 F.3d10 30 , 10 39 (8t h C ir. 2 00 5) , aff’g T.C. Mem o. 20 03 -2 12
. II. Treat m en t o f th e Lynn woo d P ro pe rty Trans act io n A. Con te nt io ns of t he Part ie s Pet it io ne rs arg ue th atth e tr an sa ct io n i nv ol vi ng th e Lynn woo d p ro pe rty is pr op erl y tre at edas ali ke -k in d e xc ha ng e, thus pe rm itti ng de ferr al of i nc om e real iz edup on th e d is po si ti onof the Ever et t p ro pe rty. Resp on de nt , con ve rs el y , as se rts th atth e tr an sa ct io n i n que st io n fa il edto qu al ify for s ect io n 1 03 1 t reat m en t. The ir d iff eren ces cen te r on whet he r anex ch an ge forpu rp os es of s ect io n 1 03 1
oc cu rred . It h as be enob se rv edth atth e “ ve ry ess en ce o f anex ch an ge is th e tra ns fer o f pr op erty

be twee n o wne rs , whi le th e m arkof asal e is th e rec ei ptof c as h fo r th e p ro pe rty”. Carl to n v . Uni te d S ta te s, 3 85 F.2d23 8, 2 42 (5t h C ir. 1 96 7) . A
co ro ll ary of

th e requi rem en t o f a rec ip ro cal tra ns fer o f pr op erty be twee n o wne rs is th atth e ta xp ay er n otha ve own edth e p ro pe rty purp orte dl y rece iv edinth e ex ch an ge be fo re the ex ch an ge oc cu rs ; i f he ha s, h e h as en ga ge d i n ano nr eci pr oc al
ex ch an ge with h im se lf. “ A tax pa y er ca nn oten ga ge inanex ch an ge with h im se lf;
anex ch an ge ord in ari ly requ ire s a ‘reci pr oc al trans fer o f pr op erty , as d is ti ng ui sh ed fro m a tr an sf er o f pr op erty

form on ey

co ns id erat io n’.” DeCl een e v . Co m m is si on er, 1 15 T.C. 45 7, 4 69 (20 00 ) (ci ta ti on om it te d)
.- 33 -

Res po nd en t m ai nt ai ns th atBart el l Dru g a lre ady own edth e Ly

nn woo d pr op erty lo ng be fo re the Decem

be r 20 01 di sp os it io n o f th e Eve ret t p ro pe rty, th ereb y pre cl ud in g a ny exch an ge as o f th atda te . Peti ti on ers co nt en d t ha t Barte ll Dru g was no t the n t he own er o f th e Lynn woo d p ro pe rty; rathe r, EPC Two m us t b e tre at edas the own er. The se di ffer en t re su lt s, i n turn, ar e ex pl ai ne d b y th e d iff eren t te st s emplo y edby the pa rti es to an swe r th e o wne rs hi p que st io n. Pe ti ti on ers cla im th atanag en cy

an al y si s i s the ap pr op ria te st an da rdan d t ha t s uc h a n a na lysis sh ou ld be em pl oyed i n am an ne r co ns is te ntwith t he wid e la ti tu de hi st or ic al ly perm it te d i n th e co nt ex t o f li ke -k in d e xc ha ng es . Res po nd en t, o n t he othe r ha nd , adv oc at es ap pl ic at io n o f a b en efi ts an d b ur de ns an al y si s as th e tr ad it io na l t es t i n t he m yria d of si tu at io ns rai si ng qu es ti on s o f ta x o wne rs hi p o f pr op erty . B. Sta tu to ry

Pri nc ip le s an d R eg ul at ory Deve lo pm en ts Gen eral ly, un de r se ct io ns 61 (a)( 3) an d 1 00 1( c), t ax pay ers m us t re co gn iz e al l ga in or l os s re al iz edup on th e sa le or e xc ha ng e o f pr op erty . Sect io n 1 03 1, ho wev er, p ro vi de s an ex cep ti on whi chall ows tax pa y ers to de fer re co gn it io n o f ga in or l os s o n e xc hang es of l ik e-k in d p ro pe rty hel d fo r pr oduc ti ve us e in a tr ad e orbu si ne ss or f

orin ve st m en t. The st atut e se ts forth insec ti on 10 31 (a) the fo ll owi ng ge ne ral rul e: “No g ai n o r lo ss sh al l b e rec og ni zedon th e ex ch an ge of pr op erty he ldforpro du ct iv e u se ina tr ad e o r bu si ne ss or f orin ve st m en t i f su ch- 34 -

pr op erty is ex ch an ge d s ol el y

for pro pe rty of l ik e k in d wh ic h i s t o b e h el d e ithe r fo r pr oduc ti ve us e in a tr ad e o r bu si ne ss or f orin ve st m en t.” Th is ge ne ral rul e fo r no nr eco gn it io n m an da te s tha t qua li fy in g p ro pe rty be ex ch an ge d “ so le ly” for o th er qu al ifyin g p ro pe rty. In th e ev en t tha t n on -li ke -k in d p ro pe rty, inc lu di ng cas h, i s rece iv edina tr an sa ct io n o th erwi se withi n t he pu rv ie w of the st atut e, se ct io n 10 31 (b ) es tabl is he s a r eg im e whe reb y an y ga in real iz edon th e ex ch an ge is
reco gn iz edto th e ex te ntof t he so -cal le d b oo t, i .e., th e n on qu al ifyin g p ro pe rty. Any gai n n otreco gn iz edis th ende ferr edth ro ug h o pe rat io n o f se ct io n 1 03 1( d) , un de r whi chth e b as is of p ro pe rty acqu ire d i n ali ke -k in d e xc ha ng e equa ls th e ba si s o f th e p ro pe rty tran sf erre d, l es s an y

cas h re cei ve d andlo ss reco gn iz ed , pl us an y ga in reco gn iz ed
. The pu rp os e fo r th e fo reg oi ng de ferr al ha s b eenid en ti fie d i n juris pr ud en ce in vo lv in g s ect io n 1 03 1 a ndit s p red eces so r st atut es as r es ti ng on th e la ckof a ny m at eri al ch an ge inth e ta xp ay er’s eco no m ic po si ti on . Comm is si on er v . P.G. Lake, In c., 35 6 U.S. 2 60 , 26 8 (1 95 8) ; DeC le en e v . Commis si on er, 1 15 T.C. at 4 66 ; Ko ch v. Co m m is si on er, 7 1 T.C. 5 4, 6 3- 64 (19 78 ). The n ew pr op erty is subs tant ia ll y

a co nt in ua ti on of t he tax pa y er’s i nv es tm en t i n t he ol d p ro pe rty, sti ll un li qu id at ed ; th e ta xp ay er’s fu nd s re m ai n t ie d up i n t he same kin d o f pr op erty . Comm is si on er v .- 35 -

P.G. Lake , Inc ., 35 6 U.S. at26 8; Koch v. Co m m is si on er, 7 1 T.C. at63 -6 4; H.R. Rep t. No . 73 -7 04 (19 34 ), 19 39 -1 C.B. (Part 2 ) 55 4, 5 64
. Giv enth atrat io na le , cou rts have freque nt ly int erp ret edth e requi rem en ts of
se ct io n 1 03 1 l ib eral ly, ex hi bi ti ng a le ni en t at ti tu de to wardtax pa y ers ’ at te m pt s t o co m e wit hi n i ts term s. See , e.g., St ark er v . Uni te d S ta te s, 6 02 F.2d13 41 , 13 52
- 13 53 (9t h C ir. 1 97 9) ; DeC le en e v . Commis si on er, 1 15 T.C. at 4 67 ; Bi gg s v . Co m m is si on er, 6 9 T.C. 9 05 , 91 3- 91 4 (1 97 8) , aff’d, 6 32 F.2d11 71 (5t h C ir. 1 98 0)
. The Co m m is si on er l ik ewis e h as oft entak ena si m il ar ap pr oa chinreg ul at io ns pr om ul ga te d a ndgu id an ce i ss ue d u nd er s ect io n 1 03 1, ev enaffo rd in g v ari ou s s afe ha rb or s fo r tr an sa ct io ns . Secs . 1.1 03 1( a)-1 to 1.1 03 1( k) -1 , Inc om e Tax Reg s. Su chbre adth ha s d ev el op edin crem en ta ll y ov er t im e, as wil l b e se eninth e di sc us si on in fra. The word s “ li ke ki nd ” as us edinsec ti on 10 31 are d efi ne d t o “ ha ve refe ren ce t o t he na tu re o r ch arac te r of th e p ro pe rty andno t t o i ts gra de or qua li ty.” Sec. 1 .10 31 (a)- 1( b) , Inc om e Tax Reg s. Itis th e “ ki ndor c la ss ” o f th e p ro pe rty tha t
m us t b e th e sa m e, su chth atth e “ factth atan y real est at e in vo lv edis im pr ov edor un im pr ov edis no t m at eri al , forth atfactrel at es on ly to the gra de or qua li ty of th e pr op erty an d n otto it s k in d o r cl as s.” Id
.- 36 -

