Like-kind Exchanges of PropertyCoordination With Section 453

DEPARTMENT OF THE TREASURY

26 CFR Parts 1 and 15a

[TD 8535]

RIN 1545-AQ48

Like-kind Exchanges of Property--Coordination With Section 453

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final income tax regulations under

section 1031(a)(3) of the Internal Revenue Code of 1986 relating to the

coordination of deferred like-kind exchanges described in section

1031(a)(3) with the installment sale rules of section 453. The final

regulations affect taxpayers who engage in certain like-kind exchanges

of property under section 1031.

DATES: These regulations are effective April 20, 1994.

For dates of applicability, see Secs. 1.1031(b)-2(d) and 1.1031(k)-

1(j)(2) of the regulations.

FOR FURTHER INFORMATION CONTACT: Christopher F. Kane at (202) 622-4950,

not a toll-free call.

SUPPLEMENTARY INFORMATION:

Background

On May 1, 1991, the IRS published in the Federal Register (56 FR

19933) final regulations under section 1031(a)(3) of the Internal

Revenue Code relating to deferred like-kind exchanges. Section

1.1031(k)-1(j)(2) of the regulations, relating to the coordination of

section 1031(a)(3) with the installment sale provisions of section 453,

is reserved. On November 2, 1992, the IRS published a notice of

proposed rulemaking in the Federal Register (57 FR 49432) coordinating

section 1031(a)(3) with the installment sale provisions of section 453.

After consideration of the written comments received regarding the

proposed regulations, the regulations are adopted as amended by this

Treasury decision. This Treasury decision amends Sec. 1.1031(b)-2 of 26

CFR part 1, Income Tax Regulations, adds the text of Sec. 1.1031(k)-

1(j)(2), and amends Sec. 15a.453-1(b)(3)(i) of 26 CFR part 15a.

Technical Background

In a typical deferred exchange, the taxpayer may require the

transferee to secure its promise to acquire replacement property with a

cash funded escrow account or trust. Alternatively, the taxpayer may

retain an intermediary to arrange for the transfer of replacement

property to the taxpayer. Section 1.1031(k)-1(g) provides certain safe

harbors that, if followed, ensure that these arrangements do not cause

the transaction to be treated as a taxable sale rather than a deferred

exchange for purposes of section 1031. Section 453(a) generally

provides that income from an installment sale is taken into account

under the installment method as payments are made. Section 15a.453-

1(b)(3)(i) of the regulations provides that the receipt of an evidence

of indebtedness that is secured directly or indirectly by cash or a

cash equivalent is treated as the receipt of a payment. That section

also provides that a payment includes amounts actually or

constructively received under an installment obligation.

These final regulations provide rules that coordinate the safe

harbor provisions of Sec. 1.1031(k)-1(g) with the installment sale

rules that determine when a taxpayer is in receipt of a payment under

section 453 and Sec. 15a.453-1(b)(3)(i).

Description of Provisions

The final regulations under Sec. 1.1031(k)-1(g) (3) and (4) provide

certain safe harbors under which taxpayers are treated as not being in

actual or constructive receipt of money or other property held in a

qualified escrow account, qualified trust, or by a qualified

intermediary. These final regulations generally adopt the same safe

harbors for the purpose of determining whether a taxpayer is in receipt

of payment under section 453 and Sec. 15a.453-1(b)(3)(i) if, at the

beginning of the exchange period, the taxpayer has a bona fide intent

to enter into a deferred exchange. The qualified escrow account,

qualified trust, or qualified intermediary is disregarded for purposes

of section 453 and Sec. 15a.453-1(b)(3)(i) until the earlier of (a) the

time the safe harbor would otherwise cease to apply for purposes of

section 1031 (e.g., when the taxpayer has the immediate right to

receive the funds held in the qualified escrow account), or (b) the end

of the exchange period. Thus, subject to the other requirements of

sections 453 and 453A and the related regulations, taxpayers who use

the safe harbors of the existing 1031 regulations and meet the

requirements of these final regulations will be entitled to report gain

recognized on the deferred exchange under the installment method.

Several commentators requested that the bona fide intent

requirement be clarified by providing either examples or presumptions.

