office_of_chief_counsel internal_revenue_service memorandum number release date cc pa apjp b02 amielke gl-110393-06 uilc date date to edwin a herrera associate area_counsel laguna niguel group small_business self-employed from blaise g dusenberry special counsel procedure administration subject response to potential assessment statute extension this memorandum responds to your request for assistance this advice may not be used or cited as precedent legend corporation x ---------------------------------------------- officer y ----------------- date ----------------------- date --------------------- date ------------------- date ------------------- date ------------------- date ------------------- date ------------------ date ---------------- date ------------------ gl-110393-06 issues whether a form_2750 waiver extending statutory period for assessment of the trust fund penalty executed during the day extension of the assessment_period provided by sec_6672 is valid and enforceable conclusions a form_2750 waiver executed during the day extension of the assessment_period provided by sec_6672 is a valid and enforceable agreement to extend the period of assessment facts corporation x had an assessed unpaid balance for employment_tax for the 3rd quarter of this assessment was based on a return filed by the taxpayer on date the tax reported thereon was assessed on date the limitations_period on assessment began on date and was due to expire on date pursuant to sec_6672 a_trust fund recovery penalty investigation was initiated and several officers of corporation x were recommended for assertion of the penalty the assertion recommendation was made on date which was the last day of limitations_period on assessment on the same day letter notice of proposed assessment was issued and mailed by certified mail to all of the officers listed on the form_4183 recommendation of assertion of trust fund penalty as responsible for the penalty as a result of the issuance of letter the assessment statute was automatically extended for days due to the taxpayers bill of right sec_2 this extension is to provide additional time for the officers of corporation x to appeal the proposed assessment in order to meet the requirements of a timely appeal the officers of corporation x had to appeal within days of the issuance of letter one of the proposed officers of corporation x officer y responded with a protest letter which was received on date the protest letter was found to be incomplete due to the fact that the protest letter was issued by an unenrolled_return_preparer not authorized to represent corporation x on collection matters officer y was notified of his right to cure a defective appeal within days however the proper appeal was not received until date that date was beyond the 45-day deadline to cure a defective appeal and beyond the 60-day deadline for a timely appeal accordingly the limitations_period for assessment for officer y was due to expire on date at this time the revenue_officer secured form_2750 waiver extending statutory period for assessment of the trust recovery penalty taxpayer executed form_2750 on date and returned the form to the revenue_officer who executed the form on date gl-110393-06 law and analysis sec_6672 failure to collect or pay over tax or attempt_to_evade_or_defeat_tax also commonly referred to as the trust fund recovery penalty imposes a one-hundred percent penalty on responsible persons if the responsible_person willfully fails to pay over to the government the amount of taxes otherwise due 808_f2d_411 5th cir courts have held that the sec_6672 penalty is a return based penalty because it is not separate and distinct from the underlying employment_tax liability rather the penalty is a mechanism for collecting the underlying employment_tax liability therefore the assessment of the sec_6672 penalty is subject_to the period of limitations on assessment provided in sec_6501 see eg 68_f3d_69 3rd cir aff'g u s dist lexis d n j acq a o d 1996_2_cb_1 the taxpayer bill of right sec_2 enacted on date included a special statute_of_limitations provision in sec_6672 along with a requirement to send a 60-day notice of proposed assessment letter before making notice_and_demand for payment of the trust fund recovery penalty when the 60-day notice is issued before the expiration of the assessment statute the statute will not expire before the date days after the 60-day notice was mailed see sec_6672 sec_6501 provides generally that tax shall be assessed within three years after the return was filed pursuant to sec_6501 the irs and a taxpayer can agree in writing to extend the period for assessment as long as the agreement is entered into before the expiration of the assessment_period sec_6501 requires the irs to notify a taxpayer of its right to refuse to extend the period of limitation for assessment limit the extension to particular issues and limit the extension to a particular period of time to provide for the receipt of uniform complete information the irs has developed specific forms to document the written_agreement to extend the period for assessment between the irs and taxpayers form_2750 waiver extending statutory period for assessment of the trust fund recovery penalty is used to extend the period of limitations for assessment of the trust fund recovery penalty see irm before a_trust fund recovery penalty is assessed taxpayers are sent or given letter notice of proposed assessment letter advises the taxpayer of the proposed penalty and of their appeal rights the taxpayer may agree to the penalty by returning signed form_2751 proposed assessment of the trust fund recovery penalty if the taxpayer disagrees with the proposed penalty the taxpayer may file a written protest the taxpayer has days in which to file a timely protest a protest is considered timely if it is mailed on or before the 60th day ie timely mailed is timely filed see irm the day period is measured from the mailing date of the letter or from the delivery date if letter is delivered in person a timely mailed protest is still timely for purposes of sec_6672 even if the protest is inadequate see irm taxpayers who establish that they did not receive gl-110393-06 the letter and therefore could not exercise their appeal rights will be given an opportunity for administrative appeal although the penalty has been assessed see irm in 97_tc_302 the taxpayer was engaged in a hobby the taxpayer filed the proper forms to elect to postpone the determination regarding whether the activity was engaged in for profit for a five year test period pursuant to sec_183 after the taxpayer's election the period for assessing tax with respect to the taxpayer's activity would not expire before the expiration of two years after a return is due for the last year in the test period id pincite during the first year after the test period the taxpayer and the service executed a form_872 consent to extend the time to assess tax before the extended period expired the service mailed the taxpayer a notice_of_deficiency the taxpayer petitioned the tax_court and alleged that the form_872 was ineffective because it had been executed during the extended period provided by sec_183 rather that the three year period mandated by sec_6501 this argument was rejected by the tax_court while the tax_court acknowledged that sec_183 does not expressly reference sec_6501 the tax_court nevertheless concluded that there was a legislative intent to modify sec_6501 where a sec_183 election had been made accordingly the tax_court concluded that the agreement to extend the period of limitations for assessment was effective notwithstanding the fact that it was executed during the extended period provided by sec_183 sec_6501 permits the service and the taxpayer to agree to extend the period for the assessment of any_tax if the parties consent to such agreement in writing before the expiration of the time prescribed for assessment in this case the period of assessment was extended days due to the issuance of the day notice under sec_6672 unlike in the crawford case sec_6672 explicitly references sec_6501 by stating that the period provided by such section for the assessment of such penalty shall not expire before the date days after the issuance of the day notice we believe the effect of sec_6672 is similar to the effect of sec_183 sec_183 was enacted to allow the period of limitations under sec_6501 to be extended by operation of law where the service required additional time to examine an activity's profit_motive similarly the function of sec_6672 is to suspend the period of limitations on assessment to provide the taxpayer an opportunity to appeal the proposed assessment we have found no legal authority which would prohibit the execution of a written_agreement to extend the period of assessment during the day extension provided under sec_6672 the service has structured its administrative practices to attempt to secure an extension of the period of limitations during the three year period provided by sec_6501 we believe the administrative practice of usually securing an extension within the original three year period of limitations is an appropriate practice gl-110393-06 nevertheless we believe the internal_revenue_code allows the service to secure an extension agreement at any time provided that the period of limitations with respect to a particular tax_year is open accordingly the form_2750 waiver extending statutory period for assessment of the trust fund recovery penalty is valid and enforceable notwithstanding the fact that the waiver was executed outside of the assessment_period provided by sec_6501 this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call if you have any further questions


estate of george h bartell jr deceased george david bartell and jean louise bartell barber co- personal_representatives and estate of elizabeth bartell deceased george david bartell and jean louise bartell barber co-personal representatives et al petitioners v commissioner of internal rev- enue respondent docket nos filed date in bd a drugstore chain entered into an agreement to purchase property l from a third party in anticipation of structuring an exchange transaction under sec_1031 to facilitate acquisition of l bd later assigned its rights in the cases of the following petitioners are consolidated herewith george d and june m bartell docket no and david h and jean b bar- ber docket no estate of bartell v commissioner purchase agreement to third-party exchange facilitator epc and entered a further agreement with epc that second agreement provided for epc to purchase l and for bd to have a right to acquire l from epc for a stated period and price epc so purchased l on date with bank financing guaranteed by bd acquiring title to l at that time bd then managed the construction of a drugstore on l using proceeds from the aforementioned financing and upon substantial completion of the construction in date leased the store from epc from that time until title to l was transferred from epc to bd on date in late bd con- tracted to sell its existing property e to a fourth party bd next entered an exchange_agreement with intermediary ss and assigned to ss its rights under the sale agreement and under the earlier agreement with epc ss sold e applied the proceeds of that sale to the acquisition of l and had the title to l transferred to bd on date held bd’s dis- position of e and acquisition of l in qualifies for non- recognition treatment pursuant to sec_1031 as a like- kind exchange as epc is treated as the owner of l during the period it held title to the property 317_f2d_790 9th cir rev’g 38_tc_215 and 69_tc_905 aff ’d 632_f2d_1171 5th cir followed robert j chicoine and john mark colvin for petitioners for ilesa b mcauliffe and william a mccarthy respondent gale judge respondent determined the following defi- ciencies and penalties with respect to petitioners’ federal_income_tax petitioners estate of george h bartell jr etc george d and june m bartell david h and jean b barber year deficiency dollar_figure big_number big_number big_number big_number