His to ric al ly, th ere h as ne ve r be enan y qu es ti on th atsec ti on 10 31 as or ig in al ly enact edco ve redsi m ul tane ou s ex ch an ge s b etweentwo parti es . See, e.g ., St ark er, 6 02 F.2d13 41 ; Al de rs on v. Co m m is si on er, 3 17 F.2d79 0 (9 th Cir . 19 63 ),
rev ’g 38 T.C. 21 5 (1 96 2) ; an d c as es di sc us se d t he rei n. Ho wev er, fo ll owi ng cas es fin di ng a br oa de r rea ch , th e st atut e it se lf a ndreg ul at ory di rect iv es were l ik ewis e wid en edex pl ic it ly to ad dr es s v ari ou s d eferredex ch an ge s (wh ere t he ex ch an ge of pr op ert ie s i s n otsi m

ul tane ou s) an d m

ul ti pa rty tran sa ct io ns (whe re thi rd -p arty ex ch an ge faci li tato rs are u se d t o e ffec t the ex ch an ge ). Forin st an ce, aft er St ark er, 60 2 F .2d13 41 , Con gr es s amend edsec ti on 10 31 (a) e xp res sl y to san ct io n s pe ci fie d de ferr edex ch an ge s b y

ad di ng th e fo ll owi ng : (3 ) Requi rem en t tha t p ro pe rty be i de nt ifi edan d t ha t ex ch an ge be co m pl et edno t m or e th an18 0 d ay s af te r tr an sf er o f ex ch an ge d pr op erty .--Fo r pu rp os es of t hi s s ub se ct io n, an y pro pe rty recei ve d b y th e ta xp ay er s ha ll be tre at edas p ro pe rty whic h i s n otli ke -k in d pr op erty if-
- (A) s uc h p ro pe rty is n otid en ti fie d a s p ro pe rty to b e rece iv edinth e ex ch an ge on or b efo re the da y whi chis 45 da y s aft er the da te on whi chth e ta xp ay er tran sf ers th e p ro pe rty rel in qu is he d i n t he ex ch an ge , or (B) s uc h p ro pe rty is re cei ve d a fte r th e ear li er o f-- (i) th e d ay

whi chis 18 0 d ay s af

te r th e d at e o n whi chth e ta xp ay er tran sf ers th e p ro pe rty reli nqui sh edin th e ex ch an ge , or- 37 - (ii ) th e due da te (de te rm in edwith re ga rdto ex te ns io n) forth e tr an sf

ero r’s return o f th e ta x i m po se d by thi s ch ap te r fo r th e ta xabl e y ear i n wh ic h t he trans fer of th e rel in qu is he d p ro pe rty occu rs . Co m pr eh en si ve reg ul at io ns were l at er i ss ue d i n s ect io n 1 .10 31 (k )-1 , Inc om e Tax Reg s., t o fa ci li tate de ferr ed“ fo rward ” ex ch an ge s (i .e., wher e th e ta xp ay er rece iv es rep la cem en t p ro pe rty after th e d at e o f hi s tran sf

er o f rel in qu is he d pr op erty ) withi n t he co nf in es of t he st atut ory

ti m e li m it s. (Ho wev er, the Secr et ary ex pr es sl y de cl in edto pro vi de gu id an ce wi th res pe ctto de ferr ed“ rev ers e”
ex ch an ge s (i .e., wher e th e ta xp ay er re cei ve s re pl acement p ro pe rty befo re the da te of hi s tran sf

er o f rel in qu is he d p ro pe rty)). See T.D. 83 46 , 19 91 -1 C.B. 1 50 , 15 1. As h as be enno te d b y

th is Co urt: “ The se reg ul at io ns , with t he ir p ro vi si on s fo r us e of th ird -p arty

‘ qu al ifi edin te rm ed iarie s’ as a cco m m od at io n t it le ho ld ers , who wil l
no t b e co ns id eredth e ta xp ay er’s ag en t i n d oi ng th e m ul ti pa rty defe rredex ch an ge s pe rm it te d b y

th e reg ul at io ns , hav e en co ur ag edth e g ro wth of ane w in du stry of th ird -p arty

ex ch an ge faci li ta to rs .” DeCl een e v . Commis si on er, 1 15 T.C. at 4 67
. Non ethe le ss , eve n wi th th es e reg ul at ory de ve lo pm en ts , th e fu ll reac h a nd
ran ge of t ran sa ct io ns en ti tl edto pro te ct io n u nd er s ect io n 1 03 1 re m ai ne d u ns et tl ed , as was m ad e cl ear i n t he pre am bl e to th e reg ul at io ns : Sect io n 1 03 1( a)(3 ) of

th e Co de an d § 1.1 03 1( a)-3 of the pr op os edreg ul at io ns ap pl y to de ferr edex ch an ge s. Th e p ro po se d- 38 -

reg ul at io ns de fin e a d eferredex ch an ge as a n e xc hang e in whi ch , pu rs uantto anag reem en t, the tax pa y er tran sf ers pro pe rty hel d fo r pr oduc ti ve us e in a tr ad e o r bu si ne ss or f orin ve st m en t (t he “ rel in qu is he d p ro pe rty”) an d s ub se qu en tl y rece iv es pro pe rty to b e he ldeithe r fo r pr oduc ti ve us e in a tr ad e o r bu si ne ss or f orin ve st m en t (th e “ rep la cem en t p ro pe rty”). The p ro po se d re gu la ti on s d o n otap pl y to tra ns act io ns inwhi chth e ta xp ay er re cei ve s the rep la cem en t pr op erty pri orto th e d at e o n wh ic h t he tax pa y er tran sf ers th e rel in qu is he d p ro pe rty (so -cal le d “ rev ers e-St ark er” t ran sa ct io ns .) * * *
* * * * * * * Howev er, the Serv ic e wil l co nt inue to stud y th e ap pl ic ab il ity

of t he ge ne ral rul e o f se ct io n 1 03 1( a)(1 ) to th es e tr an sa ct io ns . T.D. 834 6, 1 99 1- 1 C .B. at 1 50 -1 51
. The va cuum

inan y admin is tra ti ve gu id an ce co nc ern in g re ve rs e ex ch an ge s was no t al le vi at edun ti l the is su an ce b y th e IRS of R ev . Pro c. 20 00 -3 7, 2 00 0- 2 C.B. 3 08 . The rev enue pro cedur e ad dr es se d s pe ci fie d “pa rk in g” arrang em en ts an d pr ov id ed
a sa fe h arb orun de r whi chth e In te rn al Rev enue Serv ic e wil l n ot ch al le ng e (a) th e qua li fic at io n o f pr op erty as e ithe r “ rep la cem en t pr op erty ” o r “ rel in qu is he d p ro pe rty” * * * fo r pu rp os es of § 10 31 of th e In te rn al Rev enue Co de an d t he reg ul at io ns th ereu nd er o r (b ) th e tre atm en t o f th e “ ex ch an ge acco m m od at io n t it le ho ld er” as th e [ 1 0 ] be ne fic ia l o wne r of

su chpro pe rty for fe de ral in co m e ta x p ur po se s, i f Und er Re v. Pr oc . 20 00 -3 7, 2 00 0- 2 C .B. 30 8, the “ ex ch an ge 1 0 acco m m od at io n t it le ho ld er” i s, g en eral ly, a p ers on othe r th anth e ta xp ay er wh o i s subjec t t o F ed eral in co m e ta x a ndwho ho ld s l eg al ti tl e to , or o th er i nd ic iaor own ers hi p o f, pr op erty

in te nd edto be ex ch an ge d i n atra ns act io n qua li fy in g u nd er se c. 10 31 . See Re v. Pr oc . 20 00 -3 7, s ec. 4 .02 (1 ), 20 00 -2 C.B. at30 9.- 39 -

th e p ro pe rty is h el d i n a“ qu al ifi edex ch an ge acco m m od at io n arra ng em en t” (QEAA) * * * Id . sec . 1, 2 00 0- 2 C .B. at 3 08
. The rev enue pro cedur e was effe ct iv e fo r qu al ifi edex ch an ge acco m m od at io n arra ng em en ts en te redin to by an ex ch an ge acco m m od at io n t it le ho ld er o n o r aft er Sep te m be r 15 , 20 00 . Id. s ec. 5 , 20 00 -2 C.B. at31 0. Co nv ers el y , perth e pr oc edur e, [n ]o in fere nc e is in te nd edwith re sp ectto th e fed eral in co m e ta x tre atm en t o f arra ng em en ts si m il ar t o t ho se de sc rib edinth is rev enue pr oc edur e th atwere en te redin to pri or to th e eff ect iv e d at e o f th is rev enue pro cedur e. Furth er, the Serv ic e rec og ni zes th at“pa rk in g” tra ns act io ns canbe acco m pl is he d o ut si de of t he saf e h arb orpro vi de d in th is rev enue pro cedur e. Acco rd in gl y , no in fere nc e is in te nd edwith res pe ctto th e fed eral in co m e ta x t reat m en t o f “park in g” trans act io ns th atdo no t s at is fy

th e te rm s o f th e sa fe h arb orpro vi de d i n thi s rev enue pro cedur e, whe th er en te redin to pri or to or a fte r th e eff

ect iv e da te of thi s re ve nu e p ro cedur e. Id . sec . 3.0 2, 2 00 0- 2 C .B. at 3 08
. The rev enue pro cedur e o bs erv edth atinth e y ears si nc e th e d eferredforward
ex ch an ge reg ul at io ns were p ub li sh ed , tax pa y ers ha d att em pt edto stru ctur e a wid e va rie ty of rev ers e “pa rk in g” tra ns act io ns arrang ed“ so th atth e acc omm od at io n pa rty has en ou gh of the be ne fit s an d b ur de ns rel at in g t o the pro pe rty” to be tre at ed
as th e o wne r. Id. s ec. 2 .05 , 20 00 -2 C.B. at30 8. Th e p ro cedur e th enim po se d t im e li mit s p aral le li ng th os e fo r de ferr edex ch an ge s (4 5 a nd18 0 d ay s) an d e nu m erat ed- 40 -

