Finding a Port in a Non-Safe Harbor: Implications for Reverse Exchanges after Bartell

Abstract

ABSTRACT Revenue Procedure 2000-37 provides a safe harbor for reverse like-kind exchanges to qualify for deferral of gain under Section 1031. In a reverse exchange, the replacement property is acquired before the relinquished property is transferred. The taxpayer transfers title to replacement property to a third-party accommodator to hold until the exchange takes place. In a landmark ruling for the taxpayer in Bartell v. Commissioner, the Tax Court held in favor of form over substance: although the taxpayer had possession and control of the replacement property for 17 months, the accommodator with the title had tax ownership. The IRS nonacquiesced with the decision, emphasizing substance over form: the accommodator must have benefits and burdens of ownership, rather than holding mere title. This paper proposes that the IRS's nonacquiescence is problematic because it could result in inconsistency across different Circuits, and recommends that Congress adopt a consistent timing rule for all exchanges.