big_number these cases have been consolidated for purposes of trial briefing and opinion unless otherwise indicated all section references are to the internal_revenue_code_of_1986 as amended and in effect for the years at issue and all rule ref- united_states tax_court reports erences are to the tax_court rules_of_practice and proce- dure the principal issue for decision is whether a property transaction undertaken by the bartell drug co bartell drug an s_corporation owned by petitioners qualified for nonrecognition treatment pursuant to sec_1031 as a like- kind exchange findings_of_fact some of the facts have been stipulated and are so found the stipulations with accompanying exhibits are incor- porated herein by this reference at the time the petitions were filed all petitioners were residents of washington state petitioners and bartell drug bartell drug owned and operated a chain of retail drug- stores during the years at issue and had been doing so in seattle washington and surrounding areas for more than years ownership of the company has remained in the bartell family since its founding in during the years at issue all shares in bartell drug were held by petitioners george h bartell jr and his two children george d bartell and jean b barber the foregoing family members served on the company’s board_of directors in various capacities and as officers during the period under consideration jean b barber sometimes jean barber served as chief financial officer of bartell drug as well as secretary and a director on the board throughout that period in conducting its retail business bartell drug owned some of the properties in which its stores operated and leased others before the 1980s most of bartell drug’s stores were in shopping centers anchored by grocery stores generally in a strip-mall format with the drugstore space sited between two other merchants developers of those centers would typi- final disposition of petitioners’ request for a protective_order under rule and an evidentiary dispute are the subject of separate orders george h bartell jr died in early after the filing of the case at docket no his estate was substituted as a party-petitioner estate of bartell v commissioner cally approach bartell drug offering space in an already- planned complex in the ensuing decades however two key and to some degree interrelated developments affected the business model for retail drugstores first grocery stores began including pharmacies within their stores that innovation both reduced the attractiveness of the grocery-anchored cen- ters for competing drugstores and prompted grocery stores to have developers restrict leasing to such competitive mer- chants second walgreen co walgreens a national drug- store chain introduced on a massive scale and to notable success a store format that shifted the paradigm for drug retailing the emphasis became freestanding corner locations with drive-through pharmacies walgreens entered the seattle area market in the early to mid-1990s at which point bartell drug came under increasing pressure the national chains walgreens rite aid corp and safeway inc became increasingly influential and bartell drug’s chief competitors in the market given the foregoing bartell drug management faced the prospect of the growing obsolescence of its retail locations and sought to formulate a strategy to update its portfolio of owned and leased properties the changed business climate generally required bartell drug to undertake development of new sites itself in order to open freestanding stores such a project often necessitated a significantly greater financial commitment land acquisition and or building construction costs than that involved in merely occupying a space built by a third-party developer additionally the properties owned by bartell drug at that juncture generally had very low bases such that outright sale could produce significant taxable gain frequently encompassing in the early to mid-1990s jean barber was introduced to the concept of sec_1031 exchanges through her husband a real_estate broker following further investigation and con- sultation with professional advisers the bartell drug board_of directors adopted as a policy and authorized management to pursue a strategy of employing sec_1031 exchanges to update the company’s real_estate portfolio and acquire new store locations that decision was made in and was fol- lowed by four such exchanges united_states tax_court reports in executing the sec_1031 exchanges bartell drug worked with sec_1031 services inc a corporation that provided qualified_intermediary services to taxpayers and a related corporation exchange structures inc exchange structures in turn set up wholly owned limited_liability companies to serve as exchange intermediaries in such trans- actions one such limited_liability_company was epc two llc epc two a washington state entity having exchange structures as its sole member as discussed hereinafter epc two served as the exchange intermediary in the transaction at issue agreement to purchase the lynnwood property bartell drug had operated a small store in lynnwood washington since the mid-1980s that store was in a poorly maintained strip mall by only a few years remained on the existing lease for the lynnwood store and bartell drug was interested in considering other properties the com- pany’s real_estate manager began looking into potential sites at the time it was rumored that walgreens was also scouting locations in the lynnwood area one of which was likewise attractive to bartell drug that property was a recycling center owned by mildred m horton across the street from bartell drug’s existing lynnwood store on date bartell drug’s real_estate manager had an initial meeting with mildred horton and her attorney regarding the property further negotiations fol- lowed and as they proceeded bartell drug ordered a first commitment for title insurance for the site hereinafter the lynnwood property effective date the commit- ment identified mildred horton as seller and bartell drug as buyer borrower and proposed insured bartell drug also contacted an engineering firm about providing a boundary and topographic survey of the lynnwood property and the firm responded with a proposal dated date the sale negotiations culminated on date with the execution by mildred horton as seller and bartell drug a sec_4 mildred m horton owned the property both in her individual capacity and as trustee of a testamentary_trust established under her deceased hus- band’s will for simplification mildred m horton and mildred m horton trustee will be referred to without distinction as mildred horton estate of bartell v commissioner buyer of a real_estate purchase and sale agreement sale agreement the sale agreement recited a total purchase_price of dollar_figure payable in cash at closing and set forth a closing date of date in addition the sale agree- ment specified a series of steps and deadlines to occur in the interim relating to due diligence title survey inspections and environmental reports as well as requirements for peri- odic earnest money payments totaling dollar_figure to be depos- ited by bartell drug in escrow the sale agreement also con- tained the following clause sec_1031 exchange buyer and seller agree to reasonably cooperate with each other to accomplish any exchange under sec- tion of the internal_revenue_code including permitting assignment of this agreement to an exchange facilitator pro- vided that the cooperating party is put to no liability or expense in connection therewith after execution of the sale agreement bartell drug began to undertake the steps contemplated therein and related actions aimed at finalizing the acquisition and construction of a drugstore on the lynnwood property bartell drug ordered a second commitment for title insurance effective date that modified certain listed exceptions not pertinent here in date mildred horton and bartell drug agreed to extend the period for the company to com- plete its inspection of the lynnwood property so as to allow sufficient time for refining building and site plans then as the extended inspection period drew to a close bartell drug began remission of the stipulated earnest money payments by six checks dated date through date bartell drug likewise continued preparations for the construction of a drugstore on the lynnwood property on date bartell drug applied to the city of lynnwood for a building permit for the site that application listed bartell drug as applicant and mildred horton as owner of the subject real_estate bartell drug also engaged a traffic engineering firm to perform a traffic study and review of site access and that firm invoiced bartell drug for the work on date united_states tax_court reports structuring and financing the lynnwood property purchase meanwhile bartell drug sought to progress on structuring and financing the sale transaction at some point not clearly disclosed in the record but before date bartell drug approached sec_1031 services about the possibility of employing an exchange in connection with the lynnwood property at that time the company anticipated relin- quishing an older store in white center in king county washington for the exchange by march of it had been agreed that epc two would take title to the lynnwood prop- erty with a view to effecting a sec_1031 exchange simultaneously bartell drug had been working with keybank national association keybank in structuring a multicomponent credit package pertaining to both new bor- rowing facilities and extensions or renewals of existing loans totaling approximately dollar_figure million one component of that package was a dollar_figure million facility identified as a transaction loan intended to finance the acquisition of land for and construction of the new store in lynnwood the package was approved by keybank on date keybank’s commitment letter for the full package dated date and sent to bartell drug described the bor- rower of the dollar_figure million loan as the bartell drug company or an entity such as epc two llc acceptable to the bank with a guaranty provided by the bartell drug company and the purpose as to finance the acquisition of land and construction of a new store in lynnwood wa under the benefits of tax-free_exchange the commitment letter conditioned the financing in the full package upon bartell drug’s covenant to maintain a tangible net_worth of not less than dollar_figure million keybank made an exception to its general loan policy in extending the financing without bartell drug’s having to provide an audited financial statement instead keybank was willing to make the loan on the basis of bartell drug’s financial strength long operating history manage- ment team and name recognition the loan was not secured on date the bartell drug board_of directors authorized management to proceed in obtaining the facilities and jean barber countersigned the commitment letter on that date epc two in turn on date in conjunc- tion with the loan documentation detailed infra executed a estate of bartell v commissioner limited_liability_company borrowing resolution authorizing the entity to borrow from and to sign promissory notes in favor of keybank on date keybank as lender and epc two by exchange structures its sole member as borrower executed a business loan agreement in the principal_amount of dollar_figure million the loan was structured as a line of credit and required that a guaranty by bartell drug be fur- nished before the disbursement of any loan proceeds epc two simultaneously executed in favor of keybank a promis- sory note in the principal_amount of dollar_figure million and three london_interbank_offered_rate addenda designating the pertinent variable interest rate schedule as well as a disbursement request and authorization for the funds the disbursement request recited the specific purpose of the loan as being to finance construction of new store in lynnwood at the same time bartell drug signed a corporate resolution to guarantee and corresponding commercial guaranty of the dollar_figure million note made by