On August 14, 2017, the IRS released an Action on Decision (AOD) stating that it did not agree with the decision from the Tax Court regarding the Estate of Bartell. In 2016 the Tax Court held that a reverse like-kind exchange implemented outside of certain safe harbor provisions of Rev. Proc. 2000-37 qualified for nonrecognition treatment under Section 1031. Rev. Proc. 2000-37 states that someone making an exchange could 'hold' a replacement property for up to 180 days with an exchange accommodation titleholder (EAT) prior to a transaction in a qualified exchange arrangement. In which case the IRS would treat the EAT as the beneficial owner of the property for federal income tax purposes, if certain requirements are met.
However, the Tax Court permitted a holding arrangement in which the replacement property was held for 17 months without the accommodator having traditional benefits and burdens of ownership. The reason the IRS disagrees with this ruling is due to Section 1031 reverse exchanges indicates the hold time for EAT property is 180 days, and 17 months exceeds the prescribed time; therefore, the EAT would have to acquire ownership of the property, and not just bare legal title (which would make it a Section 1031 reverse exchange).
The IRS AOD means that it will continue to litigate holding arrangments for Rev. Proc. 2000-37 safe harbor limits where the accommodator does not have traditional benefits and burdens of ownership.
*information provided by PricewaterhouseCoopers LLP