Senators Seek Withdrawal of Proposed Regs on Taxation of Escrow Accounts, Other Funds

We are writing to express our serious concerns regarding regulations recently proposed by the IRS. On February 3, 2006, the IRS and the Treasury Department issued proposed regulations under the Internal Revenue Code relating to the taxation of income earned on escrow accounts, trusts, and other funds used during deferred exchanges of like-kind property. These proposed regulations substantially revise the treatment of escrow accounts, trusts, and other funds used during deferred exchanges of like-kind property, and the treatment of below-market loans associated with the exchanges.

Currently, a business may avoid taxes on a land sale if the proceeds are subsequently used to purchase other land. During this process, the proceeds of the initial sale are held by businesses or banks that function as qualified intermediaries. These intermediaries invest the funds collected from the land sale until such time as the funds are used to purchase new land. In most cases, interest earned by a non-bank intermediary is split between the intermediary and the business that is making the land swap. Existing regulations require that both parties pay taxes on the interest they receive under such arrangements.

The IRS has proposed changes to the regulation to require that all interest earned by an intermediary during the holding process be turned over to the seller of the land. This proposed rule will hurt the ability of non-bank qualified intermediaries to compete against banks. Banks engaging in this type of transaction normally pay all "interest" earned on the funds to the entity making the land swap. The banks profit from this arrangement by depositing such funds into an interest bearing account that pays a lower interest rate than the bank will actually earn on the money. Non-bank qualified intermediaries compete in this sector by investing the funds and retaining a portion of their interest. If non-bank qualified intermediaries are unable to retain any part of the accrued interest, they will have to raise the fees they charge to businesses engaged in land swaps. As a result, non-bank qualified intermediaries will be placed in a competitive disadvantage to banks in this market.

We are concerned that these proposed regulations will result in reduced competition in the qualified intermediaries market, resulting in less innovation and higher costs for consumers. These proposed regulations (REG-113365-04) were issued under Sections 468B and 7872 of the Internal Revenue Code. Section 1031 of the Internal Revenue Code covers the deferred exchanges of like-kind property.

We encourage you to withdraw this anti-competitive rule. Thank you for giving your attention to this matter. Should you have any questions, or if we may be of any assistance to you in the future on any other matter, please do not hesitate to ask.