epc two on date sec_1031 services sent to bartell drug an engagement letter for performance of intermediary services in connection with the sec_1031 exchange con- templated for the lynnwood property likewise on the same date epc two sent an engagement letter for performance of reverse warehousing services for the exchange the letters generally discussed fees transactional agreements and docu- ments financing and escrow procedures with the epc two letter advising in particular we take title to the replacement_property with funds loaned by you and or a third party lender obtained by you any loan to us from a third party lender must be non recourse to us although you may personally guarantee the loan we provide you with a non recourse note and deed_of_trust to secure your loan to us we lease the replace- ment property to you during the warehouse period you are required under the lease to obtain liability and property insurance naming us as additional insured to pay the property taxes and to loan us any funds necessary to make mortgage payments the basic intermediary fee for a standard two-property exchange was set at dollar_figure and of the value of the property was specified as the charge for warehousing in a reverse exchange under cover of a letter dated april united_states tax_court reports bartell drug returned the countersigned engagement letter that letter read enclosed are the executed warehousing and exchange letters i have talked to key bank and they have no problem with issuing a side letter to make the new loan non-recourse to epc ii however the bank cannot do this until they receive an executed copy of the exchange and coopera- tion agreement i have talked to dan pepple our attorney and asked him to draft this document once we have that document completed i will contact key bank to get the loan agreement modified as preparations for closing on the lynnwood property pro- ceeded a corporate resolution dated date was executed in which it was represented that the bartell drug board_of directors in a previous meeting held date had resolved inter alia to enter into a sec_1031 exchange transaction with sec_1031 services to result in the purchase of a retail drugstore in lynnwood washington and to assign bartell drug’s rights under the date sale agreement with mildred horton to sec_1031 services on date epc two sent to the title insur- ance company escrow instructions concerning and various documents to be executed by the parties in connection with the closing during and epc two was a single-purpose entity formed for the exclusive purpose of providing services to bartell drug it was a disregarded_entity for federal_income_tax purposes at all times relevant to these cases its sole member being exchange services inc and it had no assets during and other than as more fully dis- cussed hereinafter a right to acquire the lynnwood property and then title to the lynnwood property subject_to various contractual terms governing the property’s disposition real_estate acquisition and exchange cooperation agreement on date bartell drug and epc two entered into a real_estate acquisition and exchange cooperation agree- ment reaeca with respect to the lynnwood transaction through the reaeca bartell drug and epc two referred to as spe in the reaeca contracted to cooperate in effecting an exchange of current property ie property cur- rently owned by bartell drug but to be relinquished for replacement_property the document set forth the con- tracting parties’ rights and responsibilities in that endeavor estate of bartell v commissioner the current property was identified as of that time as the white center site and the replacement_property as the new lynnwood property the reaeca addressed acquisition and ownership of the replacement_property including assignment of the existing purchase agreement financing construction of improvements and leasing disposition of the current prop- erty through cooperation in an exchange via a qualified inter- mediary ie sec_1031 services and transfer of the replacement_property to bartell drug including the purchase_price attendant thereto as regards acquisition of the lynnwood property bartell drug assigned and epc two accepted the rights and obliga- tions under the date sale agreement with mildred horton the reaeca then specified that epc two shall acquire title to the replacement_property and then shall cause to be constructed on the replacement_property certain improvements pursuant to plans and specifications approved by bartell and undertaken by a general contractor and sub- contractors approved by bartell to that end the reaeca provided that to finance the acquisition of and construction of the improvements to the site epc two would borrow funds from an agreed lender and would have no obligation to become liable for any pay- ments or to advance any funds in excess of those so borrowed or funds supplied by the qualified_intermediary from the sale of the current property similarly epc two was to have no responsibility to investigate review or otherwise inquire into the nature of any work for which payment is requested it being expressly agreed that spe’s responsibility is solely to disburse funds on request by bartell or to review supervise inspect or otherwise become involved in the construction of the improvements the reaeca also stipulated that upon substantial completion of the improvements epc two was required to lease the replacement_property to bartell drug the lease was to be a triple net_lease and was to provide for rental equal to all debt service payable under any and all loan agreements with respect to the replacement_property if bartell drug then elected to go forward with an exchange of the current property that property would be sold to a third party through the qualified_intermediary with the intermediary having been assigned bartell drug’s right sec_147 united_states tax_court reports under such a sale contract and receiving the proceeds thereof bartell drug would next assign to the qualified_intermediary its rights and obligations under the reaeca which included a right to acquire the replacement_property at bartell drug’s direction the qualified_intermediary would then remit to epc two the proceeds from the sale of the cur- rent property up to an amount not in excess of the purchase_price of the replacement_property to complete the exchange the qualified_intermediary would direct epc two to deed the replacement_property to bartell drug per the reaeca the purchase_price for the replacement_property was equal to its fair_market_value fair_market_value in turn was defined fair_market_value of the replacement_property shall mean the fair_market_value determined by an appraisal conducted by a nationally rec- ognized real_estate appraiser as may be agreed to by bartell and spe provided however that if the replacement_property is purchased from spe within twenty-four months after the date on which spe acquired the replacement_property then the fair_market_value shall be deemed to equal its acquisition_cost as hereinafter defined the referenced definition of acquisition_cost followed acquisition_cost shall mean the sum of i the purchase_price paid_by spe to the seller to acquire the replacement_property ii all sales transfer or similar taxes and all charges and closing costs paid_by spe in connection with its purchase of the replacement_property iii all interest and stated fees including pre-payment fees in connection with mandatory pre-payments under the credit agreements which are not paid as rent pursuant to the lease iv the cost of construction of all improvements which are paid_by spe and v any and all unreimbursed costs liabilities and expenses of any kind incurred by spe in connection with the acquisition ownership and operation of the replacement prop- erty and the completion of the exchange except for excluded costs as defined the reaeca additionally incorporated epc two’s entitle- ment to receive from bartell drug the fee set forth in the previously described date letter from epc two two indemnity provisions were set forth in the reaeca one was a general indemnification clause whereby bartell drug agreed to indemnify and save epc two and or keybank harmless from all loss cost damages expenses and attorneys’ fees suffered or incurred as a result of any claim investigation proceeding or suit in connection with estate of bartell v commissioner the ownership or exchange of the replacement_property except to the extent that party is liable for such loss as a result of its gross negligence willful misconduct or breach of its obligations under the reaeca the other provision was a specific environmental release and indemnity mandating that bartell drug indemnify and hold harmless epc two and or keybank for any claims in connection with contamination of the current and replacement properties by any hazardous_substance other matters pertaining to security were likewise docu- mented during this period contemporaneously with entry into the reaeca epc two on date executed a deed_of_trust on the lynnwood property for the benefit of bartell drug the deed_of_trust secured bartell drug with respect to epc two’s obligations under the reaeca which was expressly referenced therein as well as any liability paid_by bartell drug under the provisions of its guaranty of pay- ment on the keybank loan effective date keybank as lender and epc two as borrower executed an amendment to the dollar_figure million promissory note the amendment rendered the note expressly nonrecourse to bor- rower and stipulated that all payments thereunder were to be made only from the income and proceeds from the bor- rower’s interest in the replacement_property and improve- ments to be acquired with the proceeds of the loans s evi- denced by the promissory note closing on the lynnwood property closing on the lynnwood property took place on date the final selling_price incorporating any pertinent amendments to the date contract was dollar_figure various other charges and expenses were also settled through the escrow process and epc two received out of the escrow dollar_figure in payment of a warehousing lease fee on that date a statutory warranty deed conveying the lynnwood property from grantor mildred horton to grantee the dollar_figure reduction in the sale price from the amount stated in the date sale agreement apparently resulted from an addendum to the sale agreement sought by mildred horton pertaining to the removal of per- sonal property from the site this dollar_figure payment equals of the original dollar_figure contract purchase_price for the lynnwood property united_states tax_court reports epc two was recorded the deed_of_trust on the property from epc two in favor of bartell drug was also recorded on date a final title insurance_policy on a fee simple interest in the lynnwood property dated date was issued to epc two as the named insured construction of the lynnwood store work on the new property itself advanced on date with the commencement of site demolition and the clearing of existing site debris j r abbott construction inc j r abbott invoiced bartell drug for the demolition and clearing on date and bartell drug paid directly the dollar_figure due in early september of bartell drug was subsequently reimbursed that amount through a construction draw from the keybank loan as the project moved into the phase of store construction bartell drug managed the process for instance throughout the following months bartell drug was engaged in applying for and obtaining appropriate permits and bonding to enable the work to proceed in september of bartell drug applied to the city of lynnwood for a public works permit on date the city of lynnwood issued to bartell drug the building permit which had been applied for in january of that year as noted supra performance bonds were required by the city of lynnwood for the construction of the drugstore epc two executed two commercial surety bond applications dated date in favor of the city of lynnwood bartell drug signed those applications as third-party indemnitor two performance bonds were issued for the