Tax News

CCH (cch.taxgroup.com) reports:

  The Treasury and IRS have issued final regulations that address the taxation of income earned on escrow accounts, trusts and other funds used during deferred like-kind exchanges of property. Final regulations are also issued on below-market loans to facilitators of these exchanges (T.D. 9413). The regulations affect taxpayers that engage in deferred like-kind exchanges and escrow holders, trustees, qualified intermediaries and others that hold the funds during the like-kind exchange.

  The final regulations provide that exchange funds are generally treated as loaned by a taxpayer to an exchange facilitator. The exchange facilitator must take all items of income, deduction and credit into account. Exchange funds are defined as relinquished property, cash or cash equivalents that secure the obligation of the transferee to transfer replacement property or proceeds from a transfer of relinquished property held in a qualified escrow account, qualified trust, or other escrow account, trust or fund in a deferred exchange. An exchange facilitator is a qualified intermediary (QI), transferee, escrow holder, trustee or other party that holds exchange funds for a taxpayer in a deferred exchange pursuant to an escrow, trust or exchange agreement.

  Loan treatment will not apply if the escrow agreement, trust agreement, or exchange agreement specifies that the earnings attributable to the exchange funds are payable to the taxpayer. In this situation, the taxpayer must take all items of income, deduction, and credit attributable to the exchange funds into account. The regulations provide a definitive test for determining earnings attributable to a taxpayer's exchange funds when an exchange facilitator holds the taxpayer's exchange funds in a separately identified account or sub-account. Under the rule, the earnings attributable to the taxpayer's exchange fund include only the earnings on the separately identified account. Further, fees for administrative services are not treated as earnings attributable to exchange funds.

  If the exchange funds are treated as loaned by the taxpayer to the exchange facilitator, interest is generally imputed to the taxpayer under Code Sec. 7872, unless the exchange facilitator pays sufficient interest. The exchange facilitator has income from the imputed interest and offsetting deductions for the deemed paid interest.

  The final regulations contain a number of measures intended to alleviate any burden placed on small businesses from loan characterization. Specifically, the regulations provide an exemption from Code Sec. 7872 for an exchange facilitator loan if the amount of the exchange funds treated as loaned does not exceed $2 million and the duration of the loan is six months or less. The final regulatory flexibility analysis estimates that approximately 325 businesses are full-time exchange facilitators. Of that number, a significant portion of the qualified intermediary industry consists of small businesses with $2 million or less in annual gross receipts.

  The regulations also provide a special AFR that is the investment rate on a 13-week (generally 91-day) Treasury bill. Because the short-term AFR may be lower than the 91-day rate, taxpayers may apply the lower of the two when testing for sufficient interest under Code Sec. 7872. A transition period is also provided to allow exchange facilitators time to make required changes to accounting, control and reporting systems and to revise exchange agreements.

  The regulations apply to transfers of relinquished property made, and to exchange facilitator loans issued, on or after October 8, 2008. With respect to transfers of relinquished property made by taxpayers after August 16, 1986, but before October 8, 2008, the IRS will not challenge any consistently applied method of taxation for income attributable to exchange funds.

T.D. 9413, 2008FED ¶47,049

Other References:

 
Code Sec. 468B

  CCH Reference - 2008FED ¶21,950B

  CCH Reference - 2008FED ¶21,950HC

 
Code Sec. 1031

  CCH Reference - 2008FED ¶29,619

 
Code Sec. 7872

  CCH Reference - 2008FED ¶43,957CE

  CCH Reference - 2008FED ¶4,959J

  Tax Research Consultant

  CCH Reference - TRC ACCTNG: 12,222

  CCH Reference - TRC FILEBUS: 9,350

  CCH Reference - TRC FILEBUS: 9,372