Whether a particular taxpayer has a bona fide intent to enter into a

deferred exchange is determined on the basis of all relevant facts and

circumstances. Because the presumptions suggested by commentators would

emphasize certain factors that in many cases should not be

determinative, the final regulations do not contain rules setting forth

presumptions. However, the final regulations clarify that a taxpayer

will be treated as having a bona fide intent only if it is reasonable

to believe, based on all the facts and circumstances as of the

beginning of the exchange period, that like-kind replacement property

will be acquired before the end of the exchange period. In addition,

two examples have been added to the final regulations in which the bona

fide intent requirement is determined to have been satisfied. These

examples are intended to be illustrative only, and do not represent

either the minimum steps required to establish bona fide intent or safe

harbors pursuant to which a bona fide intent will in other contexts be

assumed to exist.

The regulations provide a special rule for deferred exchanges

involving qualified intermediaries. Under this rule, a taxpayer in

receipt of an evidence of indebtedness of the qualified intermediary's

transferee is treated as receiving an evidence of indebtedness of the

transferee of the relinquished property, even though these regulations

generally treat the qualified intermediary as having acquired and

transferred the relinquished property for other purposes. Therefore,

for purposes of section 453 and Sec. 15a.453-1(b)(3)(i), the receipt by

the taxpayer of such an evidence of indebtedness is treated as the

receipt of an evidence of indebtedness of the person acquiring the

relinquished property from the taxpayer and is not considered a payment

under section 453.

One commentator was concerned that the treatment provided by the

special rule terminates at the end of the exchange period even if the

note remains outstanding. The final regulations make clear that this

rule applies beyond the end of the exchange period. Another commentator

suggested that the special rule that treats indebtedness of the

qualified intermediary's transferee as indebtedness of the person

acquiring relinquished property from the taxpayer for purposes of

section 453 and Sec. 15a.453-1(b)(3)(i) should also apply to

simultaneous exchanges under Sec. 1.1031(b)-2. This comment has been

adopted, as reflected in amendments to Sec. 1.1031(b)-2.

Another commentator recommended that the regulations provide that

the distribution of an installment note to the taxpayer at any time by

a qualified intermediary would not terminate the applicability of the

qualified intermediary safe harbor. The Internal Revenue Service and

the Treasury do not believe a special exception to the limitations

contained in Sec. 1.1031(k)-1(g)(4) (ii) and (vi) (relating to the

taxpayer's right to receive or otherwise obtain the benefits of money

or other property held by a qualified intermediary) should be provided

for installment notes. Rather, Sec. 1.1031(k)-1(g)(4)(vii) provides

sufficient flexibility by permitting the receipt of money or other

property (including an installment note) by the taxpayer directly from

a transferee without affecting the applicability of the qualified

intermediary safe harbor. Therefore, this comment has not been adopted.

Another commentator suggested that certain interest payments made

on the installment note during the exchange period be treated as fee

income to the qualified intermediary and not as interest income to the

taxpayer. Section 1.1031(k)-1(h)(2) specifies that interest payments

received by the taxpayer, whether received in cash or property

(including like-kind property), are to be treated as income to the

taxpayer. The determination of whether interest payments retained by a

qualified intermediary should be treated as received by the taxpayer,

and thereby represent income to the taxpayer, is beyond the scope of

this regulation and may be the subject of future guidance.

One commentator requested that the regulations address the timing

of gain recognition in deferred exchanges involving assumptions of

liabilities. The Internal Revenue Service and the Treasury are

currently studying the circumstances under which, and the extent to

which, gain attributable to assumptions of liabilities in like-kind

exchanges (including simultaneous exchanges) should be eligible for

deferral under the installment method. Among other things, this process

will include an examination of the rules proposed under section

453(f)(6) in 1984. Accordingly, this final regulation does not address

these issues.

Two commentators requested that the regulations consider issues

relating to the timing of receipt of income after the end of the

exchange period in cases where the delivery of money or other property

is delayed due to events such as breach of contract or bankruptcy.

Because section 1031(a)(3) requires deferred exchanges to be completed

by the end of the exchange period, the safe harbors from the

constructive receipt rules provided by Sec. 1.1031(k)-1(g) (3) and (4)

have no application after that period. Whether a taxpayer is in receipt

of money or other property held in a qualified escrow account or

qualified trust or by a qualified intermediary after the end of the

exchange period is determined under general principles of federal

income tax law. Therefore, the final regulations do not provide

specific guidance regarding the timing of receipt of income where

delivery of the money or other property held in a qualified escrow

account or a qualified trust, or by a qualified intermediary is delayed

beyond the end of the exchange period.