construction listing epc two llc c o bartell drug company as principal and travelers casualty and security company of america as surety and were signed on date only by bartell drug and filed with the city of lynnwood bartell drug selected j r abbott the same firm that had performed the demolition as the contractor for the construc- all permits issued by the city of lynnwood in the record list bartell drug as applicant and mildred horton as owner regardless of the date of application and or approval a performance bond prepared previously dated date and listing bartell drug as principal was apparently not in proper form and not relied upon to meet the bonding obligation for the lynnwood site estate of bartell v commissioner tion a contract for the work on the new drugstore dated date was executed between epc two l l c c o the bartell drug company as owner and j r abbott as contractor both epc two and bartell drug signed the document via signature blocks labeled owner all requisite building and similar permits for construction of the drugstore were issued to bartell drug one key component of the drugstore project was site access bartell drug believed that having two driveway access points was critical but applicable governmental regu- lations would have limited the lynnwood property to one curb cut accordingly bartell drug worked closely with the city of lynnwood to formulate an easement plan involving the drugstore site and the adjacent corner lot those negotia- tions culminated in an agreement for joint access agree- ment sic dated date between epc two and bartell drug as grantors and the city of lynnwood as grantee the agreement opened with the following recitals a epc two llc holds title to the real_property the bartell parcel and the bartell drug company holds the beneficial_interest in the bartell parcel bartell applied to the city for a building permit to develop the bartell parcel b as a condition to the issuance of a building permit the city required bartell to agree to grant access easements in favor of the adjacent parcel the agreement then went on to describe the subject ease- ments and was executed by both epc two and bartell drug as construction progressed periodic_payments for the work were typically made in the following manner j r abbott would send an invoice to bartell drug a bartell drug employee would send written authorization to epc two for requesting a construction draw from the keybank loan in the amount of the invoice epc two would send written authorization to keybank for disbursement of funds from the construction loan to be paid_by wire transfer to j r abbott keybank would pay j r abbott the amount specified in the epc two authorization during the period from feb- ruary through date six such payments were made var- ious other expenses including those incurred after the dollar_figure million loan was depleted were paid_by bartell drug directly a promissory note dated date was executed united_states tax_court reports by epc two in favor of bartell drug in the amount of dollar_figure with respect to at least a portion of the expenses so paid the note bore no interest for the first days and thereafter was to bear interest pincite per annum completion and leasing of the lynnwood store as the construction phase came to a close epc two as landlord and bartell drug as tenant entered a lease agree- ment for the lynnwood property and new store effective date the lease_term was for months beginning date the rent obligation was summarized at the outset of the lease as follows the initial net rent of the lease shall be dollar_figure which has been pre- viously paid_by tenant as of the commence date net monthly rent shall be dollar_figure per month with a total net rent under the lease not to exceed dollar_figure net rent shall mean the amount of rent owing by tenant after offsets for any interest owed by landlord to tenant related to the premises subsequent provisions set forth further details eg tenant may offset the rent owing with payments due tenant under that certain note payable by landlord to tenant of even date herewith ten- ant shall also be responsible for payment of all utilities taxes and insur- ance of the premises as set forth below as additional rent tenant shall make all payments due from landlord on the loan secured_by the premises to the applicable lender the dollar_figure amount had been explained by an epc two officer in a facsimile accompanying transmission of a draft of the lease with the comment the dollar_figure ‘cap’ is of the dollar_figure spent on lynnwood to date plus its acquisition_cost of dollar_figure consistent with the reaeca the lease also incorporated indemnification clauses in favor of epc two one general and one specifically focused on environmental hazards in the former tenant agreed to hold landlord harmless against all liabilities arising from acts or omissions of tenant or visitors to the premises in the latter tenant undertook to indemnify landlord against all claims related to hazardous materials brought to or used on the premises on date the city of lynnwood issued a certificate of occupancy for the new bartell drugstore in august of j r abbott sent to bartell drug an application and estate of bartell v commissioner certification for payment for dollar_figure remaining due on the project a conditional release and waiver of lien rights for the project such as any applicable mechanic’s or similar lien contingent upon payment of the dollar_figure was included with the invoice bartell drug paid the requested amount by check dated date agreement to sell the everett property meanwhile bartell drug was also proceeding with steps directed toward the property to be relinquished in the exchange in date bartell drug had acquired a retail drugstore in everett washington everett property as part of a sec_1031 exchange involving the sale of another prop- erty that transaction was accomplished through sec_1031 services and a statutory warranty deed from epc two to bartell drug was recorded on date in the spring of jean barber requested from keybank a six- month extension on the term of the dollar_figure million lynnwood property loan otherwise expiring date keybank documentation explaining the request prepared date stated t he new lynnwood store under construction and which is being financed by this loan is now approximately completed and will not be finished and ready for customers until the month of july in addition management needs extra time after completion of the lynnwood store to determine the most appropriate repayment source - either from sale leaseback of the company’s white center store as originally planned or from the sale of the existing everett store which may or may not be leased back depending on management’s negotiations on acquisition of a new everett store site the new maturity_date of this loan will afford management more than adequate time to make the best economic and strategic decision for repayment bartell’s continues to produce excellent financial results for the year the request was approved and a modification agreement of the keybank loan dated date was executed by epc two on or about date bartell drug entered into a purchase agreement to sell the everett property to william and theresa eng the transaction was structured as a sale- leaseback and after a series of amendments negotiated between bartell drug and the engs during september and united_states tax_court reports october the selling_price was stipulated at dollar_figure among other provisions the purchase agreement included a seller exchange clause stating buyer agrees to cooperate should seller elect to sell the property as part of a like-kind_exchange under sec_1031 seller’s contemplated exchange shall not impose upon buyer any additional liability or financial obligation by mid-october of however bartell drug had received two offers to purchase the lynnwood property that would have enabled the company to use the site in a sale- leaseback arrangement consequently bartell drug manage- ment requested from keybank an additional extension of the construction loan to negotiate that possibility keybank acceded to the request and a concomitant modification and or extension agreement dated date was executed by epc two on date however the bartell drug board_of directors approved the sale of the everett store observing that the proceeds will be used to purchase our store in lynnwood exchange_agreement on date bartell drug as exchangor and sec_1031 services as intermediary executed an exchange_agreement for the exchange of relinquished prop- erty identified as the everett property for replacement prop- erty identified as the lynnwood property in a transaction intended to qualify for tax-deferred treatment under sec_1031 the exchange_agreement provided for the pur- chase agreement with the engs and for bartell drug’s rights under the reaeca to be assigned to sec_1031 services sec_1031 services would then transfer the relinquished_property to the engs acquire the replacement_property from epc two and transfer the replacement_property to bartell drug these transfers were to be accomplished through a direct deeding mechanism ie conveyance of title between bartell drug and the underlying buyer or seller at sec_1031 services’ direction the purchase_price for the relin- quished property would be paid to sec_1031 services and used by sec_1031 services to acquire the replacement_property from epc two bartell drug agreed to indemnify estate of bartell v commissioner sec_1031 services from all loss in general and from any claims related to hazardous materials in particular by letter dated likewise date sec_1031 services sent to bartell drug to the company’s attorney and to the escrow agent for the lynnwood transaction a sub- stitute exhibit for the reaeca the exhibit identified the everett property as the relinquished_property for the exchange two further letters of the same date were sent by sec_1031 services to the escrow agent for the approaching the exchange intermediary’s instructions to escrow for the relinquished and replacement_property respectively transmitting closings closing of the exchange finalization of the transfers of the everett and lynnwood properties took place between date and date on date bartell drug executed an assignment of the purchase agreement for the everett property and sec_1031 services provided notification of that assignment to the engs in conjunction therewith bartell drug also executed a special warranty deed conveying the everett property to entities managed by the engs the deed was recorded on date on december or epc two executed a statu- tory warranty deed conveying the lynnwood property to bartell drug and the deed was recorded on date on date bartell drug executed an assign- ment of the reaeca to sec_1031 services sec_1031 services had previously on date provided notice of the assignment to epc two through the respective escrow processes sale of the everett property provided a net amount after charges of dollar_figure which was applied toward purchase of the lynnwood property from that balance charges paid out of the escrow included dollar_figure remitted to exchange struc- tures as final rent payment and dollar_figure remitted to sec- tion services as exchange fee an excess payment of dollar_figure was due from the buyer to be furnished by although the pertinent signature is dated the document refers to the parties’ having executed the exchange_agreement which did not occur until date united_states tax_court reports bartell drug under the exchange_agreement to complete the transaction tax reporting and examination for and prior years bartell drug filed with the irs forms 1120s u s income_tax return for an s_corporation included with the return was a form_8824 like-kind_exchanges addressing the transfers of the everett and lynnwood properties bartell drug reported that the prop- erty relinquished in the subject exchange had been acquired on date and had been transferred to another party on date the company further reported that like-kind_property was actually received on date the fair_market_value of