sp eci fic co nt ractua l p ro vi si on s an d/ orrel at io ns hi ps th atwou ldno t b e co ns id ered fat al to tre atm en t o f th e “ ex ch an ge acco m m od at io n t it le ho ld er” a s the own er o f th e rep la cem en t o r rel in qu is he d p ro pe rty for Fe de ral in co m e ta x p ur po se s. Id . sec . 4, 20 00 -2 C.B. at30 9. C. App li cat io n o f Cas el aw Pri nc ip le s Bart el l Dru g u nd ert oo k t he tra ns act io n i nv ol vi ng th e Lynn woo d p ro pe rty be fo re Re v. Pr oc 20 00 -3 7, s up ra, was publ is he d o n Oct ob er 2 , 20 00 . See Re v. Pro c. 20 00 -3 7, 2 00 0- 40 I.R.B. 3 08 . There is no di sp ut e th atRev . Pro c. 20 00 -3 7,
supr a, is in ap pl ic ab le . EPC Two acqui redti tl e o n Au gu st1, 2 00 0, b efo re the
rev enue pro cedur e’s effe ct iv e d at e, an d t he co m pl et e tr an sa ct io n c on su m ed17
m on th s, wel l b ey on d t he 18 0 d ay s tha t wo ul d h av e b eenall owe d fo r cl os in g t he tra ns act io n u nd er i t. Hen ce, ea chsi de co nt en ds forit s re sp ect iv e p os it io n o n whe th er a qua li fy in g e xc ha ng e o ccu rredby drawi ng onge ne ral tax pri nc ip le s an d
cas el aw itco ns id ers ap pl ic ab le
. The fun da m en ta l que st io n i n d et erm in in g wh ethe r se ct io n 1 03 1 app li es he re is whethe r anex ch an ge oc cu rred . The an swe r to th atin qu iry will de pe nd , inth is
co nt ex t an d a s fr am edby the pa rti es ’ po si ti on s, o n wh ethe r wha t h ap pe ne d h ere sh ou ldbe de em eda se lf- ex ch an ge . A sel f-ex ch an ge , inturn , wil l b e sa idto ha ve- 41 -

tra ns pi redif B art el l Dru g wo ul d b e co ns id eredth e o wne r of th e Lynn woo d pr op erty fortax pu rp os es be fo re ac qu iri ng ti tl e in Decem be r of 20 01
. Res po nd en t co nt en ds th atBart el l Dru g a lre ady own edth e Lynn woo d pr op erty at t he ti m e o f th e d is pu te d e xc ha ng e b ecau se Bart el l Dru g- -n otEPC Two-- ha d a ll th e b en efi ts an d b ur de ns of o wne rs hi p o f th e p ro pe rty; na m el y , th e cap aci ty to b en efi t fr om

an y ap pr eci at io n i n t he pro pe rty’ s v al ue , th e ri skof l os s fro m an y di m in ut io n i n i ts va lu e, an d t he ot he r bu rd en s o f own ers hi p s uc h a s t ax es an d l iabi li ti es ari si ng fro m th e p ro pe rty. By

co ntras t, re sp on de ntco nt en ds , EPC Two d idno t p os se ss any

of t he be ne fit s an d b ur de ns of o wne rs hi p o f th e p ro pe rty; itha d n o e qu ity

in te res t i n t he pro pe rty, it h adm ad e n o e co no m ic ou tl ay to acqui re it , itwas n otat r is k wi th res pe ctto th e p ro pe rty becaus e al l the fin an ci ng was no nr eco ur se as t o i t, i t p ai d n o re al est at e ta xe s, an d t he co ns tru ct io n o f im pr ov em en ts onth e p ro pe rty was fi na nc edan d d ire ct edby Barte ll Drug . Mo reo ve r, res po nd en t co nt en ds , Bart el l Dru g h adpo ss es si on an d c on tro l o f th e pr op erty du rin g t he en ti re p eri odEPC Two h el d t it le , firs t b y vi rtu e o f th e REAECA pro vi si on s g iv in g i t co nt ro l o ve r th e co ns tru ct io n o f si te im pr ov em en ts
an d t he n p os se ss io n thr ou gh a le as e th atEPC Two was ob li ga te d u nd er the REAECA to ex te ndto it , forren t equa l t o t he de btservi ce o n t he KeyBan k l oa n pl us EPC Two’s fee forho ld in g t it le . Res po nd en t’s p os it io n i s tha t a b en efi ts an d- 42 -

bu rd en s t es t, wh ic h i s u se d i n m an y co nt ex ts to de te rm in e o wne rs hi p o f pr op erty fo r Fed eral tax pu rp os es , see , e.g., Gro dt& McKa y Real ty, In c. v. Co m

m is si on er, 77 T.C. 12 21 , 12 37 -1 23 8 (1 98 1) , sh ou ldbe ap pl ie d i n t he co nt ex t o f a cl ai m of
se ct io n 1 03 1 t reat m en t t o d et erm in e who own s the rep la cem en t p ro pe rty, as be twee n ath ird -p arty

ex ch an ge faci li ta to r who tak es leg al ti tl e to itto faci li ta te an ex ch an ge an d the tax pa y er wh o u lt im at el y rece iv es itat the ti m e o f th e ex ch an ge . Pet it io ne rs po in t o ut , ho wev er, tha t b oth t hi s C ou rt andth e Co urt o f App eal s fo r th e Nin th Cir cu it , to whi chanap pe al inth is cas e wou ldord in ari ly lie, s ee s ec. 74 82 (b ), ha ve ex pr es sl y

reject edth e p ro po si ti on th ata pe rs onwho tak es ti tl e to th e rep la cem en t p ro pe rty for the pu rp os e o f effe ct in g asec ti on 10 31 ex ch an ge m us t as su m e th e b en efi ts an d b ur de ns of o wne rs hi p i n t ha t p ro pe rty to s at is fy th e ex ch an ge requi rem en t. As t he Co urt o f App eal s fo r th e Nin th Cir cu itpo in te d o ut in Ald ers on v. Co m

m is si on er, 3 17 F.2dat 7 95 : [O]ne n eedno t as su m e th e b en efi ts an d b ur de ns of o wne rs hi p i n pr op erty be fo re ex ch an gi ng itbu t m ay pro pe rly acqu ire ti tl e so le ly for th e p ur po se of e xc hang e an d a ccep t t it le an d tran sf er i t i n e xc ha ng e fo r ot he r li ke pro pe rty, all a s a p artof t he same tran sa ct io n wi th no res ul ti ng ga in whi chis reco gn iz ab le un de r Sec ti on 10 02 of t he In te rn al Rev enue Co de of 1 95 4. W e h av e fo ll owe d Al de rs oninacco rd in g s ect io n 1 03 1 t reat m en t i n ava rie ty of tra ns act io ns wher e th e ta xp ay ers us eda th ird -p arty ex ch an ge faci li ta to r to tak e- 43 -

ti tl e to th e rep la cem en t p ro pe rty to e ffec t an ex ch an ge of p ro pe rty in f orm , who
was co nt ractua ll y

in su la te d fr om

an y be ne fic ia l o wne rs hi p o f th e rep la cem en t pr op erty . See, e.g ., Garci a v . Comm is si on er, 8 0 T.C. 4 91 (19 83 ); B ark er v . Co m m is si on er, 7 4 T.C. 5 55 (19 80 ); B ig gs v. Co m m is si on er, 6 9 T.C. 9 05 . Whe n th e th ird -p arty

ex ch an ge faci li tato r ha s b eenco nt ractua ll y ex cl ud edfro m be ne fic ia l o wne rs hi p p ur su an t t o t he ag reem en t u nd er wh ic h h e h ol ds ti tl e to th e rep la cem en t p ro pe rty for the tax pa y er, tha t b en efi ci al own ers hi p n eces saril y res id es with t he tax pa y er o nc e ti tl e h as be enob ta in edfro m th e se ll er o f th e rep la cem en t p ro pe rty. Andy etth e th ird -p arty ex ch an ge faci li ta to r, rathe r th anth e ta xp ay er, h as be entre at edas t he own er o f th e rep la cem en t p ro pe rty at th e ti m e o f th e ex ch an ge inth e cas es cit edab ov e. Oth erwi se , a di squa li fy in g s el f-ex ch an ge co ul d b e sa idto ha ve oc curred
. The so m ewh atform al is ti c ap pr oa chof t he cas el aw on whi chpe ti ti on ers rel y is pe rh ap s b es t ex pl ai ne d b y th is Co urt’s o bs erv at io ns ov er 3 5 years a go inBark er v. Co m m is si on er, 7 4 T.C. at56 0- 56 1, 5 65 : The to uc hs to ne of s ect io n 1 03 1 * * * is th e requi rem en t tha t the re b e anex ch an ge of l ik e-k in d b us in es s o r in ve st m en t p ro pe rti es , as di st in gu is he d fr om

a cas h s al e o f pr op erty

by the tax pa y er an d a rei nv es tm en t o f th e p ro ceed s i n o th er p ro pe rty. The “ ex ch an ge ” requi rem en t p os es anan al yti cal pro bl em be cau se itrun s h ead lo ng in to th e fam il iar ta x l aw m ax im th atth e- 44 -

subs tanc e o f a tran sa ct io n c on tro ls ov er fo rm . In a s en se , th e subs tanc e o f a tran sa ct io n i n wh ic h t he tax pa y er s el ls pro pe rty and imm ed ia te ly rein ve st s the pro ceed s i n l ik e-k in d p ro pe rty is n otm uc h di ffer en t fr om

