Volume 1, Issue 1, September 29, 2005

THE PRESIDENT’S CORNER

FEA Assesses Strategic Planning Objectives

As you all know, last year at this time the Federation of Exchange Accommodators celebrated its 15 th anniversary.   During that period, the organization has witnessed the evolution of the 1031 industry from a small, West-Coast niche business to one with a comprehensive national presence whereby the 1031 exchange has become a standard part of a typical real estate transaction.

In light of these developments, last spring the FEA held a two-day planning session to assess the strategic objectives of the organization in light of the rapid growth of the Section 1031 industry during the last several years. The participants (approximately 20 in number) included all the Board members plus a number of other members.   At the conference the participants identified, among other things, the organization’s core purpose and values, its long-term visionary goals, its strategic objectives and a five-part action plan.

Core purpose and values .   According to the consensus view of the participants, the core purpose of the FEA is to protect and serve our clients and the exchange industry.  This is accomplished by, among other things:

• Providing opportunities to exchange information.
• Providing educational programs and resources.
• Advocating and speaking for the industry.
• Building and maintaining professional credibility and public trust in the profession.

What flows from this core purpose are three   core values and beliefs of the FEA: (i) all transactions shall be conducted by qualified intermediaries with high professional and ethical standards and a thorough knowledge of the relevant law; (ii) the fundamental concept of   like kind exchanges should be preserved; and (iii) honesty and integrity are essential to the industry practice.

Long-term Visionary Goal.   The group determined that the long-term visionary goal for the FEA is that it is recognized by public policy makers and U.S. taxpayers as the industry leader and standard setter for the exchange industry.   Among other things, accomplishment of this goal might be evidenced by all qualified intermediaries belonging to the FEA, the Certified Exchange Specialist becoming a recognized credential and the FEA becoming synonymous with exchanges.

Strategic Objectives/ Action Plan.   To move the organization towards the accomplishment of its Core Purpose and Long-term Visionary Goal,   a number of objectives for the next two or three years were established.    Five of these were identified as requiring an action plan to be implemented immediately and a task force has been established, or is in the process of being established, with respect to each of these plans.

The first of these was to complete and agree upon   model state legislation and implement a strategy for its adoption.  The current results of the task force headed by Max Hansen will be reported to the general membership at the FEA’s annual meeting to be held in Las Vegas on October 7-8 on their progress.

The second was to complete draft federal regulations for qualified intermediaries and implement a strategy for winning adoption.   Among other things, it is anticipated that such actions would augment the role of the qualified intermediaries within the federal regulatory scheme and would promote better delivery of services by QI’s for the benefit of their clients and the public good.

The third was to develop and implement a plan for marketing FEA to key professions and the investing public.   The rationale for this action plan was that to effect its core purpose of protecting and serving our clients and the exchange industry, the FEA needed to establish more visibility within the industry and among the general public.   The committee, headed by Kate Gallivan, will be reporting on their recommendations at the annual conference.

The fourth plan involves the revision of the Ethics Code to a consensus level and   the enforcement of it uniformly.    There was a generally accepted view that the current Ethics Code, drafted many years ago, needs to be updated from both a substantive and a procedural standpoint.

Finally, there will be a task force dealing with governance issues, such as procedures for membership on the Board and various committees and task forces. The objective is to implement the new procedures by 2006.  

Promote Involvement in the FEA.   This latter point brings us to a major theme that you will see in the next year and beyond. We are interested in getting your participation in the FEA.   As I have told some, many of the Board members are in their 50’s and rumor has it that at least three are in their sixties (we will not out them but they know who they are).   We need to get younger members active in our committees, which has been a stepping stone for some to membership on the Board.

At the annual convention, there will be an FEA booth.   Please visit us and consider getting active.   After all, it is your industry.

In summary, the FEA approaches its next 15 years with great enthusiasm and optimism and views the implementation of the strategic objectives as a critical element of realizing its goals during this period and we look forward to your help in doing it.

1031 EXCHANGES FOR TAX & ACCOUNTING PROFESSIONALS

(WHY SHOULD BROKERS HAVE ALL OF THE FUN?)

We hope you enjoy this first issue of FEA’s electronic newsletter, brought to you by our very first sponsor, Cap Harbor.   Each monthly issue of The Accommodator is available for sponsorship at a cost of $500 per month.   If you are interested in sponsoring an issue, click here and sponsorships will be issued on a first-come, first served basis.   Each sponsor is entitled to submit one article for publication with the newsletter on a topic of industry interest.   Here is Cap Harbor’s opening.   To read the full text, please click here.