the property received was shown as dollar_figure and the basis of the property given up as dollar_figure for a deferred gain of dollar_figure schedules k-1 shareholder’s share of income credits deductions etc were prepared for each of bartell drug’s shareholders ie george h bartell jr george d bartell and jean b barber setting forth his or her respective shares of bartell drug’s items of income and deduction petitioners filed form sec_1040 u s individual_income_tax_return for and subsequent years at issue reflecting inter alia amounts flowing through from bartell drug’s corporate returns the gain realized from the sale of the everett prop- erty having been treated as deferred by bartell drug was not reported by the individual petitioners in early the irs commenced an examination of bartell drug’ sec_2001 corporate return that audit culminated in a form_5701 notice of proposed_adjustment dated date and corresponding form 886a expla- nation of items the single adjustment proposed was the dis- allowance of tax_deferral treatment under sec_1031 for the dollar_figure reported as realized in the like-kind_exchange involving the lynnwood and everett properties the notices of deficiency underlying the instant cases followed as the resultant increase in corporate income flowed through to the personal returns of the shareholders estate of bartell v commissioner i burden_of_proof opinion as a general_rule the commissioner’s determinations are presumed correct and the taxpayer bears the burden of proving error therein rule a 290_us_111 however sec_7491 may shift the burden to the commissioner with respect to factual issues affecting liability for tax where the taxpayer intro- duces credible_evidence but the provision operates only where the taxpayer establishes that he has complied under sec_7491 with all substantiation requirements has maintained all required records and has cooperated with reasonable requests for witnesses information documents meetings and interviews see h_r conf rept no pincite 1998_3_cb_747 petitioners assert that they have met the record retention cooperation and introduction of credible_evidence requisites for a shift of the burden_of_proof respondent argues to the contrary nonetheless we find it unnecessary to decide whether the burden should be shifted under sec_7491 as will be detailed infra the crux of the parties’ disagree- ment as to the outcome of these cases lies not in different views as to what took place but in different positions as to what standard or test should be applied in analyzing whether those events generated taxable_income for peti- tioners the relevant facts are substantially those gleaned from the documentary record the bulk of which has been stipulated together with a small number of additional docu- ments offered at trial these materials afford the court a largely uncontroverted view of what happened once the more legal or theoretical question in dispute is answered the record is not evenly weighted and is sufficient for the court to render a decision on the merits based upon a preponder- ance of the evidence without regard to the burden_of_proof because there is no evidentiary tie here the burden_of_proof need not be resolved see 394_f3d_1030 8th cir aff ’g tcmemo_2003_212 united_states tax_court reports ii treatment of the lynnwood property transaction a contentions of the parties petitioners argue that the transaction is properly treated as a involving the lynnwood property like-kind_exchange thus permitting deferral of income realized upon the disposition of the everett property respondent con- versely asserts that the transaction in question failed to qualify for sec_1031 treatment their differences center on whether an exchange for purposes of sec_1031 occurred it has been observed that the very essence of an exchange is the transfer of property between owners while the mark of a sale is the receipt of cash for the property 385_f2d_238 5th cir a corollary of the requirement of a reciprocal transfer of property between owners is that the taxpayer not have owned the property purportedly received in the exchange before the exchange occurs if he has he has engaged in a nonreciprocal exchange with himself a taxpayer cannot engage in an exchange with himself an exchange ordinarily requires a ‘reciprocal transfer of property as distinguished from a transfer of property for money consideration’ 115_tc_457 citation omitted respondent maintains that bartell drug already owned the lynnwood property long before the date dis- position of the everett property thereby precluding any exchange as of that date petitioners contend that bartell drug was not then the owner of the lynnwood property rather epc two must be treated as the owner these dif- ferent results in turn are explained by the different tests employed by the parties to answer the ownership question petitioners claim that an agency analysis is the appropriate standard and that such an analysis should be employed in a manner consistent with the wide latitude historically per- mitted in the context of like-kind_exchanges respondent on the other hand advocates application of a benefits and bur- dens analysis as the traditional test in the myriad of situa- tions raising questions of tax_ownership of property estate of bartell v commissioner b statutory principles and regulatory developments generally under sec_61 and sec_1001 taxpayers must recognize all gain_or_loss realized upon the sale_or_exchange of property sec_1031 however provides an exception which allows taxpayers to defer recognition of gain_or_loss on exchanges of like-kind_property held for productive use in a trade_or_business or for investment the statute sets forth in sec_1031 the following general_rule no gain_or_loss shall be recognized on the exchange of property held for productive use in a trade_or_business or for investment if such property is exchanged solely for property of like_kind which is to be held either for productive use in a trade_or_business or for investment this general_rule for nonrecogni- tion mandates that qualifying property be exchanged solely for other qualifying property in the event that non-like-kind property including cash is received in a transaction other- wise within the purview of the statute sec_1031 estab- lishes a regime whereby any gain realized on the exchange is recognized to the extent of the so-called boot ie the non- qualifying property any gain not recognized is then deferred through operation of sec_1031 under which the basis_of_property acquired in a like-kind_exchange equals the basis of the property transferred less any cash received and loss recognized plus any gain recognized the purpose for the foregoing deferral has been identified in jurisprudence involving sec_1031 and its predecessor statutes as resting on the lack of any material_change in the taxpayer’s economic position 356_us_260 decleene v commissioner t c pincite 71_tc_54 the new property is substantially a continuation of the taxpayer’s investment in the old property still unliqui- dated the taxpayer’s funds remain tied up in the same kind of property commissioner v p g lake inc u s pincite koch v commissioner t c pincite h_r rept no c b part given that rationale courts have frequently interpreted the requirements of sec_1031 liberally exhibiting a lenient attitude toward taxpayers’ attempts to come within its terms see eg 602_f2d_1341 9th cir decleene v commissioner united_states tax_court reports t c pincite 69_tc_905 aff ’d 632_f2d_1171 5th cir the commis- sioner likewise has often taken a similar approach in regula- tions promulgated and guidance issued under sec_1031 even affording various safe harbors for transactions sec_1_1031_a_-1 to k -1 income_tax regs such breadth has developed incrementally over time as will be seen in the discussion infra the words like_kind as used in sec_1031 are defined to have reference to the nature or character of the property and not to its grade or quality sec_1_1031_a_-1 income_tax regs it is the kind or class of the property that must be the same such that the fact that any real_estate involved is improved or unimproved is not material for that fact relates only to the grade or quality of the property and not to its kind or class id historically there has never been any question that sec_1031 as originally enacted covered simultaneous exchanges between two parties see eg 602_f2d_1341 317_f2d_790 9th cir and cases discussed therein rev’g 38_tc_215 how- ever following cases finding a broader reach the statute itself and regulatory directives were likewise widened explic- itly to address various deferred exchanges where the exchange of properties is not simultaneous and multiparty transactions where third-party exchange facilitators are used to effect the exchange for instance after 602_f2d_1341 congress amended sec_1031 expressly to sanction specified deferred exchanges by adding the fol- lowing requirement that property be identified and that exchange be completed not more than days after transfer of exchanged property -for purposes of this subsection any property received by the taxpayer shall be treated as property which is not like- kind property if- a such property is not identified as property to be received in the exchange on or before the day which i sec_45 days after the date on which the taxpayer transfers the property relinquished in the exchange or b such property is received after the earlier of- i the day which i sec_180 days after the date on which the taxpayer transfers the property relinquished in the exchange or estate of bartell v commissioner ii the due_date determined with regard to extension for the transferor’s return of the tax imposed by this chapter for the taxable_year in which the transfer of the relinquished_property occurs comprehensive regulations were later issued in sec_1_1031_k_-1 income_tax regs to facilitate deferred for- ward exchanges ie where the taxpayer receives replace- ment property after the date of his transfer of relinquished_property within the confines of the statutory time limits however the secretary expressly declined to provide guid- ance with respect to deferred reverse exchanges ie where the taxpayer receives replacement_property before the date of his transfer of relinquished_property see t d 1991_1_cb_150 as has been noted by this court these regulations with their provisions for use of third-party ‘qualified intermediaries’ as accommodation titleholders who will not be considered the taxpayer’s agent in doing the multiparty deferred exchanges permitted by the regulations have encouraged the growth of a new industry of third-party exchange facilitators decleene v commissioner t c pincite nonetheless even with these regulatory developments the full reach and range of transactions entitled to protection under sec_1031 remained unsettled as was made clear in the preamble to the regulations sec_1031 of the code and sec_1 a -3 of the proposed regu- lations apply to deferred exchanges the proposed_regulations define a deferred_exchange as an exchange in which pursuant to an agreement the taxpayer transfers property held for productive use in a trade_or_business or for investment the relinquished_property and subse- quently receives property to be held either for productive use in a trade_or_business or for investment the replacement_property the proposed_regulations do not apply to transactions in which the taxpayer receives the replacement_property prior to the date on which the taxpayer trans- fers the relinquished_property so-called reverse-starker transactions however the service will continue to study the applicability of the gen- eral rule_of sec_1031 to these transactions t d c b pincite the vacuum in any administrative guidance concerning reverse exchanges was not alleviated until the issuance by the irs of revproc_2000_37 2000_2_cb_308 the revenue united_states tax_court reports procedure addressed specified parking arrangements and provided a safe_harbor under which the internal_revenue_service will not chal- lenge a the qualification of property as either replacement_property or