th e subs tanc e o f a tran sa ct io n i n wh ic h t wo p arce ls are ex ch an ge d wi th ou t ca sh . * * *
* * * * * * * [T]he co nc ep tu al di st in ct io n b etweenanex ch an ge qu al ifyin g fo r se ct io n 1 03 1 o n t he on e h an d a nda sa le an d re in ve st m en t o n t he ot he r is lar ge ly one of f

orm . Pet it io ne rs furth er p oi ntou t tha t s et tl edcas el aw ha s p erm itte d t ax pa y ers to ex erci se an y

nu m be r of in di ci a o f own ers hi p a ndco ntro l o ve r th e rep la cem en t pr op erty be fo re i t i s tran sf

erre d t o t he m , witho utjeop ard iz in g s ect io n 1 03 1
ex ch an ge tre atm en t. As we no te d i n B ig gs v. Co m m is si on er, 6 9 T.C. at91 3- 91 4: [C]ou rts ha ve pe rm it te d t ax pa y ers gre atlat itud e in stru ctur in g [s ect io n 1 03 1 e xc ha ng e] tran sa ct io ns . * * * Th e ta xp ay er ca n l oc at e su it ab le pro pe rty to b e rec ei ve d i n e xc ha ng e an d c anen te r in to ne go ti at io ns for

th e acqui si ti on of s uc h p ro pe rty. Coas ta l Term in al s, In c. v. Un it edSta te s, 3 20 F.2d33 3, 3 38 (4t h C ir. 1 96 3) ; Al de rs onv. Co m m is si on er, 3 17 F.2dat 7 93 ; Co up e v . Comm is si on er, 5 2 T.C. at 39 7- 39 8. Mo reo ve r, th e ta xp ay er ca n o ve rs ee i m pr ov em en ts onth e landto be acqui red(J.H. Ba irdPubl is hi ng Co . v. Co m m is si on er, 3 9 T.C. at 6 11 ) an d c anev enadva nc e m on ey to wardth e p ur ch as e p ric e of th e p ro pe rty to b e acqui redby exch an ge (12 4 F ro ntStr eet , Inc . v. Co m m is si on er, 6 5 T.C. 6 , 15 -1 8 (1 97 5) ). Pro vi de d t he fin al res ul t i s anex ch an ge of p ro pe rty for o th er p ro pe rty of a l ik e k in d, the tra ns act io n wi ll qu al ify un de r se ct io n 1 03 1. [ 1 1 ] Thi s d is cu ss io n o f th e la ti tu de affo rd edtax pa y ers instru ctur in g s ec. 1 03 1 1 1 tra ns act io ns was l at er quo te d i n fu ll with app ro va l b y th e Co urt o f App eal s fo r th e

(co nt in ue d...)- 45 -

InBig gs , th e ta xp ay er was li ke wis e p erm it te d t o a dv an ce the fun ds forth e pu rch as e o f th e rep la cem en t p ro pe rty, where t it le was tran sf erre d fr om

th e se ll er t o a th ird -p arty

ex ch an ge faci li tato r an d h el d b y itun ti l the ex ch an ge was e ffec te d. Id . at 9 08 -9 09
. Res po nd en t, h owe ve r, rel ie s i n p art ic ul ar o n o ur m or e rec en t d eci si on in DeCl een e, in whi chwe em pl oyed a b en efi ts an d b ur de ns an al y si s i n re jecti ng th e ta xp ay er’s cl ai m

of s ect io n 1 03 1 t reatm en t, as supp ort fo r hi s co nt en ti on th ata th ird -p arty

ex ch an ge faci li ta to r--h ere, EPC Two--m us t h ol d t he be ne fit s an d bu rd en s o f own ers hi p o f th e rep la cem en t p ro pe rty in o rd er t o b e tr eat edas i ts own er atth e ti m e o f th e ex ch an ge . In DeC le en e we co nc lu de d, u si ng a be ne fit s an d b ur de ns an al y si s, tha t the tax pa y er h adbe ne fic ia l o wne rs hi p o f th e rep la cem en t p ro pe rty at th e ti m e o f th e ex ch an ge , eve n t ho ug h h e h adarrang edfor th e tr an sf er o f le ga l t it le to th e rep la cem en t p ro pe rty to t he pu rch as er o f hi s rel in qu is he d p ro pe rty. H is purp orte d e xc hang e o f th e rel in qu is he d a nd rep la cem en t p ro pe rti es was the refo re n o m or e th ananex ch an ge with h im se lf. “ A ta xp ay er ca nn oten ga ge inanex ch an ge with h im se lf; anex ch an ge ord in ari ly

(...co nt in ue d) 1 1 Nin thCir cu it . Starke r v. Un it edSta te s, 6 02 F.2d13 41 , 13 53 n.1 0 (9 th Cir . 19 79 ).- 46 -

requi res a ‘recip ro cal tra ns fer o f pr op erty ’”. DeCl een e v . Comm is si on er, 1 15 T.C. at46 9 (c it at io n o m it te d)
. The tax pa y er i n DeC le en e h adm ad e anou tri gh t p ur ch as e o f th e rep la cem en t pr op erty (th e Lawren ce Dri ve pro pe rty), whic h was un im pr ov edlan d, m or e th ana y ear b efo re the pu rp orte d e xc ha ng e. Id . at 4 59 , 46 8. Th en , when ap pr oa ch edby a pr os pe ct iv e p ur ch as er (WLC) of the pro pe rty the tax pa y er wi sh edto rel in qu is h (th e Mc Don al d S tre etpro pe rty), th e ta xp ay er was advi se d h e co ul d e ffec t a s ect io n 10 31 ex ch an ge of t he McDo na ldStr eetpro pe rty for the Lawren ce St reetpro pe rty. Id . at 4 59 . In an effo rt t o a cco m pl is h a n e xc hang e, th e ta xp ay er fi rs t tran sf erre d th e Lawren ce St reetpro pe rty to WLC inSep te m be r--s ub ject t o areac qu is it io n ag reem en t u nd er wh ic h WLC agr eedto co nv ey th e Lawren ce Dri ve pro pe rty back to th e ta xp ay er b y

y eare nd , with abu il di ng co ns tru ct edon itinth e in te rim pu rs ua ntto th e ta xp ay er’s d ire ct io n a ndat h is ex pe ns e. Id. at46 8- 46 9. WLC 1 2 pu rp orte d t o p ur ch as e th e Lawren ce Dri ve pro pe rty by gi vi ng th e ta xp ay er h is
no n- in te res t-b eari ng , no nr eco ur se no te for$1 42 ,40 0. Id . at 4 60 . The p art ie s ag reedth at$1 42 ,40 0 was th e v al ue of b ot h t he Lawren ce Dri ve pro pe rty in i ts un im pr ov edst at e an d the McDo na ldStr eetpro pe rty. Id. at 4 63 . Once The co ns tru ct io n l oa n fo r th e b ui ld in g was no nr eco ur se to W LC an d 1 2 gu aran te edby the tax pa y er. DeCl een e v . Comm is si on er, 1 15 T.C. 45 7, 4 61 (2 00 0)
.- 47 -

co ns tru ct io n o f th e b ui ld in g o n t he Lawren ce Dri ve pro pe rty was co m pl et e, bu t n o la te r th any eare nd , th e p art ie s’ agr eem en t ca ll edforanex ch an ge of p ro pe rti es whe reb y th e ta xp ay er wo ul d d eedth e Mc Don al d S tre etpro pe rty to WLC and W LC wou ldintu rnde edth e Lawren ce Dri ve pro pe rty backto th e ta xp ay er an d pa y off hi s $ 14 2,4 00 pro m is so ry no te (th e co ns id erat io n i t g av e fo r th e p ur po rte d pu rch as e o f th e Lawren ce Dri ve pro pe rty). Id. at46 0- 46 1. Th e ex ch an ge of d eed s an d p aym en t o f th e n ot e were a cco m pl is he d thr ee m on th s l at er as cal le d fo r un de r th e ag reem en t. Id . at 4 63
. The tax pa y er cl ai m edth athe ha d e ffec te d atax ab le sal e o f th e Lawren ce Driv e p ro pe rty to WLC, fol lo wedby his tra ns fer o f th e Mc Don al d S tre etpro pe rty to W LC ina li ke -k in d e xc ha ng e fo r W LC’s reco nv ey an ce t o h im of t he Lawren ce Driv e p ro pe rty. The Co m m is si on er d et erm in edth atth e ta xp ay er h adm ad e a 1 3 ta xabl e sa le of t he McDo na ldStr eetpro pe rty to WLC. Inres ol vi ng th e is su e, aft er n ot in g t he hi st or ic al ly len ie ntatt itud e o f co urts to ward s t ax pa y ers inli ke -k in d e xc hang e cas es , we pu t co ns id erab le em ph as is on th e ta xp ay er’s fai lu re t o u se a th ird -p arty ex ch an ge faci li ta to r. The subjec t tran sa ct io ns pre se nta cas e o f fi rs t i m pr es si onin th is Co urt. The y

refl ectth e eff

ort o f * * * [t he tax pa y er] andhi s The tax pa y er p refe rreda ta xabl e sa le of h is hi gh -b as is Lawren ce Dri ve 1 3 pr op erty to a ta xabl e sa le of h is lo w-b as is McDo na ldStr eetpro pe rty.- 48 -