Several additional comments were received pertaining to issues that

may arise when an installment note is used in a deferred like-kind

exchange. Commentators suggested that guidance be provided on the tax

consequences of making the installment note payable to a qualified

intermediary. Commentators also wanted to know the consequences of a

qualified intermediary's disposition of a note to a third party during

the exchange period. Commentators requested guidance on the treatment

of principal payments made on an installment note during the exchange

period. One commentator requested guidance on the tax consequences of a

reversion to the transferee of cash held in a qualified escrow account

or qualified trust followed by the transferee's issuance of an

installment note to the taxpayer at the end of the exchange period.

Commentators also suggested that the final regulations address the

treatment of issues arising from deferred exchanges of multiple assets.

The issues raised by these comments are broader than the scope of

these regulations. Resolution of these issues would affect not only

deferred like-kind exchanges spanning more than one tax year, but also

such exchanges taking place within one tax year. In addition, these

issues may also involve the character of income rather than the timing

of the receipt of income. Therefore, the final regulations do not

address these comments. However, the Internal Revenue Service will take

these issues into consideration in issuing further guidance in this

area.

Finally, under these regulations, taxpayers may choose to apply the

safe harbors retroactively to transfers of property occurring on or

after May 16, 1990. However, if taxpayers reported gain that qualifies

for installment method reporting under these regulations in the year

they transferred the relinquished property, they in effect elected out

of the installment method. In the preamble to the proposed regulations,

the Internal Revenue Service requested comments on whether the Service

should publish a revenue procedure providing simplified procedures

under which those taxpayers who elected out of the installment method

could use the installment method in reporting gain on those

transactions. Because commentators expressed only minimal interest in

this revenue procedure, the Service will not issue such a revenue

procedure or similar guidance.

Special Analyses

It has been determined that these regulations are not a significant

regulatory action as defined in EO 12866. Therefore, a regulatory

assessment is not required. It has also been determined that section

553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the

Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these

regulations, and, therefore, a Regulatory Flexibility Analysis is not

required. Pursuant to section 7805(f) of the Internal Revenue Code, the

notice of proposed rulemaking published in the Federal Register on

November 2, 1992 (57 FR 49432) was submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on its impact

on small businesses.

Drafting Information

The principal author of these regulations is Christopher F. Kane of

the Office of Assistant Chief Counsel (Income Tax and Accounting),

Internal Revenue Service. However, other personnel from the IRS and

Treasury Department participated in their development.

List of Subjects in 26 CFR Parts 1 and 15a

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendment to the Regulations

Accordingly, 26 CFR parts 1 and 15a are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in

part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.1031(b)-2 is amended as follows:

1. Paragraph (b) is revised.

2. Paragraphs (c) and (d) are added.

3. The added and revised provisions read as follows:

Sec. 1.1031(b)-(2) Safe harbor for qualified intermediaries.

* * * * *

(b) In the case of simultaneous exchanges of like-kind properties

involving a qualified intermediary (as defined in Sec. 1.1031(k)-

1(g)(4)(iii)), the receipt by the taxpayer of an evidence of

indebtedness of the transferee of the qualified intermediary is treated

as the receipt of an evidence of indebtedness of the person acquiring

property from the taxpayer for purposes of section 453 and

Sec. 15a.453-1(b)(3)(i) of this chapter.

(c) Paragraph (a) of this section applies to transfers of property

made by taxpayers on or after June 10, 1991.

(d) Paragraph (b) of this section applies to transfers of property

made by taxpayers on or after April 20, 1994. A taxpayer may choose to

apply paragraph (b) of this section to transfers of property made on or

after June 10, 1991.

Par. 3. In Sec. 1.1031(k)-1, the text of paragraph (j)(2) is added

to read as follows:

Sec. 1.1031(k)-1 Treatment of deferred exchanges.