relinquished_property for purposes of sec_1031 of the internal_revenue_code and the regulations thereunder or b the treatment of the exchange accommodation titleholder as the beneficial_owner of such property for federal_income_tax purposes if the property is held in a qualified exchange accommodation arrangement qeaa id sec_1 c b pincite the revenue_procedure was effective for qualified exchange accommodation arrangements entered into by an exchange accommodation titleholder on or after date id sec_5 c b pincite conversely per the procedure n o inference is intended with respect to the federal_income_tax treat- ment of arrangements similar to those described in this revenue proce- dure that were entered into prior to the effective date of this revenue_procedure further the service recognizes that parking transactions can be accomplished outside of the safe_harbor provided in this revenue_procedure accordingly no inference is intended with respect to the fed- eral income_tax treatment of parking transactions that do not satisfy the terms of the safe_harbor provided in this revenue_procedure whether entered into prior to or after the effective date of this revenue_procedure id sec_3 c b pincite the revenue_procedure observed that in the years since the deferred forward exchange regulations were published tax- payers had attempted to structure a wide variety of reverse parking transactions arranged so that the accommodation party has enough of the benefits and burdens relating to the property to be treated as the owner id sec_2 c b pincite the procedure then imposed time limits paral- leling those for deferred exchanges and days and enumerated specific contractual provisions and or relation- ships that would not be considered fatal to treatment of the exchange accommodation titleholder as the owner of the replacement or relinquished_property for federal_income_tax purposes id sec_4 c b pincite under revproc_2000_37 2000_2_cb_308 the exchange accommo- dation titleholder is generally a person other than the taxpayer who is subject_to federal_income_tax and who holds legal_title to or other indicia or ownership of property intended to be exchanged in a transaction quali- fying under sec_1031 see revproc_2000_37 sec_4 c b pincite estate of bartell v commissioner c application of caselaw principles bartell drug undertook the transaction involving the lynnwood property before revproc_2000_37 supra was published on date see revproc_2000_37 2000_40_irb_308 there is no dispute that revproc_2000_37 supra is inapplicable epc two acquired title on date before the revenue procedure’s effective date and the complete transaction consumed months well beyond the days that would have been allowed for closing the trans- action under it hence each side contends for its respective position on whether a qualifying exchange occurred by drawing on general tax principles and caselaw it considers applicable the fundamental question in determining whether sec_1031 applies here is whether an exchange occurred the answer to that inquiry will depend in this context and as framed by the parties’ positions on whether what happened here should be deemed a self-exchange a self-exchange in turn will be said to have transpired if bartell drug would be considered the owner of the lynnwood property for tax purposes before acquiring title in december of respondent contends that bartell drug already owned the lynnwood property at the time of the disputed exchange because bartell drug-not epc two-had all the benefits_and_burdens_of_ownership of the property namely the capacity to benefit from any appreciation in the property’s value the risk of loss from any diminution in its value and the other burdens of ownership such as taxes and liabilities arising from the property by contrast respondent contends epc two did not possess any of the benefits_and_burdens_of_ownership of the property it had no equity_interest in the property it had made no economic outlay to acquire it it was not at risk with respect to the property because all the financing was nonrecourse as to it it paid no real_estate_taxes and the construction of improvements on the property was financed and directed by bartell drug moreover respondent contends bartell drug had possession and con- trol of the property during the entire period epc two held title first by virtue of the reaeca provisions giving it con- trol over the construction of site improvements and then possession through a lease that epc two was obligated united_states tax_court reports under the reaeca to extend to it for rent equal to the debt service on the keybank loan plus epc two’s fee for holding title respondent’s position is that a benefits and burdens test which is used in many contexts to determine ownership of property for federal tax purposes see eg 77_tc_1221 should be applied in the context of a claim of sec_1031 treatment to determine who owns the replace- ment property as between a third-party exchange facilitator who takes legal_title to it to facilitate an exchange and the taxpayer who ultimately receives it at the time of the exchange petitioners point out however that both this court and the court_of_appeals for the ninth circuit to which an appeal in this case would ordinarily lie see sec_7482 have expressly rejected the proposition that a person who takes title to the replacement_property for the purpose of effecting a sec_1031 exchange must assume the benefits and bur- dens of ownership in that property to satisfy the exchange requirement as the court_of_appeals for the ninth circuit pointed out in alderson v commissioner f 2d pincite o ne need not assume the benefits_and_burdens_of_ownership in prop- erty before exchanging it but may properly acquire title solely for the purpose of exchange and accept title and transfer it in exchange for other like property all as a part of the same transaction with no resulting gain which is recognizable under sec_1002 of the internal_revenue_code of we have followed alderson in according sec_1031 treat- ment in a variety of transactions where the taxpayers used a third-party exchange facilitator to take title to the replace- ment property to effect an exchange of property in form who was contractually insulated from any beneficial_ownership of the replacement_property see eg 80_tc_491 74_tc_555 69_tc_905 when the third- party exchange facilitator has been contractually excluded from beneficial_ownership pursuant to the agreement under which he holds title to the replacement_property for the tax- payer that beneficial_ownership necessarily resides with the taxpayer once title has been obtained from the seller of the replacement_property and yet the third-party exchange facilitator rather than the taxpayer has been treated as the estate of bartell v commissioner owner of the replacement_property at the time of the exchange in the cases cited above otherwise a disqualifying self-exchange could be said to have occurred the somewhat formalistic approach of the caselaw on which petitioners rely is perhaps best explained by this court’s observations over years ago in barker v commis- sioner t c pincite the touchstone of sec_1031 is the requirement that there be an exchange of like-kind business or investment properties as distin- guished from a cash sale of property by the taxpayer and a reinvestment of the proceeds in other_property the exchange requirement poses an analytical problem because it runs headlong into the familiar tax law maxim that the substance of a transaction controls over form in a sense the substance of a transaction in which the taxpayer sells property and immediately reinvests the pro- ceeds in like-kind_property is not much different from the substance of a transaction in which two parcels are exchanged without cash t he conceptual distinction between an exchange qualifying for sec_1031 on the one hand and a sale and reinvestment on the other is largely one of form petitioners further point out that settled caselaw has per- mitted taxpayers to exercise any number of indicia of owner- ship and control_over the replacement_property before it is transferred to them without jeopardizing sec_1031 exchange treatment as we noted in biggs v commissioner t c pincite c ourts have permitted taxpayers great latitude in structuring sec_1031 exchange transactions the taxpayer can locate suitable property to be received in exchange and can enter into negotiations for the acquisition of such property 320_f2d_333 4th cir alderson v commissioner f 2d pincite coupe v commissioner t c pincite moreover the taxpayer can oversee improvements on the land to be acquired j h baird publishing co v commissioner t c pincite and can even advance money toward the purchase_price of the property to be acquired by exchange 65_tc_6 provided the final result is an exchange of property for other_property of a like_kind the transaction will qualify under sec_1031 this discussion of the latitude afforded taxpayers in structuring sec_1031 transactions was later quoted in full with approval by the court of continued united_states tax_court reports in biggs the taxpayer was likewise permitted to advance the funds for the purchase of the replacement_property where title was transferred from the seller to a third-party exchange facilitator and held by it until the exchange was effected id pincite respondent however relies in particular on our more recent decision in decleene in which we employed a benefits and burdens analysis in rejecting the taxpayer’s claim of sec_1031 treatment as support for his contention that a third-party exchange facilitator-here epc two-must hold the benefits_and_burdens_of_ownership of the replacement_property in order to be treated as its owner at the time of the exchange in decleene we concluded using a benefits and burdens analysis that the taxpayer had beneficial_ownership of the replacement_property at the time of the exchange even though he had arranged for the transfer of legal_title to the replacement_property to the purchaser of his relinquished_property his purported exchange of the relinquished and replacement properties was therefore no more than an exchange with himself a taxpayer cannot engage in an exchange with himself an exchange ordinarily requires a ‘reciprocal transfer of property’ decleene v commissioner t c pincite citation omitted the taxpayer in decleene had made an outright purchase of the replacement_property the lawrence drive property which was unimproved land more than a year before the purported exchange id pincite then when approached by a prospective purchaser wlc of the property the tax- payer wished to relinquish the mcdonald street property the taxpayer was advised he could effect a sec_1031 exchange of the mcdonald street property for the lawrence street property id pincite in an effort to accomplish an exchange the taxpayer first transferred the lawrence street property to wlc in september-subject to a reacquisition agreement under which wlc agreed to convey the lawrence drive property back to the taxpayer by yearend with a building constructed on it in the interim pursuant to the tax- payer’s direction and at his expense id pincite wlc appeals for the ninth circuit 602_f2d_1341 ndollar_figure 9th cir the construction loan for the building was nonrecourse to wlc and estate of bartell v commissioner purported to purchase the lawrence drive property by giving the taxpayer his non-interest-bearing nonrecourse note for dollar_figure id pincite the parties agreed that dollar_figure was the value of both the lawrence drive property in its unim- proved state and the mcdonald street property id pincite once construction of the building on the lawrence drive property was complete but no later than yearend the par- ties’ agreement called for an exchange of properties whereby the taxpayer would deed the mcdonald street property to wlc and wlc would in turn deed the lawrence drive prop- erty back to the taxpayer and pay off his dollar_figure promis- sory note the consideration it gave for the purported pur- chase of the lawrence drive property id pincite the exchange of deeds and