Question
From: (REDACTED)
Sent: Tuesday, July 15, 2008 4:04 PM
To: Verne, B. Michael
Subject: RE: Section 1031
Mike:
Our client's situation also arises from a Section1031 "like kind" exchange, but our client intends to structure areverse exchange (the informal opinion you identified addresses a"forward" deferred Section I031 exchange). Both structures involvethe sale of "relinquished property" and the corresponding purchase of"replacement property." What differentiates the "forward"from the "reverse" Section 1031 exchange is that the formercontemplates the taxpayer's first identifying "relinquishedproperty," while the latter contemplates the "replacement property"being first identified. The principal issue addressed by the informal opinionwas whether the transfer to an Exchange Accommodation Titleholder("EAT") of bare legal title to the relinquished property (with thetransferor retaining beneficial ownership and control) qualified for theexemption provided by 802.30(a) of the FTC's rules. Our client's question iswhether transfer by a third party seller to an EAT of bare legal title to thereplacement property (with all other indicia of beneficial ownership beingtransferred to our client) constitutes a separate asset acquisition subject tothe HSR Act. The underlying principle and analysis appear similar to that inthe informal interpretation you cited.
More specifically, here's our client'ssituation.
Company A has entered into a contract toacquire certain assets from Company B. HSR filings were made, and the waitingperiod for that transaction has expired.
Company A wishes to take advantage of theprovisions of Section 1031 of the Internal Revenue Code, by engaging in areverse Section 1031 exchange. Under this procedure, Company A will identifycertain "like kind" assets that it will sell to an otherwiseunrelated third party. The assets to be sold to the third party are referred toas "Relinquished Assets." HSR filings for those transfers would bemade separately, if required. The assets that Company A has contracted toacquire from Company B are referred to as "Replacement Assets."
Pursuant to Section 1031 and safe harborrules promulgated by the IRS, Company B will transfer legal title to theReplacement Assets to one or more EATs. This will be accomplished pursuant toQualified Exchange Accommodation Agreements between Company A and the EATs.These agreements will require the EATs to lease the Replacement Assets toCompany A on a triple-net basis with nominal payments, permit Company A tocontrol and manage the Replacement Assets, and permit Company A to sell theReplacement Assets to third parties. Company A will loan to the EATs the fundsnecessary for the EATs to purchase title to the Replacement Assets from CompanyB. Neither Company B nor the EATs will have any involvement in the operation ofthe assets or business. As a result of these Qualified Exchange Accommodation Agreements,the only indicium of beneficial ownership that the EATs will hold during thisinterim period is bare legal title, which will be held for the sole benefit ofCompany A.
Under IRS Rev. Proc. 2000-37, the IRS safeharbor rules, Company A must identify the to-be-Relinquished Assets within 45days after transfer of legal title to the EATs and must complete the sale ofthose assets to third party buyers no later than 180 days after transfer oflegal title to the EATs. Under the contractual arrangements between theparties, sale of the Relinquished Assets results in a simultaneous transfer toCompany A of the legal title to the Replacement Assets previously held by theEATs. This must be accomplished no later than 180 days after transfer of legaltitle to the EATs. Transfer of this sole remaining indicium of beneficialownership to Company A completes the reverse Section 103 I exchange, andCompany A then receives favorable tax treatment on its on its disposition of theRelinquished Assets. If Company A is unable to complete the sale of sufficientRelinquished Assets prior to the expiration of the 180 day period, then theQualified Exchange Accommodation Agreements between Company A and the EATsobligate the EATs to transfer to Company A legal title to the ReplacementAssets (and Company A loses the tax benefits of a Section 1031 exchange).
Our client seeks an informal interpretationthat the transfer from Company B to Company A of all the indicia of beneficialownership of the Replacement Assets except bare legal title constitutes theacquisition that was the subject of the previous HSR Act filings by Company Aand Company B, and that the transfer of legal title by Company B to the EATsand inevitably from the EATs to Company A in compliance with Section 1031 safeharbor rules is not itself an asset acquisition subject to the HSR Act.
Please treat this e-mail as a confidentialcommunication. We would be happy to answer any questions you may have, orprovide you with any additional information upon request.