* * * * *

(j) * * *

(2) Coordination with section 453--(i) Qualified escrow accounts

and qualified trusts. Subject to the limitations of paragraphs (j)(2)

(iv) and (v) of this section, in the case of a taxpayer's transfer of

relinquished property in which the obligation of the taxpayer's

transferee to transfer replacement property to the taxpayer is or may

be secured by cash or a cash equivalent, the determination of whether

the taxpayer has received a payment for purposes of section 453 and

Sec. 15a.453-1(b)(3)(i) of this chapter will be made without regard to

the fact that the obligation is or may be so secured if the cash or

cash equivalent is held in a qualified escrow account or a qualified

trust. This paragraph (j)(2)(i) ceases to apply at the earlier of--

(A) The time described in paragraph (g)(3)(iv) of this section; or

(B) The end of the exchange period.

(ii) Qualified intermediaries. Subject to the limitations of

paragraphs (j)(2) (iv) and (v) of this section, in the case of a

taxpayer's transfer of relinquished property involving a qualified

intermediary, the determination of whether the taxpayer has received a

payment for purposes of section 453 and Sec. 15a.453-1(b)(3)(i) of this

chapter is made as if the qualified intermediary is not the agent of

the taxpayer. For purposes of this paragraph (j)(2)(ii), a person who

otherwise satisfies the definition of a qualified intermediary is

treated as a qualified intermediary even though that person ultimately

fails to acquire identified replacement property and transfer it to the

taxpayer. This paragraph (j)(2)(ii) ceases to apply at the earlier of--

(A) The time described in paragraph (g)(4)(vi) of this section; or

(B) The end of the exchange period.

(iii) Transferee indebtedness. In the case of a transaction

described in paragraph (j)(2)(ii) of this section, the receipt by the

taxpayer of an evidence of indebtedness of the transferee of the

qualified intermediary is treated as the receipt of an evidence of

indebtedness of the person acquiring property from the taxpayer for

purposes of section 453 and Sec. 15a.453-1(b)(3)(i) of this chapter.

(iv) Bona fide intent requirement. The provisions of paragraphs

(j)(2) (i) and (ii) of this section do not apply unless the taxpayer

has a bona fide intent to enter into a deferred exchange at the

beginning of the exchange period. A taxpayer will be treated as having

a bona fide intent only if it is reasonable to believe, based on all

the facts and circumstances as of the beginning of the exchange period,

that like-kind replacement property will be acquired before the end of

the exchange period.

(v) Disqualified property. The provisions of paragraphs (j)(2) (i)

and (ii) of this section do not apply if the relinquished property is

disqualified property. For purposes of this paragraph (j)(2),

disqualified property means property that is not held for productive

use in a trade or business or for investment or is property described

in section 1031(a)(2).

(vi) Examples. This paragraph (j)(2) may be illustrated by the

following examples. Unless otherwise provided in an example, the

following facts are assumed: B is a calendar year taxpayer who agrees

to enter into a deferred exchange. Pursuant to the agreement, B is to

transfer real property X. Real property X, which has been held by B for

investment, is unencumbered and has a fair market value of $100,000 at

the time of transfer. B's adjusted basis in real property X at that

time is $60,000. B identifies a single like-kind replacement property

before the end of the identification period, and B receives the

replacement property before the end of the exchange period. The

transaction qualifies as a like-kind exchange under section 1031.

Example 1. (i) On September 22, 1994, B transfers real property

X to C and C agrees to acquire like-kind property and deliver it to

B. On that date B has a bona fide intent to enter into a deferred

exchange. C's obligation, which is not payable on demand or readily

tradable, is secured by $100,000 in cash. The $100,000 is deposited

by C in an escrow account that is a qualified escrow account under

paragraph (g)(3) of this section. The escrow agreement provides that

B has no rights to receive, pledge, borrow, or otherwise obtain the

benefits of the cash deposited in the escrow account until the

earlier of the date the replacement property is delivered to B or

the end of the exchange period. On March 11, 1995, C acquires

replacement property having a fair market value of $80,000 and

delivers the replacement property to B. The $20,000 in cash

remaining in the qualified escrow account is distributed to B at

that time.

(ii) Under section 1031(b), B recognizes gain to the extent of

the $20,000 in cash that B receives in the exchange. Under paragraph

(j)(2)(i) of this section, the qualified escrow account is

disregarded for purposes of section 453 and Sec. 15a.453-1(b)(3)(i)

of this chapter in determining whether B is in receipt of payment.