payment of the note were accom- plished three months later as called for under the agreement id pincite the taxpayer claimed that he had effected a taxable sale of the lawrence drive property to wlc followed by his transfer of the mcdonald street property to wlc in a like- kind exchange for wlc’s reconveyance to him of the law- rence drive property the commissioner determined that the taxpayer had made a taxable sale of the mcdonald street property to wlc in resolving the issue after noting the historically lenient attitude of courts towards taxpayers in like-kind_exchange cases we put considerable emphasis on the taxpayer’s failure to use a third-party exchange facilitator the subject transactions present a case of first impression in this court they reflect the effort of the taxpayer and his advisors to implement a so-called reverse exchange directly with wlc without the participation of a third-party exchange facilitator in the case at hand the taxpayer did not just locate and iden- tify the lawrence drive property in anticipation of acquiring it as replacement_property in exchange for the mcdonald street property that he intended to relinquish he purchased the lawrence drive property without the participation of an exchange facilitator a year or more before he was ready to relinquish the mcdonald street property in the guaranteed by the taxpayer 115_tc_457 the taxpayer preferred a taxable sale of his high-basis lawrence drive property to a taxable sale of his low-basis mcdonald street property united_states tax_court reports following year the taxpayer transferred title to the lawrence drive property subject_to a reacquisition agreement-the exchange agreement-not to a third-party exchange facilitator but to wlc the party to which he simultaneously obligated himself to relinquish the mcdonald street property in foregoing the use of a third party and doing all the transfers with wlc the taxpayer and his advisers created an inherently ambiguous situation decleene v commissioner t c pincite emphasis added we analyzed the transaction to determine whether the tax- payer having acquired the lawrence drive property outright and directly held it for more than a year actually ceased being its owner for tax purposes during the three-month period that wlc held legal_title in anticipation of a sec_1031 exchange if not then the taxpayer had merely engaged in an exchange with himself rather than the reciprocal exchange of property necessary for sec_1031 treatment id pincite we employed a benefits and burdens test to deter- mine the ownership question concluding that wlc never acquired any of the benefits_and_burdens_of_ownership of the lawrence drive property as it acquired no equity_interest made no economic outlay to acquire the property was not at risk because its obligations in the transaction were all non- recourse and was obligated to reconvey the property to the taxpayer id pincite as a consequence i n substance the taxpayer never disposed of the lawrence drive property and remained its owner during the 3-month construction_period because the transfer of title to wlc never divested the taxpayer of beneficial_ownership id pincite we therefore concluded that a sec_1031 exchange had not occurred in contending that decleene supports his position that epc two-a third-party exchange facilitator-had to possess the benefits_and_burdens_of_ownership of the lynnwood prop- erty in order for epc two to be treated as its owner for tax purposes before the exchange respondent interprets that case too broadly given the decleene opinion’s explicit and repeated emphasis upon the taxpayer’s failure to use a third- party exchange facilitator it must be said that decleene did not address the circumstances where a third-party exchange facilitator is used from the outset in a reverse exchange moreover the taxpayer in decleene had acquired the pur- estate of bartell v commissioner ported replacement_property outright and held title to it directly without any title-holding intermediary for more than a year before transferring title to wlc this feature also distinguishes decleene from the myriad of cases where taxpayers seeking sec_1031 treatment were careful to interpose a title-holding intermediary between themselves and outright ownership of the replacement_property in sum decleene does not dictate a result for respondent here our analysis must also take into account the position of the court_of_appeals for the ninth circuit where an appeal in this case would lie absent stipulation to the contrary see sec_7482 54_tc_742 aff ’d 445_f2d_985 10th cir as pre- viously noted that court_of_appeals has expressly rejected the contention that the party to the exchange with the tax- payer must possess the benefits_and_burdens_of_ownership of the replacement_property in order for the exchange to qualify for sec_1031 treatment alderson v commissioner f 2d pincite the taxpayers in alderson had executed a contract to sell their buena park property to alloy die casting co alloy for dollar_figure pursuant to an escrow agreement under which alloy had deposited of the purchase_price into escrow the taxpayers then found the salinas property and decided that they wished to obtain it to replace the buena park property the taxpayers and alloy thereupon amended the escrow agreement to provide that alloy would acquire the salinas property and exchange it for the buena park prop- erty in lieu of the original contemplated cash transaction id pincite as recounted by the court_of_appeals for the ninth circuit the taxpayers then took a series of steps with respect to the salinas property-the replacement property-that warrant close scrutiny in view of the arguments respondent has advanced in this case the taxpayers negotiated the dollar_figure sale price of the salinas property with its owners and then on date through written instructions to the salinas title guarantee co salinas title executed on that in decleene we noted the paucity of applicable sec_1031 cases in the court_of_appeals for the seventh circuit where the appeal in that case lay decleene v commissioner t c pincite united_states tax_court reports date the taxpayers dictated the terms for the disposition of the salinas property id the instructions provided that the taxpayers would make the dollar_figure downpayment for the property which they paid into the salinas escrow the next day and that title to the salinas property would be taken in the name of salinas title id the instructions further authorized salinas title to deed the salinas property to alloy provided salinas title could ‘immediately record a deed from alloy to james alderson and clarissa e alderson his wife the taxpayers issuing final title evidence in the last mentioned grantees ’ id by deed dated the next day date title to the salinas property was transferred to salinas title id by deed dated date salinas title conveyed the salinas property to alloy id by deed dated date the taxpayers conveyed the buena park property to alloy and by deed dated date alloy conveyed the salinas property to the taxpayers id pincite on sep- tember alloy deposited the dollar_figure purchase_price of the buena park property into the salinas escrow with instructions that it be used to purchase the salinas property id pincite that amount together with the dollar_figure previously deposited by the taxpayers slightly exceeded the dollar_figure purchase_price of the salinas property and the excess was refunded to the taxpayers id the following day all of the foregoing deeds were recorded id the taxpayers took the position that they had effected a sec_1031 exchange of the buena park property for the salinas property but the commissioner disagreed arguing that they had sold the buena park property to alloy and pur- chased the salinas property in part because alloy never held a real interest in the salinas property-that is the replace- ment property id pincite the court_of_appeals rejected the commissioner’s argument these escrow instructions for the disposition of the replacement prop- erty were entitled buyer’s instructions the court_of_appeals noted 317_f2d_790 9th cir rev’g 38_tc_215 the deposit that alloy had previously placed into escrow to pur- chase the buena park property was refunded to it alderson v commis- sioner f 2d pincite estate of bartell v commissioner t here was no need for alloy to acquire a real interest in the salinas property by assuming the benefits_and_burdens_of_ownership to make the exchange qualify under the statute although the commissioner asserts that failure of alloy to hold a real interest in the salinas prop- erty precluded the transactions involved from being construed as consti- tuting an exchange o ne need not assume the benefits_and_burdens_of_ownership in prop- erty before exchanging it but may properly acquire title solely for the purpose of exchange and accept title and transfer it in exchange for other like property all as a part of the same transaction with no resulting gain which is recognizable under sec_1002 of the internal_revenue_code of alderson v commissioner f 2d pincite neither salinas title the third-party exchange facilitator nor alloy the acquirer of the taxpayer’s relinquished prop- erty assumed any benefits or burdens of the salinas prop- erty the replacement_property before the exchange salinas title obtained title to the salinas property subject_to a contractual obligation in the buyer’s instructions to transfer it to alloy then alloy obtained title to the property under a contractual obligation that it immediately transfer title to the taxpayers consequently the beneficial_ownership of the salinas property necessarily resided with the taxpayers during the period that salinas title and alloy held bare_legal_title to the property it could be nowhere else thus the tax- payers in alderson held the benefits and burdens of the replacement_property before the exchange under the theory advanced by respondent in this case the alderson taxpayers would have engaged in a disqualifying exchange with them- selves the court_of_appeals however treated alloy’s nominal ownership of the replacement_property as sufficient to establish an exchange for purposes of sec_1031 the transaction in alderson was a forward exchange that spanned approximately three months from the time the tax- payers first executed a contract for the sale of their relin- quished property until the deed transfers effecting the exchange of the relinquished and replacement properties were made salinas title held title to the replacement prop- erty for only days and alloy held it only instantaneously yet the same principle that treated a third-party exchange facilitator holding bare_legal_title but no beneficial_interest in the replacement_property as the owner of that property for purposes of a sec_1031 exchange is also evident in united_states tax_court reports 632_f2d_1171 a case where the exchange facilitator held the replacement_property much longer in biggs the third-party exchange facilitator held bare_legal_title but no beneficial_interest in the replacement prop- erty from the time the replacement_property was purchased with the taxpayer’s funds until title was transferred to the taxpayer-a period of approximately months in that case the taxpayer agreed to sell his maryland property the relinquished_property to powell but only as part of an exchange for another property powell agreed to cooperate in the arrangements for an exchange the taxpayer identified a replacement_property the virginia property executed a sales contract for its purchase in which the purchaser was described as the taxpayer acting as agent for syndicate and supplied the downpayment id pincite powell however was either unable or unwilling to take title to the virginia property and so the taxpayer arranged for the title to be transferred to shore title co inc shore a corporation con- trolled by the taxpayer’s attorney id before the transfer of title the taxpayer and shore entered into an agreement concerning the virginia property that entitled either to request that title be conveyed to the tax- payer or his nominee in