advi so rs to im

pl em en t a s o- cal le d re ve rs e ex ch an ge di rect ly w ith W LC, witho utth e p art ic ip at io n o f a thi rd -p arty ex ch an ge faci li ta to r. * * *
* * * * * * * Inth e cas e atha nd , * * * [the tax pa y er] di d n otjus t l oc at e an d id en ti fy th e Lawren ce Dri ve pro pe rty in a nt ic ip at io n o f acqui rin g i t as rep la cem en t p ro pe rty in e xc ha ng e fo r th e Mc Don al d S tre etpro pe rty th athe in te nd edto rel in qu is h. He p ur ch as edth e Lawren ce Dri ve pr op erty witho utth e p art ic ip at io n o f anex ch an ge faci li ta to r a y ear o r m or e b efo re h e was ready to rel in qu is h t he McDo na ldStr eetpro pe rty * * * . Inth e fo ll owi ng y ear, * * * [th e ta xp ay er] tran sf erre d t it le to th e Lawren ce Dri ve pro pe rty, sub ject t o areac qu is it io n a gr eem en t-- th e ex ch an ge ag reem en t-- no t t o ath ird -p arty ex ch an ge faci li ta to r, bu t to W LC, th e p arty

to whi chhe si m

ul tane ou sl y

ob li ga te d h im se lf t o rel in qu is h t he McDo na ldStr eetpro pe rty. * * * Infor eg oi ng th e u se of ath irdpa rty anddo in g a ll th e tr an sf ers with WLC, * * * [t he tax pa y er] andhi s ad vi se rs create d a n i nh eren tl y am bi gu ou s s itua ti on . * * * DeCl een e v . Comm is si on er, 1 15 T.C. at 4 67 -4 69 (em ph as is ad de d)
. W e an al yzedth e tr an sa ct io n t o d et erm in e whe th er the tax pa y er, h av in g acqui redth e Lawren ce Dri ve pro pe rty ou tri gh t an d d ire ct ly hel d i t fo r m or e th ana y ear, ac tu al ly cease d b ei ng it s o wne r fo r ta x p ur po se s dur in g t he th ree- m on th pe rio d t ha t WLC hel d l eg al ti tl e in an ti ci pa ti on of asec ti on 10 31 ex ch an ge . If no t, th enth e ta xp ay er h adm erel y en ga ge d i n a n e xc ha ng e wit h h im se lf, ra th er tha n the reci pr oc al ex ch an ge of p ro pe rty nece ss ary fo r se ct io n 1 03 1 t reat m en t. Id . at 4 69
. W e em pl oyed a b en efi ts an d b ur de ns tes t t o d et erm in e th e o wne rs hi p que st io n,- 49 -

co nc lu di ng th atW LC ne ve r acqui redan y of the be ne fit s an d b ur de ns of o wne rs hi p of th e Lawren ce Dri ve pro pe rty, as itacqui redno equi ty int eres t, m ad e n o eco no m ic ou tl ay

to acqui re the pro pe rty, was no t atris k b ecau se it s o bl ig at io ns in th e tr an sa ct io n wer e al l n on reco ur se , andwas o bl ig at edto reco nv ey th e p ro pe rty to th e ta xp ay er. Id . at 4 69 -4 70 . As a co ns eque nc e, “ [i]n s ub st an ce, * * * [th e ta xp ay er] nev er d is po se d o f th e Lawren ce Dri ve pro pe rty andrem ai ne d i ts own er du rin g t he 3-mont h c on st ru ct io n p eri odbe cau se th e tr an sf er o f ti tl e to W LC ne ve r di ve st ed* * * [t he tax pa y er] of b en efi ci al own ers hi p.” Id. at47 1. We th eref or e co nc lu de d t ha t a s ect io n 1 03 1 e xc ha ng e h adno t o ccu rred
. Inco nt en di ng th atDeCl een e supp orts hi s p os it io n t ha t EPC Two --a thi rd
pa rty exch an ge faci li ta to r--h adto po ss es s the be ne fit s an d b ur de ns of o wne rs hi p of th e Lynn woo d p ro pe rty in o rd er fo r EPC Two t o b e tr eat edas i ts own er fo r ta x pu rp os es be fo re the ex ch an ge , res po nd en t i nt erp ret s tha t ca se to o b ro ad ly. Giv en th e DeCl een e Opi ni on ’s exp li ci t an d re pe at edem ph as is up on th e ta xp ay er’s fai lu re to us e a thi rd -p arty

ex ch an ge faci li ta to r, itm us t b e sa idth atDeCl een e d idno t ad dr es s the cir cu m st an ces wher e a thi rd -p arty ex ch an ge faci li ta to r is us edfro m th e ou ts etina rev ers e ex ch an ge . Mor eo ve r, th e ta xp ay er i n DeC le en e h adacqui red th e p ur po rte d re pl acement p ro pe rty ou tri gh t, an d h el d t it le to itdi rect ly w itho ut
an y ti tl e-h ol di ng in te rm ed iary , for m or e th ana y ear b efo re tran sf erri ng ti tl e to- 50 -

W LC. Thi s fe atur e al so di st in gu is he s DeC le en e fro m th e m yria d o f cas es wher e ta xp ay ers see ki ng sec ti on 10 31 tre atm en t wer e car efu l t o i nt erp os e a t it le -h ol di ng in te rm ed iary

be twee n t he m se lv es an d o ut rig htown ers hi p o f th e rep la cem en t pr op erty . In s um , DeCle en e d oe s n otdi ct at e a res ul t fo r res po nd en t h ere. Ouran al y si s m

us t al so tak e in to acco un t the po si ti on of the Co urt o f App eal s fo r th e Nin th Cir cu it , wher e anap pe al inth is cas e wou ldli e ab se nt st ip ul at io n t o t he co nt rary. See s ec. 7 48 2( b) (1 )(A), (2 ); Go ls env. Co m mis si on er, 54 T.C. 74 2, 7 57 (19 70 ), aff’d, 4 45 F.2d98 5 (1 0t h C ir. 1 97 1)
. As p rev io us ly 1 4
no te d, tha t Co urt o f App eal s h as ex pr es sl y reject edth e co nt en ti on th atth e p arty to th e ex ch an ge with t he tax pay er m us t p os se ss th e b en efi ts an d b ur de ns of
own ers hi p o f th e rep la cem en t p ro pe rty in o rd er fo r th e ex ch an ge to qu al ify for
se ct io n 1 03 1 t reat m en t. Ald ers on v. Co m m is si on er, 3 17 F.2dat 7 95
. The tax pa y ers inAld ers on ha d e xe cu te d aco nt ractto sel l the ir B ue naPark pr op erty to All oy Die Cas ti ng Co . (All oy) for $ 17 2,8 71 .40 , pu rs ua ntto anesc ro w ag reem en t u nd er wh ic h Al lo y ha d d ep os it ed10 % of t he pu rch as e p ric e in to es cro w. The t ax pa y ers th enfou ndth e Sal in as pro pe rty, andde ci de d t ha t the y wis he d t o o bt ai n i t t o re pl ace t he Bu en a Park p ro pe rty. T he tax pa y ers an d Al lo y InDeCl een e we n ot edth e p au ci ty of ap pl ic ab le sec . 10 31 cas es inth e 1 4 Co urt o f App eal s fo r th e Sev en th Cir cu it , wher e th e ap pe al inth atcas e la y . DeCl een e v . Comm is si on er, 1 15 T.C. at 4 72
.- 51 -

th ereupo n a m en de d t he esc ro w agr eem en t t o p ro vi de th atAll oy woul d a cqui re the Sal in as pro pe rty andex ch an ge itforth e Bu en a Park p ro pe rty “ in li euof t he
or ig in al co nt em

pl at edcas h t ran sa ct io n.” Id. a t 7 91
. As re co un te d b y

th e Co urt o f App eal s fo r th e Nin th Cir cu it , th e ta xp ay ers th ento oka se rie s o f st ep s wi thres pe ctto th e Sal in as pro pe rty--th e rep la cem en t pr op erty --tha t warran t cl os e sc ru ti ny in v ie w of the arg um en ts res po nd en t h as adva nc edinth is cas e. The t axpa y ers ne go ti at edth e $ 19 0,0 00 sal e p ric e o f th e Sal in as pro pe rty with it s o wne rs an d t he n, o n Au gu st19 , 19 57 , th ro ug h wri tt en in st ru ct io ns to th e Sal in as Tit le Guar an te e Co . (Sal in as Tit le ) ex ecu te d o n tha t da te , th e ta xp ay ers di ct at edth e te rm s fo r th e d is po si ti on of t he Sal in as pro pe rty. 1 5 Id . The i ns tru ct io ns pro vi de d t ha t the tax pa y ers wou ldm ak e th e $ 19 ,00 0 do wnp aym en t fo r th e p ro pe rty (whi chth ey pa idin to th e Sal in as esc ro w th e n ex t da y ) an d t ha t t it le to th e Sal in as pro pe rty woul d b e ta ke n i n t he nam e o f Sal in as Tit le . Id. The in st ru ct io ns furth er au th or iz edSal in as Tit le “ to de edth e Sal in as pr op erty to All oy, pro vi de d S al in as Tit le co ul d ‘imm ed ia te ly recor d ade edfro m All oy * * * to James Ald ers on an d C laris saE. Alde rs on , hi s wi fe [the tax pa y ers ], is su in g fi na l t it le ev id en ce i n t he las t m en ti on edgra nt ees .’ ” Id
. The se esc ro w in st ru ct io ns forth e d is po si ti on of t he rep la cem en t p ro pe rty 1 5 were en ti tl ed“ Bu y er’s In st ru ct io ns ”, th e Co urt o f App eal s n ot ed . Ald ers on v. Co m m is si on er, 3 17 F.2d79 0, 7 91 (9t h C ir. 1 96 3) , rev ’g 38 T.C. 21 5 (1 96 2)
.- 52 -

