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Related Party Exchanges

Revenue Ruling 2002-83

As part of the Revenue Reconciliation Act of 1989, Code Section 1031(f)(1) added a required two-year holding period on exchanges between related parties.

The language of the statute at Code Section 1031(f)(2) contains specific exceptions to the two-year holding period, including transfers within the two years as a result of involuntary conversion or death of the Taxpayer or a related party. Additionally, in situations where the Taxpayer can establish that neither the exchange nor the subsequent disposition within the two-year period had, as one of its principal purposes, the avoidance of federal income tax, a disposition before the end of the two-year period will not disqualify the exchange.

There had been much uncertainty on the appropriate application of Code Section 1031(f) to exchanges between related parties where a Taxpayer acquires property from a related party.

In November 2002, the Service published Revenue Ruling 2002-83 in an attempt to clarify its position on the application of Code Section 1031(f)(4) - which provides that the non-recognition rules of Code Section 1031 do not apply to any transaction (or series of transactions) structured to avoid the purposes of the related party rules.

Revenue Ruling 2002-83 addresses the following scenario:

  1. Taxpayer sells relinquished property with FMV of $150 and basis of $50 to an unrelated third party purchaser.
  2. Taxpayer transfers the relinquished property, through a Qualified Intermediary, directly to an unrelated third party purchaser.
  3. Taxpayer acquires replacement property with a FMV of $150 from a related party. The property’s basis in the related party's hands is $150.
  4. Related party transfers replacement property, through a Qualified Intermediary, directly to Taxpayer.

The Revenue Ruling concludes that Taxpayer is using the Qualified Intermediary to "circumvent the purposes" of Code Section1031(f) and that, as provided in Code Section1031(f)(4), the non-recognition provisions afforded by Code Section 1031 will not apply.

The conclusion of the Revenue Ruling is consistent with TAM 9748006. It appears from the example in the Revenue Ruling, and the facts of the TAM, that Taxpayer never intended to acquire any property other than the related party property.