IRS will not acquiesce to ruling on non-safe-harbor reverse Sec. 1031 exchange

By Andrea Whiteway, J.D., LL.M.; Blake Rubin; and Glenn Johnson, J.D., LL.M., Washington

Editor: Michael Dell, CPA

In Action on Decision (AOD) 2017-06, the IRS announced it will not acquiesce to the Tax Court's ruling in Estate of Bartell,147 T.C. 140 (2016), in which it held that a taxpayer's disposition and acquisition of property was not a self-exchange and qualified for Sec. 1031 nonrecognition treatment.


In August 2000, Bartell Drug Co., an S corporation, arranged through a qualified exchange facilitator to purchase property in Lynnwood, Wash., on which to build a new drugstore. An affiliate of the qualified exchange intermediary, EPC Two LLC, took title to the property. EPC Two was required to lease the Lynnwood property to Bartell Drug. As planned, Bartell Drug leased it from EPC Two until ownership was transferred to Bartell Drug upon completion of the exchange transaction.

At the same time, Bartell Drug was working to find a buyer for the property to be relinquished. The identified property in Everett, Wash., was an older retail drugstore. When a buyer was found, the transaction was structured as a sale-leaseback. The contract included a clause in which the buyers agreed to cooperate if Bartell Drug decided to sell the property as part of a like-kind exchange.

In December 2001, Bartell Drug as the "exchanger" and Section 1031 Services as the "intermediary" executed an agreement for the exchange of relinquished property, identified as the Everett property, for replacement property, identified as the Lynnwood property. These transfers were done through a direct deeding process by Section 1031 Services.

The IRS argued that Bartell Drug owned the Lynnwood property long before the disposition of the Everett property in December 2001 and, thus, following DeCleene, 115 T.C. 457 (2000), could not qualify for nonrecognition treatment. The IRS argued that EPC Two had none of the benefits and burdens of ownership and that Bartell Drug should be treated as the owner of the Lynnwood property as of August 2000. The IRS also noted that Bartell Drug had full direction over and burden for the construction.

Bartell Drug argued that an agency analysis was the appropriate standard to determine ownership and that EPC Two was the property owner.

The court distinguished the case from DeCleene, where the taxpayer purchased the replacement property outright more than a year before the exchange. The taxpayer later transferred legal title to the replacement property to the purchaser of his relinquished property. The court held then that the taxpayer was the beneficial owner and had made a taxable sale of the property.

The court stated that Alderson, 317 F.2d 790 (9th Cir. 1963), rev'g 38 T.C. 215 (1962), applied. It found that Alderson established the principle that a third-party facilitator that takes title to the replacement property need not assume the benefits and burdens of ownership in that property to satisfy the exchange requirement in a Sec. 1031 transaction. Thus, the court held that Bartell Drug's disposition of the Everett property and acquisition of the Lynnwood property in 2001 qualified for nonrecognition treatment pursuant to Sec. 1031.

After Bartell acquired the Lynnwood property in the exchange transaction, the IRS issued Rev. Proc. 2000-37, which provides a safe harbor for taxpayers seeking to park relinquished property or replacement property with an exchange accommodation titleholder (EAT) in anticipation of a like-kind exchange. If the safe harbor requirements are met, including that the EAT cannot hold the parked property for more than 180 days, the EAT (and not the exchanging taxpayer) is considered the owner of the property held by the EAT, regardless of who has the benefits and burdens of ownership. Because Bartell undertook the Lynnwood property transaction before the publication of Rev. Proc. 2000-37, and the entire exchange transaction at issue took over 17 months, Bartell and the IRS agreed that it did not apply.


Bartell is a significant case supporting a taxpayer's ability to park replacement property, including build-to-suit replacement property, outside the safe harbor of Rev. Proc. 2000-37. The taxpayer's victory in Bartell seems to suggest that in the context of a non-safe-harbor reverse like-kind exchange, the normal analysis of benefits and burdens of ownership might not apply in determining the validity of the arrangement.

However, through the AOD, the IRS has made it clear that in determining whether a reverse like-kind exchange that does not meet the Rev. Proc. 2000-37 safe-harbor requirements is valid, the Service will continue to scrutinize the arrangement to determine whether the taxpayer has received the benefits and burdens of ownership prior to the actual transfer of legal title to the property. Presumably, the marketplace will first attempt to structure reverse exchange/parking transactions that satisfy the safe-harbor requirements under Rev. Proc. 2000-37, rather than ones that fall outside the safe harbor and leave the taxpayers involved to contend with the uncertainty of how the IRS will treat the arrangement.


Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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