By de edda te d t he ne xtda y

(Aug us t 2 0, 1 95 7) , ti tl e to th e Sal in as pro pe rty was trans ferr edto Sal in as Tit le . Ald ers on v. Co m m is si on er, 3 17 F.2dat 7 91 . By de eddate d Au gu st21 , 19 57 , Sal in as Tit le co nv ey edth e Sal in as pro pe rty to Al lo y . Id . By de eddate d Au gu st26 , 19 57 , th e ta xp ay ers co nv ey edth e Bu en a Park pr op erty to All oy, andby deedda te d Au gu st29 , 19 57 , All oy con ve y edth e Sal in as pr op erty to th e ta xp ay ers . Id. at79 1- 79 2. OnSep te m be r 3, 1 95 7, Al lo y

de po si te d th e $ 17 2,8 71 .40 pu rch as e p ric e o f th e Bu en a Park p ro pe rty int o t he Sal in as esc ro w with i ns tru ct io ns th atitbe us edto pu rch as e th e Sal in as pro pe rty. Id. at 7 92 . That
am ount , to ge th er wi th th e $ 19 ,00 0 p rev io us ly dep os it edby the tax pa y ers , sl ig ht ly
ex ceed edth e $ 19 0,0 00 pu rch as e p ric e o f th e Sal in as pro pe rty, andth e ex ces s was refu nd edto th e ta xp ay ers . Id. Th e fo ll owi ng da y , all of t he for eg oi ng de ed s 1 6
were re co rd ed . Id. The tax pa y ers to okth e p os it io n t ha t the y ha d e ffec te d asec ti on 10 31
ex ch an ge of t he Bu en a Park p ro pe rty for the Sal in as pro pe rty, butth e Co m m is si on er d is ag reed , arg ui ng th atth ey ha d s ol d t he Bu en a Park p ro pe rty to All oy andpu rch as edth e Sal in as pro pe rty, in p artbe cau se All oy nev er h el d a

The 10 % de po si t tha t Al lo y ha d p rev io us ly pla cedin to esc ro w to pu rch as e 1 6 th e Bu en a Park p ro pe rty was ref un de d t o i t. Ald ers on v. Co m m is si on er, 3 17 F.2d at79 2.- 53 -

“ real ” in te res t i n t he Sal in as pro pe rty--th atis , th e rep la cem en t p ro pe rty. Id. at 7 95
. The Co urt o f App eal s re

jecte d t he Co m

m is si on er’s arg um en t. [T]here was no ne edfor

All oy to a cqui re a “ real ” in te res t i n t he Sal in as pro pe rty by

ass um in g t he be ne fit s an d b ur de ns of o wne rs hi p to m ak e th e ex ch an ge qu al ify un de r th e st atut e al th ou gh * * * [the Co m m is si on er] ass ert s tha t fa il ur e o f All oy to h ol d a“ real ” in te res t i n th e Sal in as pro pe rty prec lu de d t he trans act io ns in vo lv edfro m be in g co ns tru edas c on st itut in g a n e xc ha ng e. [O]ne n eedno t as su m e th e b en efi ts an d b ur de ns of o wne rs hi p i n pr op erty be fo re ex ch an gi ng itbu t m ay pro pe rly acqu ire ti tl e so le ly for th e p ur po se of e xc hang e an d a ccep t t it le an d tran sf er i t i n e xc ha ng e fo r ot he r li ke pro pe rty, all a s a p artof t he same tran sa ct io n wi th no res ul ti ng ga in whi chis reco gn iz ab le un de r Sec ti on 10 02 of t he In te rn al Rev enue Co de of 1 95 4. Id
. Neit he r Sal in as Tit le , th e th ird -p arty ex ch an ge faci li ta to r, no r All oy, the acqui rer o f th e ta xp ay er’s rel in qu is he d p ro pe rty, ass um edan y be ne fit s o r bu rd en s of th e Sal in as pro pe rty (th e rep la cem en t p ro pe rty) bef or e th e ex ch an ge . Sali na s Tit le ob ta in edti tl e to th e Sal in as pro pe rty subjec t t o aco nt ractua l o bl ig at io n i n the Bu y er’s In stru ct io ns to tra ns fer i t t o Al lo y . ThenAll oy ob ta in edti tl e to th e pr op erty un de r a co ntractua l o bl ig at io n t ha t i t i m m ed ia te ly tran sf

er t it le to th e ta xp ay ers . Con se qu en tl y , th e b en efi ci al own ers hi p o f th e Sal in as pro pe rty ne ces sa ril y

res id edwith t he tax pa y ers du rin g t he pe rio d t ha t Sa li na s Ti tl e an d All oy hel d b are l eg al ti tl e to th e p ro pe rty; itco ul d b e n owh ere e ls e. Thu s, the- 54 -

ta xp ay ers inAld ers on he ldth e b en efi ts an d b ur de ns of t he rep la cem en t p ro pe rty be fo re the ex ch an ge . Und er the th eo ry adva nc edby resp on de ntinth is cas e, th e Ald ers on tax pa y ers wou ldha ve en ga ge d i n adi squa li fy in g e xc ha ng e wit h th em se lv es . The Co urt o f App eal s, h owe ve r, tre at edAll oy’ s n om in al own ers hi p of th e rep la cem en t p ro pe rty as s uf fic ie ntto est ab li sh anex ch an ge forpurp os es of
se ct io n 1 03 1. The tra ns act io n i n Al de rs on was aforwardex ch an ge th atsp anne d ap pr ox im at el y

th ree m on th s fr om

th e ti m e th e ta xp ay ers fir stex ecu te d aco nt ract fo r th e sa le of t he ir r el in qu is he d p ro pe rty un ti l the de edtra ns fers effe ct in g t he
ex ch an ge of t he rel in qu is he d a ndrep la cem en t p ro pe rti es were m ad e. Sal in as Tit le he ldti tl e to th e rep la cem en t p ro pe rty for o nl y 10 da y s, an d Al lo y

he lditon ly in st an tane ou sl y . Yet the same pri nc ip le th attre at eda th ird -p arty ex ch an ge faci li ta to r, ho ld in g b are l eg al ti tl e b utno be ne fic ia l i nt eres t i n t he rep la cem en t pr op erty , as the own er o f th atpro pe rty for p ur po se s o f a s ect io n 1 03 1 e xc ha ng e is al so ev id en t i n B ig gs v. Co m m is si on er, 6 32 F.2d11 71 , a cas e whe re the ex ch an ge faci li ta to r he ldth e rep la cem en t p ro pe rty m uc h l on ge r. InBig gs , th e th ird -p arty

ex ch an ge faci li ta to r he ldbare l eg al ti tl e b utno be ne fic ia l i nt eres t i n t he rep la cem en t p ro pe rty from th e ti m e th e rep la cem en t pr op erty was p ur ch as ed(with the tax pa y er’s fund s) un ti l t it le was tran sf erre d t o- 55 -

th e ta xp ay er-- a p eri odof app ro xi m at el y 4 1 /2 m on th s. Inth atcas e, th e ta xp ay er ag reedto sel l h is Marylan d p ro pe rty (th e rel in qu is he d p ro pe rty) to Po well , bu t on ly as pa rt o f anex ch an ge foran ot he r pr op erty . Powel l ag reedto co op erat e in th e arr an ge m en ts foranex ch an ge . The t axpa y er i de nt ifi eda rep la cem en t pr op erty , th e Vir gi ni a p ro pe rty, exec ut eda sa le s co nt ractforit s p ur ch as e in whi ch th e p ur ch as er was de sc rib edas t he tax pa y er “ (act in g a s ag en t fo r synd ic at e)”, an d
supp li edth e d ownpa ym en t. Id . at 1 17 3. Po well , ho wev er, was “ ei th er u nabl e o r un wil li ng ” to tak e ti tl e to th e Vir gi ni a p ro pe rty andso th e ta xp ay er arran ge d fo r th e ti tl e to be tra ns ferr edto Sh or e Tit le Co ., Inc . (Sh or e), a co rp or at io n c on tro ll ed by the tax pa y er’s at to rn ey . Id. Befo re the tra ns fer o f ti tl e, th e ta xp ay er an d S ho re en te redin to anag reem en t co nc ern in g t he Virg in iapro pe rty tha t en ti tl edeit he r to reque stth atti tl e b e co nv ey edto th e ta xp ay er o r hi s n om in ee i n e xc hang e fo r th e p ric e Sh or e p ai d fo r th e p ro pe rty, plu s an y

co st s Sh or e in cu rredinho ld in g the pro pe rty, anda co m m it m en t b y

th e ta xp ay er o r hi s n om in ee t o re le as e Sh or e fro m , or c au se Sh or e to be rel eas edfro m , any ob li ga ti on s o f Sh or e ari si ng fro m it s ac qu iri ng or h ol di ng th e p ro pe rty. Id. On J anua ry 9, 1 96 9, the sal es co nt racton th e Vir gi ni a p ro pe rty was clo se d a ndti tl e was tra ns ferr edto Sh or e. Id . The t axpa y er ad va nc edto Sh or e- 56 -