exchange for the price shore paid for the property plus any costs shore incurred in holding the property and a commitment by the taxpayer or his nominee to release shore from or cause shore to be released from any obligations of shore arising from its acquiring or holding the property id on date the sales contract on the virginia property was closed and title was transferred to shore id the taxpayer advanced to shore the remaining cash due the seller dollar_figure and shore assumed liabil- ities of dollar_figure both amounts being secured_by deeds of trust on the property id shore then held the virginia property for the next months during which time it entered into a contract to sell the virginia property to powell and powell thereupon assigned its contract right to purchase the virginia property to the taxpayer as part of the consideration for an agreement pursuant to which the taxpayer agreed to sell the maryland property to powell id pincite the various contracts were closed on date when shore executed a deed to estate of bartell v commissioner the virginia property to the taxpayer and the taxpayer assumed all of shore’s liabilities with respect to the property and released shore from its obligation to repay the purchase money the taxpayer had previously advanced and on date when the taxpayer deeded the maryland property to powell’s assignee id pincite the court_of_appeals for the fifth circuit and this court both concluded that a sec_1031 exchange had occurred rejecting two arguments advanced by the commissioner the commissioner argued that no exchange had occurred because powell never received legal_title to the virginia property the replacement_property but each court found powell’s exchange of his right to acquire the virginia property rather than title to the property itself sufficient id pincite7 biggs v commissioner t c pincite of greater perti- nence here both courts also rejected the commissioner’s argument premised on the fact that the taxpayer had advanced all the funds for the replacement property’s pur- chase that shore was the taxpayer’s agent biggs v commis- sioner f 2d pincite biggs v commissioner t c pincite the court_of_appeals recognized that if shore were treated as the taxpayer’s agent the exchange would have been meaningless because in essence the taxpayer would have merely effected an exchange with himself biggs v commissioner f 2d pincite instead each court con- cluded that shore took title to the replacement_property to facilitate an exchange tax_court biggs v commissioner t c pincite or to facilitate the exchange court_of_appeals biggs v commissioner f 2d pincite the incidents_of_ownership shore assumed were thus sufficient for it to be treated as the owner of the replacement_property during the period it held title otherwise the taxpayer who supplied the funds for the replacement property’s purchase would have been the owner and a self-exchange ineligible for sec_1031 treatment would have occurred notably for the issue at hand shore did not have any beneficial_ownership of the replacement_property shore made no outlay to acquire the replacement_property and held title to it subject_to contractual provisions that precluded the company from benefiting from any appreciation in the prop- erty’s value or from being exposed to any risk of loss from a diminution in its value or any liability arising from holding united_states tax_court reports title the agreement between shore and the taxpayer set out in detail in each court’s opinion gave the taxpayer a call on the replacement_property at any time for consideration equal to the price shore paid to acquire the property plus any costs shore incurred to hold the property and satisfac- tion or release of shore from any obligations it assumed or became bound by as a result of holding title shore could likewise put the property to the taxpayer for the same consideration it is thus readily apparent that the taxpayer not shore held the benefits_and_burdens_of_ownership of the replacement_property during the period shore held legal_title nevertheless shore a third-party exchange facilitator was treated as the owner of the replacement_property for pur- poses of satisfying the exchange requirement of sec_1031 thus alderson and biggs establish that where a sec_1031 exchange is contemplated from the outset and a third- party exchange facilitator rather than the taxpayer takes title to the replacement_property before the exchange the exchange facilitator need not assume the benefits and bur- dens of ownership of the replacement_property in order to be treated as its owner for sec_1031 purposes before the exchange respondent contends that alderson biggs and the tax- payer-favorable cases we cited in biggs are inapposite because they concerned forward exchanges and a reverse exchange is at issue here we disagree first although biggs is sometimes characterized as involving a forward exchange the transaction at issue in biggs was actually a reverse exchange as that term has been defined by respondent in the preamble to the regulations promulgated as sec_1_1031_k_-1 income_tax regs governing forward exchanges respondent cites in support of his position a number of cases where the taxpayers made outright purchases of the replacement_property and then subsequently sought to retrofit the transaction into the form of a sec_1031 exchange see eg 845_f2d_217 9th cir aff ’g tcmemo_1987_140 dibsy v commissioner tcmemo_1995_477 lee v commissioner tcmemo_1986_294 bartell drug made no such outright purchase here it interposed a third-party exchange facilitator between itself and title to the replacement_property in con- templation of a sec_1031 exchange from the outset these cases are there- fore not helpful on the question of whether the third-party exchange facilitator is to be treated as the owner of the replacement_property for federal_income_tax purposes before the exchange estate of bartell v commissioner the secretary expressly excluded reverse exchanges from cov- erage by those regulations defining reverse exchanges as transactions in which the taxpayer receives the replacement_property prior to the date on which the taxpayer transfers the relinquished_property t d c b pincite- see also revproc_2000_37 sec_2 c b pincite in biggs although the taxpayer and powell initially executed a memorandum of intent covering the sale of the relinquished_property on date they abandoned that agreement after the taxpayer’s attorney reviewed it and instead agreed to have their respective attorneys work out the terms of a written exchange_agreement biggs v commissioner f 2d pincite thereafter the sales con- tract on the replacement_property the virginia property was closed and title transferred to the third-party exchange facilitator on date whereas the contract for the sale of the relinquished_property the maryland property was not executed until date and the transfer of the relinquished_property did not occur until date id pincite5 consequently the principles of biggs are applicable to reverse exchanges second even forward exchange cases including alderson and those that permit great latitude to taxpayers in struc- turing sec_1031 transactions starker f 2d pincite n analyze the relationship to the replacement_property of the taxpayer versus the third-party exchange facilitator and treat the latter as the owner before the exchange typically notwithstanding the utterly transitory barker v commis- sioner t c pincite and nominal nature of that ownership in our view this analysis of the relationship of the taxpayer to the replacement_property as compared to an exchange facilitator holding bare_legal_title is equally applicable in a reverse exchange as the holding in biggs confirms see also 159_br_303 bankr c d cal t he transfer of legal_title is sufficient to effectuate a reverse sec_1031 exchange involving an accommodator to be sure the transaction at issue involved a period before consummation of the exchange during which epc two was obligated to and in fact did lease the replacement prop- erty to bartell drug bartell drug leased the replacement_property and used it as a drugstore for approximately six united_states tax_court reports months from the completion of the improvements in early date until consummation of the exchange at yearend there was no such leasing of the replacement_property to the taxpayer by the exchange facilitator in biggs or alderson nevertheless given that the caselaw has countenanced a tax- payer’s pre-exchange control and financing of the construc- tion of improvements on the replacement_property while an exchange facilitator held title to it see 39_tc_608 we see no rea- son why the taxpayer’s pre-exchange temporary possession of the replacement_property pursuant to a lease from the exchange facilitator should produce a different result it is also true that the transaction at issue spanned a greater period than those countenanced in alderson and biggs which spanned and months respectively under the terms of the reaeca epc two as a practical matter could have held title to the lynnwood property for up to months and in fact epc two held title for months given the inapplicability of revproc_2000_37 supra to the transaction at issue the caselaw provides no specific limit on the period in which a third-party exchange facilitator may hold title to the replacement_property before the titles to the relinquished and replacement properties are transferred in a reverse exchange we express no opinion with respect to we note in this regard that the safe harbors extended to reverse ex- changes in revproc_2000_37 supra cover the exchange accommodation title holder’s leasing of the replacement_property to the taxpayer albeit within the time limits imposed therein id sec_4 2000_2_cb_308 we conclude given that under the reaeca the purchase_price bartell drug was obligated to pay for the lynnwood property went from i the ac- quisition cost of the real_property and improvements to ii the parcel’s fair_market_value after epc two had held title for months that the possi- bility that bartell drug would fail to purchase the lynnwood property be- fore the expiration of that months was too remote to be considered a practical possibility in scrutinizing the length of the period during which epc two held title to the replacement_property before its transfer to bartell drug we do not suggest that the transaction at issue failed to comply with the time limits of sec_1031 nor do the parties dispute that point the and 180-day periods in which the taxpayer must identify the replacement prop- erty and receive it respectively begin to run on the date on which the taxpayer transfers the property relinquished in the exchange sec_1031 and b as the transfer of the everett property occurred on estate of bartell v commissioner the applicability of sec_1031 to a reverse exchange trans- action that extends beyond the period at issue in these cases in view of the finite periods in which the exchange facilitator in these cases could have held and in fact did hold title to the replacement_property we are satisfied that the trans- action qualifies for sec_1031 treatment under existing caselaw principles for the foregoing reasons we conclude and hold that bartell drug’s disposition of the everett property and acquisition of the lynnwood property in qualify for non- recognition treatment pursuant to sec_1031 to reflect the foregoing decisions will be entered for petitioners f date and bartell drug received title to the lynnwood prop- erty on date the taxpayers satisfied those time limits


id office uilc cca-715844-08 -------------- number release date from -------------------- sent tue am to --------------------- cc -------------------------------------------------------------------------------------------------------------------- subject fw scrivener's error i think the letter is appropriate sec_7605 provides that only one inspection of a taxpayer's books of account shall be made unless the secretary notifies the taxpayer in writing that an additional inspection is necessary -------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------