Accordingly, B's receipt of C's obligation on September 22, 1994,

does not constitute a payment. Instead, B is treated as receiving

payment on March 11, 1995, on receipt of the $20,000 in cash from

the qualified escrow account. Subject to the other requirements of

sections 453 and 453A, B may report the $20,000 gain in 1995 under

the installment method. See section 453(f)(6) for special rules for

determining total contract price and gross profit in the case of an

exchange described in section 1031(b).

Example 2. (i) D offers to purchase real property X but is

unwilling to participate in a like-kind exchange. B thus enters into

an exchange agreement with C whereby B retains C to facilitate an

exchange with respect to real property X. On September 22, 1994,

pursuant to the agreement, B transfers real property X to C who

transfers it to D for $100,000 in cash. On that date B has a bona

fide intent to enter into a deferred exchange. C is a qualified

intermediary under paragraph (g)(4) of this section. The exchange

agreement provides that B has no rights to receive, pledge, borrow,

or otherwise obtain the benefits of the money held by C until the

earlier of the date the replacement property is delivered to B or

the end of the exchange period. On March 11, 1995, C acquires

replacement property having a fair market value of $80,000 and

delivers it, along with the remaining $20,000 from the transfer of

real property X to B.

(ii) Under section 1031(b), B recognizes gain to the extent of

the $20,000 cash B receives in the exchange. Under paragraph

(j)(2)(ii) of this section, any agency relationship between B and C

is disregarded for purposes of section 453 and Sec. 15a.453-

1(b)(3)(i) of this chapter in determining whether B is in receipt of

payment. Accordingly, B is not treated as having received payment on

September 22, 1994, on C's receipt of payment from D for the

relinquished property. Instead, B is treated as receiving payment on

March 11, 1995, on receipt of the $20,000 in cash from C. Subject to

the other requirements of sections 453 and 453A, B may report the

$20,000 gain in 1995 under the installment method.

Example 3. (i) D offers to purchase real property X but is

unwilling to participate in a like-kind exchange. B enters into an

exchange agreement with C whereby B retains C as a qualified

intermediary to facilitate an exchange with respect to real property

X. On December 1, 1994, pursuant to the agreement, B transfers real

property X to C who transfers it to D for $100,000 in cash. On that

date B has a bona fide intent to enter into a deferred exchange. The

exchange agreement provides that B has no rights to receive, pledge,

borrow, or otherwise obtain the benefits of the cash held by C until

the earliest of the end of the identification period if B has not

identified replacement property, the date the replacement property

is delivered to B, or the end of the exchange period. Although B has

a bona fide intent to enter into a deferred exchange at the

beginning of the exchange period, B does not identify or acquire any

replacement property. In 1995, at the end of the identification

period, C delivers the entire $100,000 from the sale of real

property X to B.

(ii) Under section 1001, B realizes gain to the extent of the

amount realized ($100,000) over the adjusted basis in real property

X ($60,000), or $40,000. Because B has a bona fide intent at the

beginning of the exchange period to enter into a deferred exchange,

paragraph (j)(2)(iv) of this section does not make paragraph

(j)(2)(ii) of this section inapplicable even though B fails to

acquire replacement property. Further, under paragraph (j)(2)(ii) of

this section, C is a qualified intermediary even though C does not

acquire and transfer replacement property to B. Thus, any agency

relationship between B and C is disregarded for purposes of section

453 and Sec. 15a.453-1(b)(3)(i) of this chapter in determining

whether B is in receipt of payment. Accordingly, B is not treated as

having received payment on December 1, 1994, on C's receipt of

payment from D for the relinquished property. Instead, B is treated

as receiving payment at the end of the identification period in 1995

on receipt of the $100,000 in cash from C. Subject to the other

requirements of sections 453 and 453A, B may report the $40,000 gain

in 1995 under the installment method.