th e rem ai ni ng cas h due th e se ll er, $ 11 5,6 55 .14 , andSh or e as su m edli ab il it ie s o f $1 42 ,54 4.8 6, b ot h a m ount s b ei ng sec ur edby deed s o f trus t o n t he pro pe rty. Id. Sh or e th enhe ldth e Vir gi ni a p ro pe rty for the ne xt4 1 /2 m on th s, dur in g whi chti m e iten te redin to a co nt ractto sel l the Virg in iapro pe rty to P owe ll , and Po well th ereupo n a ss ig ne d i ts co nt ractrig htto pu rch as e th e Vir gi ni a p ro pe rty to th e ta xp ay er as pa rt o f th e co ns id erat io n fo r anag reem en t p ur su an t t o wh ic h t he ta xp ay er ag reedto sel l the Marylan d p ro pe rty to P owe ll . Big gs v. Co m m is si on er, 63 2 F .2dat 1 17 4. Th e v ari ou s co nt ract s wer e cl os ed(1) on May 24, 1 96 9, wh en Sh or e ex ecu te d ade edto th e Vir gi ni a p ro pe rty to t he tax pa y er an d t he tax pa y er as su m edall of S ho re’s l iabi li ti es with re sp ectto th e p ro pe rty andrel eas edSh or e fro m it s o bl ig at io n t o re pa y

th e p ur ch as e m on ey

th e ta xp ay er h adpre vi ou sl y adva nc edan d (2 ) on May 26, 1 96 9, wh enth e ta xp ay er d eed edth e Mary land pr op erty to Po well ’s ass ig ne e. Id . at 1 17 5. The Co urt o f App eal s fo r th e Fi fth Cir cu itan d t hi s C ou rt b ot h c on cl ud ed th ata se ct io n 1 03 1 e xc ha ng e h adoc cu rred , reject in g t wo ar gu m en ts advanc edby th e Co m m is si on er. The Co m

m is si on er arg ue d t ha t n o e xc hang e h adoc cu rred be cau se Po well ne ve r rec ei ve d l eg al ti tl e to th e Vir gi ni a p ro pe rty (th e rep la cem en t pr op erty ), bu t ea chCo urt fo un d P owe ll ’s exc ha ng e o f hi s ri gh t t o a cqui re the Virg in iapro pe rty (rath er tha n t it le to th e p ro pe rty its el f) s uf fic ie nt . Id. at11 76
-- 57 -

11 77 ; Bi gg s v . Comm is si on er, 6 9 T.C. at91 4- 91 6. Of g reat er p ert in en ce h ere, bo th Co urts als o re

jecte d t he Co m

m is si on er’s arg um en t, p rem is edon th e fac t tha t th e ta xp ay er h adadvanc edall th e fu nd s fo r th e rep la cem en t p ro pe rty’ s p ur ch as e, th atSh or e was th e ta xp ay er’s ag en t. Bi gg s v . Comm is si on er, 6 32 F.2dat 1 17 8; Bi gg s v . Comm is si on er, 6 9 T.C. at91 7. Th e Co urt o f App eal s re co gn iz edth atif Sh or e were treat edas t he tax pa y er’s ag en t “ th e ex ch an ge wou ldha ve be en m ean in gl es s” be cau se “ in ess en ce, * * * [th e ta xp ay er] wou ldha ve m erel y effe ct ed
anex ch an ge with h im se lf.” Big gs v. Co m m is si on er, 6 32 F.2dat 1 17 8. In st ead , each Co urt co nc lu de d t ha t Sh or e to okti tl e to th e rep la cem en t p ro pe rty: “ to faci li ta te anex ch an ge ” (Tax Co urt), B ig gs v. Co m mis si on er, 6 9 T.C. at91 7, o r “ to faci li ta te th e ex ch an ge ” (Co urt o f App eal s) , Big gs v. Co m m is si on er, 6 32 F.2dat 11 78 . The i nc id en ts of o wne rs hi p S ho re as su m edwere thu s s uf fic ie ntforitto be tre at edas the own er o f th e rep la cem en t p ro pe rty durin g t he pe rio d i t h el d t it le
. Oth erwi se , th e ta xp ay er, wh o s up pl ie d t he fun ds forth e rep la cem en t p ro pe rty’ s pu rch as e, wou ldha ve be enth e o wne r an d asel f-ex ch an ge in el ig ib le forsec ti on 10 31 tre atm en t wo ul d h av e o ccu rred
. Not ab ly for the is su e atha nd , Sho re d idno t h av e an y be ne fic ia l o wne rs hi p of th e rep la cem en t p ro pe rty. Sho re m ad e n o o ut lay to acqui re the rep la cem en t pr op erty an d h el d t it le to itsubjec t t o c on tra ctua l p ro vi si on s tha t p recl ud edth e- 58 -

co m pa ny from

be ne fit in g fr om

an y ap pr eci at io n i n t he pro pe rty’ s v al ue or f ro m be in g e xp os edto an y

ris k o f lo ss fro m

a di m in ut io n i n i ts va lu e o r an y li ab il ity ari si ng fro m

ho ld in g t it le . The ag reem en t b etweenSh or e an d t he tax pa y er, s etou t in de ta il ineach co urt’s o pi ni on , gav e th e ta xp ay er a “ cal l” on th e rep la cem en t pr op erty at a ny tim e fo r co ns id erat io n e qu al to th e p ric e Sh or e p ai d t o a cqui re the pr op erty , pl us any

co st s Sh or e in cu rredto ho ldth e p ro pe rty, andsat is fact io n o r rel eas e o f Sh or e fro m

an y ob li ga ti on s i t as su m edor b ecame bo un d b y as ares ul t o f ho ld in g t it le . Sho re co ul d l ik ewis e “pu t” th e p ro pe rty to t he tax pa y er fo r th e sa m e co ns id erat io n. Itis th us read il y ap pa ren t tha t the tax pa y er, n otSh or e, he ldth e be ne fit s an d b ur de ns of o wne rs hi p o f th e rep la cem en t p ro pe rty durin g t he pe rio d Sh or e h el d l eg al ti tl e. Neve rth el es s Sh or e, a th ird -p arty ex ch an ge faci li ta to r, was tre at edas the own er o f th e rep la cem en t p ro pe rty for p ur po se s o f sa ti sf

y in g t he
ex ch an ge requi rem en t o f se ct io n 1 03 1. Thu s, Al de rs on an d B ig gs est ab li sh th atwher e a s ect io n 1 03 1 e xc hang e is
co nt em pl at edfro m

th e o ut se t an d ath ird -p arty ex ch an ge faci li ta to r, rathe r th anth e ta xp ay er, t ak es ti tl e to th e rep la cem en t p ro pe rty befo re the ex ch an ge , th e 1 7 Res po nd en t ci te s i n s up po rt o f hi s p os it io n anu m be r of cas es wher e th e 1 7 ta xp ay ers m ad e o ut rig htpurch as es of t he rep la cem en t p ro pe rty andth en subs eque nt ly sou gh t t o re tro fitth e tr an sa ct io n i nt o t he form of asec . 10 31 ex ch an ge . See, e.g ., Bezd jianv. Co m

m is si on er, 8 45 F.2d21 7 (9 thCir . 19 88 ), (co nt in ue d...)- 59 -

ex ch an ge faci li tato r ne edno t as su m e th e b en efi ts an d b ur de ns of o wne rs hi p o f th e rep la cem en t p ro pe rty in o rd er t o b e tr eat edas i ts own er fo r se ct io n 1 03 1 p ur po se s be fo re the ex ch an ge . Res po nd en t co nt en ds th atAld ers on , Big gs , andth e ta xp ay er-f av or ab le cas es we ci te d i n B ig gs are i napp os it e b ecau se th ey co nc ern edforwardex ch an ge s an d a
rev ers e ex ch an ge is at i ss ue he re. W e d is ag ree. Fi rs t, al th ou ghBig gs is
so m et im es ch arac te riz edas i nv ol vi ng a fo rwardex ch an ge , th e tr an sa ct io n a t i ss ue in Big gs was a ctua ll y

a rev ers e ex ch an ge as t ha t t erm ha s b eende fin edby
res po nd en t. Inth e p ream bl e to th e reg ul at io ns pro m ul ga te d a s s ect io n 1 .10 31 (k )- 1, In co m e Tax Reg s., g ov ern in g fo rwardex ch an ge s, the Secr et ary ex pr es sl y ex cl ud edrev ers e ex ch an ge s fr om co ve rag e b y

th os e reg ul at io ns , def

in in g re ve rs e ex ch an ge s as “ tra ns act io ns inwhi chth e ta xp ay er re cei ve s the rep la cem en t pr op erty pri orto th e d at e o n wh ic h t he tax pa y er tran sf ers th e rel in qu is he d pr op erty ”. T.D. 834 6, 1 99 1- 1 C .B. at 1 50 -1 51 ; s ee al so Rev . Pro c. 20 00 -3 7, s ec. (...co nt in ue d) 1 7 aff’g T.C. Me m o. 1 98 7- 14 0; Dib sy v. Co m m is si on er, T.C. Mem o. 1 99 5- 47 7; Lee v. Co m m is si on er, T.C. Mem o. 1 98 6- 29 4. Ba rte ll Drug m ad e n o s uc h o ut rig ht pu rch as e h ere; itin te rp os eda th ird -p arty ex ch an ge faci li ta to r be twee n i ts el f an d ti tl e to th e rep la cem en t p ro pe rty in c on te m pl at io n o f a s ec. 1 03 1 e xc ha ng e fro m th e o ut se t. The se cas es are the refo re n othe lp fu l o n the qu es ti on of wh ethe r th e th ird -p arty

ex ch an ge faci li ta to r is to be tre at edas the own er o f th e rep la cem en t pr op erty forFed eral in co m e ta x p ur po se s b efo re the ex ch an ge .- 60 -