The more time that we spend dealing with IRC Section 1031, the more we realize that the focus of 1031 Exchanges is somewhat misplaced on real estate and securities brokers.   Don’t get us wrong; as both real estate and securities brokers, we certainly appreciate the business activity that is generated through 1031 Exchanges, but we understand that, by thoughtful and expert application of the options available through a 1031 Exchange, the benefits to the investor can extend far beyond simple tax deferral.   Let’s explore some of these options!..

ANNUAL CONFERENCE WILL PACK ‘EM IN

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The FEA Annual Conference, scheduled for October 7-8 at the MGM Grand Hotel in Las Vegas, Nevada is already a record-breaker and it hasn’t even begun yet!   More than 470 delegates are registered for this annual event.   For details on this meeting, just click here.   See you soon in Las Vegas!

IRS FINDS INVESTMENT INTENT IN SECTION 1031 EXCHANGE TRANSFERS
FROM TRUST TO BENEFICIARIES

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Phil Jelsma, Luce Forward Hamilton & Scripps LLP

pjelsma@luce.com

One of the most difficult issues in structuring a tax-deferred exchange under IRS Code Section 1031 is whether the intent to hold property for use in a trade or business or for investment carries over to a subsequent owner.   Generally, the IRS has been reluctant to find that investment intent can transfer from one owner to another.   Nevertheless, in Private Letter Ruling 200521002, the IRS ruled that replacement property acquired by a testamentary trust in a tax-deferred exchange could later be distributed to the trust beneficiaries without affecting a Code Section 1031 exchange.

The taxpayer was a testamentary trust which was due to terminate 20 years after the death of the decedent’s last surviving child.   The trustees formulated a plan whereby the trust would diversify its assets, some of which would be transferred into a single-member LLC.   The trust proposed disposing of the relinquished property, initiated an exchange, and having the replacement property conveyed to the LLC.   The trust would then terminate, distributing the LLC interest to the trust beneficiaries.  

There were two issues presented by the taxpayer.   First, would the acquisition of replacement property by the trust followed by a distribution of the property in termination of a trust destroy the exchange because the trust did not acquire the replacement property with the intent to use the property in a trade or business or for investment.   At the time the trust acquired the replacement property, it was contemplated that the trust would terminate and distribute the LLC to the beneficiaries.   Second would be whether the distribution of the single-member LLC interest to multiple trust beneficiaries, thereby creating a partnership shortly after the exchange.

In concluding that the exchange qualified for a Section 1031 exchange, the IRS noted that the trust termination date had been fixed by the decedent and approved by a probate court which would take effect without regard to the exchange of properties.   Thus, the exchange was wholly independent from the distribution of properties.   The subsequent creation of a partnership did not adversely impact the exchange.

The IRS did not comment on the fact that the taxpayer had elected to wait until a time near the termination date of the trust to initiate the exchange.

The ruling is interesting because it is not unusual that legal entities such as trusts, partnerships and LLCs, have fixed termination dates, which have been established well in advance of an exchange.   In addition, there are ways to cause a court to trigger a dissolution of a trust, partnership or LLC.   It appears that the IRS is looking for a disconnect between the event causing termination and the exchange.   That is, if the event causing the termination of a legal entity was established prior to the formulation of an exchange strategy, this Private Letter Ruling suggests that the exchange followed by a distribution may be acceptable to the IRS.   The IRS did not comment on the question of conveying the property to a partnership shortly after the exchange.   The Private Letter Ruling suggests that it may be simpler to convince the IRS that investment intent can carryover than most practitioners thought.   Taxpayer victories in Magneson, 753 F.2d 1490 and Bolker, 81 T.C. 782 (1983) have often empowered taxpayers to be comfortable with exchanges followed by distributions from partnerships to partners or LLCs to members.

MEMBER NEWS

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J.P. Morgan Adds New York Office

J.P. Morgan Property Exchange Inc.(JPEX) has announced that they added a New York office located in the city’s financial district.   Michelle Allan has been named Vice President of the recently opened New York location of JPEX.   Prior to joining JPMorgan earlier this year, Allan worked at The Bank of New York, where she held positions within the cash management and stock transfer areas for eight years.    Allan received an MBA from Fordham University and received a BBS from Pace University. She attained her CTP designation and is a board member of the Pace University Lubin School of Business Alumni Association.

Diversified Exchange Acquired by TransUnion.  

The management, administration and operations team, branch locations, and all other contact information remains exactly the SAME - other than the acquisition, significantly increased financial strength and bonding, and a name change to be announced shortly, there will be no other changes at Diversified Exchange.

Here is a link to the press release for more complete information: http://www.diversifiedexchange.com/news_transunion_acquires_diversified.asp.