Example 4. (i) D offers to purchase real property X but is

unwilling to participate in a like-kind exchange. B thus enters into

an exchange agreement with C whereby B retains C to facilitate an

exchange with respect to real property X. C is a qualified

intermediary under paragraph (g)(4) of this section. On September

22, 1994, pursuant to the agreement, B transfers real property X to

C who then transfers it to D for $80,000 in cash and D's 10-year

installment obligation for $20,000. On that date B has a bona fide

intent to enter into a deferred exchange. The exchange agreement

provides that B has no rights to receive, pledge, borrow, or

otherwise obtain the benefits of the money or other property held by

C until the earlier of the date the replacement property is

delivered to B or the end of the exchange period. D's obligation

bears adequate stated interest and is not payable on demand or

readily tradable. On March 11, 1995, C acquires replacement property

having a fair market value of $80,000 and delivers it, along with

the $20,000 installment obligation, to B.

(ii) Under section 1031(b), $20,000 of B's gain (i.e., the

amount of the installment obligation B receives in the exchange)

does not qualify for nonrecognition under section 1031(a). Under

paragraphs (j)(2) (ii) and (iii) of this section, B's receipt of D's

obligation is treated as the receipt of an obligation of the person

acquiring the property for purposes of section 453 and Sec. 15a.453-

1(b)(3)(i) of this chapter in determining whether B is in receipt of

payment. Accordingly, B's receipt of the obligation is not treated

as a payment. Subject to the other requirements of sections 453 and

453A, B may report the $20,000 gain under the installment method on

receiving payments from D on the obligation.

Example 5. (i) B is a corporation that has held real property X

to expand its manufacturing operations. However, at a meeting in

November 1994, B's directors decide that real property X is not

suitable for the planned expansion, and authorize a like-kind

exchange of this property for property that would be suitable for

the planned expansion. B enters into an exchange agreement with C

whereby B retains C as a qualified intermediary to facilitate an

exchange with respect to real property X. On November 28, 1994,

pursuant to the agreement, B transfers real property X to C, who

then transfers it to D for $100,000 in cash. The exchange agreement

does not include any limitations or conditions that make it

unreasonable to believe that like-kind replacement property will be

acquired before the end of the exchange period. The exchange

agreement provides that B has no rights to receive, pledge, borrow,

or otherwise obtain the benefits of the cash held by C until the

earliest of the end of the identification period, if B has not

identified replacement property, the date the replacement property

is delivered to B, or the end of the exchange period. In early

January 1995, B's directors meet and decide that it is not feasible

to proceed with the planned expansion due to a business downturn

reflected in B's preliminary financial reports for the last quarter

of 1994. Thus, B's directors instruct C to stop seeking replacement

property. C delivers the $100,000 cash to B on January 12, 1995, at

the end of the identification period. Both the decision to exchange

real property X for other property and the decision to cease seeking

replacement property because of B's business downturn are recorded

in the minutes of the directors' meetings. There are no other facts

or circumstances that would indicate whether, on November 28, 1994,

B had a bona fide intent to enter into a deferred like-kind

exchange.

(ii) Under section 1001, B realizes gain to the extent of the

amount realized ($100,000) over the adjusted basis of real property

X ($60,000), or $40,000. The directors' authorization of a like-kind

exchange, the terms of the exchange agreement with C, and the

absence of other relevant facts, indicate that B had a bona fide

intent at the beginning of the exchange period to enter into a

deferred like-kind exchange. Thus, paragraph (j)(2)(iv) of this

section does not make paragraph (j)(2)(ii) of this section

inapplicable, even though B fails to acquire replacement property.

Further, under paragraph (j)(2)(ii) of this section, C is a

qualified intermediary, even though C does not transfer replacement

property to B. Thus, any agency relationship between B and C is

disregarded for purposes of section 453 and Sec. 15a.453-1(b)(3)(i)

of this chapter in determining whether B is in receipt of payment.

Accordingly, B is not treated as having received payment until

January 12, 1995, on receipt of the $100,000 cash from C. Subject to

the other requirements of sections 453 and 453A, B may report the

$40,000 gain in 1995 under the installment method.

Example 6. (i) B has held real property X for use in its trade

or business, but decides to transfer that property because it is no

longer suitable for B's planned expansion of its commercial

enterprise. B and D agree to enter into a deferred exchange.

Pursuant to their agreement, B transfers real property X to D on

September 22, 1994, and D deposits $100,000 cash in a qualified

escrow account as security for D's obligation under the agreement to

transfer replacement property to B before the end of the exchange

period. D's obligation is not payable on demand or readily tradable.