2.0 4, 2 00 0- 2 C .B. at 3 08 . In Bi gg s, al th ou ghth e ta xp ay er an d P owe ll in it ia ll y ex ecu te d a“ m em or an du m of i nt en t” co ve rin g t he sal e o f th e rel in qu is he d p ro pe rty on Octo be r 25 , 19 68 , th ey ab an do ne d t ha t ag reem en t af te r th e ta xp ay er’s at to rn ey rev ie wedit , andin st eadag reedto ha ve th ei r res pe ct iv e at to rn ey s “ work o utth e te rm s o f a wri tt enex ch an ge ag reem en t.” Bi gg s v . Comm is si on er, 6 32 F.2dat 11 73 . There aft er, the sal es co nt ractonth e rep la cem en t p ro pe rty (th e Vir gi ni a pr op erty ) was clo se d (a ndti tl e tr an sf erre d t o t he th ird -p arty

ex ch an ge faci li ta to r)
on Jan uary

9, 1 96 9, wh erea s the co nt ractforth e sa le of the rel in qu is he d p ro pe rty (th e Mary landpro pe rty) was n otex ecu te d u nt il Feb ru ary 27 , 19 69 , andth e tr an sf er of th e rel in qu is he d p ro pe rty didno t o ccu r un ti l M ay 26 , 19 69 . Id. at11 74 -1 17 5. Co ns eque nt ly, th e p rin ci pl es of B ig gs are ap pl ic ab le to rev ers e ex ch an ge s. Seco nd , eve n fo rwardex ch an ge cas es , in cl ud in g Al de rs on an d tho se th at pe rm it“ gr eatlat itud e” t o t ax pa y ers instru ctur in g s ect io n 1 03 1 t ran sa ct io ns , St ark er, 6 02 F.2dat 1 35 3 n .10 , ana lyze th e rel at io ns hi p t o t he rep la cem en t pr op erty of t he tax pa y er v ers us th e th ird -p arty ex ch an ge faci li ta to r, an d treatth e la tt er as th e o wne r be fo re the ex ch an ge , ty pi cal ly not withs tand in g t he utte rly

“ tra ns it ory ”, Bark er v . Comm is si on er, 7 4 T.C. at56 5, an d n om in al na tu re o f th at own ers hi p. Inou r vi ew, th is an al y si s o f th e rel at io ns hi p o f th e ta xp ay er t o t he rep la cem en t p ro pe rty, as co m pa redto anex ch an ge faci li ta to r ho ld in g b are l eg al- 61 -

ti tl e, is equa ll y

ap pl ic ab le ina rev ers e ex ch an ge , as the ho ld in g i n B ig gs co nf irms. See a ls o DeGr oo t v . Exch an ge d Ti tl es (Inre Exc hang edTit le s, In c.), 1 59 B.R. 3 03 (Ban kr . C.D. Cal. 1 99 3) (“ [T]he tr an sf er o f le ga l t it le is su ffi ci en t t o e ffec tu at e a rev ers e I.R.C. § 10 31 ex ch an ge in vo lv in g a n a cco m m od at or [.]”). To b e su re, the tra ns act io n a t i ss ue in vo lv eda pe rio d b efo re co ns umm at io n of th e ex ch an ge durin g wh ic h EPC Two was ob li ga te d t o, an d i n fa ctdi d, l eas e th e rep la cem en t p ro pe rty to B art el l Dru g. Barte ll Drug lea se d t he rep la cem en t pr op erty an d u se d i t as a drug st or e fo r ap pr ox im at el y si x m on th s, fr om

th e co m pl et io n o f th e im

pr ov em en ts inearl y

Ju ly 201 1 u nt il co ns umm at io n o f th e ex ch an ge at yearen d. Th ere was no su chlea si ng of t he rep la cem en t p ro pe rty to th e ta xp ay er b y

th e ex ch an ge faci li ta to r in Big gs or Al de rs on . Neverth el es s, g iv en th atth e cas el aw ha s co un te na nc eda ta xp ay er’s p re-e xc ha ng e co nt ro l an d fin an ci ng of t he co ns tru ct io n o f im pr ov em en ts on th e rep la cem en t p ro pe rty whil e anex ch an ge faci li ta to r he ldti tl e to it , see J.H. Bai rdPubl ’g. Co. v . Comm is si on er, 39 T.C. 60 8, 6 10 -6 11 (19 62 ), we se e n o re as onwhy th e ta xp ay er’s p re-e xc ha ng e, te m po rary pos se ss io n o f th e rep la cem en t p ro pe rty purs ua ntto a le as e fro m th e ex ch an ge faci li tato r sh ou ldpro du ce a d iff eren t re su lt
. 1 8 W e n ot e in th is reg ardth atth e sa fe h arb or s ex te nd edto rev ers e ex ch an ge s 1 8 in Rev . Pro c. 20 00 -3 7, s up ra, co ve r th e ex ch an ge acco m m od at io n t it le ho ld er’s

(co nt in ue d...)- 62 -

It i s al so tru e th atth e tr an sa ct io n a t i ss ue sp an ne d agre at er p eri odth an th os e co un te na nc edinAld ers on an d B ig gs , whi chsp an ne d t hr ee an d 4 1/ 2
m on th s, re sp ect iv el y . Und er the term s o f th e REAECA, EPC Two as a pr act ic al
m at te r co ul d h av e h el d t it le to th e Lynn woo d p ro pe rty for up t o 2 4 m on th s an d i n 1 9 factEPC Two h el d t it le for 17 m on th s. Giv enth e in ap pl ic ab il ity of R ev . Pro c. 20 00 -3 7, s up ra, t o t he tra ns act io n a t i ss ue , th e cas el aw pr ov id es no sp eci fic li m it
on th e p eri odinwhi cha th ird -p arty ex ch an ge faci li ta to r m ay ho ldti tl e to th e rep la cem en t p ro pe rty befo re the ti tl es to th e rel in qu is he d a ndrep la cem en t pr op ert ie s ar e tr an sf

erre d i n arev ers e ex ch an ge . W e ex pr es s n o o pi ni onwith 2 0 (...co nt in ue d) 1 8 le as in g o f th e rep la cem en t p ro pe rty to t he tax pa y er, al be itwithi n the ti m e li m it s im po se d the rei n. Id . sec . 4.0 3( 4) , 20 00 -2 C.B. 3 08 , 31 0. W e co nc lu de , gi ve n t ha t u nd er the REAECA th e p ur ch as e p ric e Barte ll 1 9 Dru g was ob li ga te d t o p ay forth e Lynn woo d p ro pe rty wentfro m (i) th e acqui si ti on co stof t he real pro pe rty andim pr ov em en ts to (ii ) th e p arce l’s fa ir m ark etva lu e, aft er EPC Two ha d h el d t it le for24 m on th s, tha t the po ss ib il ity th at Bart el l Dru g wo ul d fa il to pu rch as e th e Lynn woo d p ro pe rty befo re the ex pi rat io n of th at24 m on th s was to o re m ot e to be co ns id ereda pr act ic al po ss ib il ity . Inscrut in iz in g t he len gt h o f th e p eri oddurin g wh ic h EPC Two h el d t it le to 2 0 th e rep la cem en t p ro pe rty befo re i ts tra ns fer t o B art el l Dru g, we d o n otsu gg es t tha t th e tr an sa ct io n a t i ss ue fai le d t o c om pl y with t he ti m e li m it s o f se c. 10 31 (a)( 3) , no r do th e p art ie s d is pu te th atpo in t. The 45 - an d 1 80 -d ay pe rio ds inwhi chth e ta xp ay er m

us t i de nt ify the rep la cem en t p ro pe rty andrece iv e it , res pe ct iv el y , beg in to run on “ th e d at e o n wh ic h t he tax pa y er tran sf ers th e p ro pe rty reli nqui sh edinth e ex ch an ge ”. Sec. 1 03 1( a)(3 )(A) an d (B ). As the tra ns fer o f th e Eve ret t p ro pe rty (co nt in ue d...)- 63 -

res pe ctto th e ap pl ic ab il ity of s ect io n 1 03 1 t o arev ers e ex ch an ge tra ns act io n t ha t ex te nd s b ey on d t he pe rio d a t i ss ue inth es e cas es . In v ie w of the fin it e p eri od s i n whi chth e ex ch an ge faci li ta to r in th es e cas es co ul d h av e h el d, an d i n fa ctdi d h ol d, ti tl e to th e rep la cem en t p ro pe rty, we are sa ti sf ie d t ha t the tra ns act io n qua li fie s fo r se ct io n 1 03 1 t reat m en t u nd er ex is ti ng cas el aw pr in ci pl es . Fo r th e fo reg oi ng reas on s, we co nc lu de an d h ol d t ha t Ba rte ll Drug ’s di sp os it io n o f th e Eve ret t p ro pe rty andacqui si ti on of t he Ly nn woo d p ro pe rty in 20 01 qu al ify for n on reco gn it io n t reatm en t p ur su an t t o s ect io n 1 03 1. To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te redfor pe ti ti on ers .

(...co nt in ue d) 2 0 oc cu rredon Decem

be r 28 , 20 01 , andBart el l Dru g re cei ve d t it le to th e Lynn woo d pr op erty on Decem

be r 31 , 20 01 , th e ta xp ay ers sat is fie d t ho se ti m e li m it s.