The agreement provides that B is not required to accept any property

that is not zoned for commercial use. Before the end of the

identification period, B identifies real properties J, K, and L, all

zoned for residential use, as replacement properties. Any one of

these properties, rezoned for commercial use, would be suitable for

B's planned expansion. In recent years, the zoning board with

jurisdiction over properties J, K, and L has rezoned similar

properties for commercial use. The escrow agreement provides that B

has no rights to receive, pledge, borrow, or otherwise obtain the

benefits of the money in the escrow account until the earlier of the

time that the zoning board determines, after the end of the

identification period, that it will not rezone the properties for

commercial use or the end of the exchange period. On January 5,

1995, the zoning board decides that none of the properties will be

rezoned for commercial use. Pursuant to the exchange agreement, B

receives the $100,000 cash from the escrow on January 5, 1995. There

are no other facts or circumstances that would indicate whether, on

September 22, 1994, B had a bona fide intent to enter into a

deferred like-kind exchange.

(ii) Under section 1001, B realizes gain to the extent of the

amount realized ($100,000) over the adjusted basis of real property

X ($60,000), or $40,000. The terms of the exchange agreement with D,

the identification of properties J, K, and L, the efforts to have

those properties rezoned for commercial purposes, and the absence of

other relevant facts, indicate that B had a bona fide intent at the

beginning of the exchange period to enter into a deferred exchange.

Moreover, the limitations imposed in the exchange agreement on

acceptable replacement property do not make it unreasonable to

believe that like-kind replacement property would be acquired before

the end of the exchange period. Therefore, paragraph (j)(2)(iv) of

this section does not make paragraph (j)(2)(i) of this section

inapplicable even though B fails to acquire replacement property.

Thus, for purposes of section 453 and Sec. 15a.453-1(b)(3)(i) of

this chapter, the qualified escrow account is disregarded in

determining whether B is in receipt of payment. Accordingly, B is

not treated as having received payment on September 22, 1994, on D's

deposit of the $100,000 cash into the qualified escrow account.

Instead, B is treated as receiving payment on January 5, 1995.

Subject to the other requirements of sections 453 and 453A, B may

report the $40,000 gain in 1995 under the installment method.

(vii) Effective date. This paragraph (j)(2) is effective for

transfers of property occurring on or after April 20, 1994. Taxpayers

may apply this paragraph (j)(2) to transfers of property occurring

before April 20, 1994, but on or after June 10, 1991, if those

transfers otherwise meet the requirements of Sec. 1.1031(k)-1. In

addition, taxpayers may apply this paragraph (j)(2) to transfers of

property occurring before June 10, 1991, but on or after May 16, 1990,

if those transfers otherwise meet the requirements of Sec. 1.1031(k)-1

or follow the guidance of IA-237-84 published in 1990-1, C.B. See

Sec. 601.601(d)(2)(ii)(b) of this chapter.

PART 15a--TEMPORARY INCOME TAX REGULATIONS UNDER THE INSTALLMENT

SALES REVISION ACT

Par. 4. The authority citation for part 15a is revised to read as

follows:

Authority: 26 U.S.C. 453(i) and 7805.

Par. 5. In Sec. 15a.453-1, paragraph (b)(3)(i) is amended by adding

a sentence, after the current first sentence, after the current third

sentence, and after the current fourth sentence, respectively, to read

as follows:

Sec. 15a.453-1 Installment method reporting for sales of real property

and casual sales of personal property.

* * * * *

(b) * * *

(3) Payment--(i) In general. * * * For special rules regarding the

receipt of an evidence of indebtedness of a transferee of a qualified

intermediary, see Secs. 1.1031(b)-2(b) and 1.1031(k)-1(j)(2)(iii) of

this chapter. * * * For a special rule regarding a transfer of property

to a qualified intermediary followed by the sale of such property by

the qualified intermediary, see Sec. 1.1031(k)-1(j)(2)(ii) of this

chapter. * * * For a special rule regarding a transfer of property in

exchange for an obligation that is secured by cash or a cash equivalent

held in a qualified escrow account or a qualified trust, see

Sec. 1.1031(k)-1(j)(2)(i) of this chapter. * * *

* * * * *

Approved: March 16, 1994.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 94-9557 Filed 4-19-94; 8:45 am]

BILLING CODE 4830-01-U