Law Firm Seeks Guidance on Like-Kind Exchanges Involving Bankrupt Qualified Intermediaries

Dear Mr. Solomon:

We are writing in regards to the plight of the large number of taxpayers that may be adversely affected by the recent bankruptcy filing of LandAmerica 1031 Exchange Services, Inc. ("LandAmerica").

LandAmerica served as a "qualified intermediary" under the safe harbor reflected in Treasury Regulation Section 1.1031(k)-1(g)(4), which permits qualified intermediaries to hold sale proceeds in connection with deferred like kind exchanges without causing selling taxpayers to be considered to be in actual or constructive receipt of the sale proceeds. We understand that when LandAmerica filed its Chapter 11 petition, it was acting as a qualified intermediary pursuant to approximately 450 exchange agreements.¹ Unfortunately, the current economic crisis creates considerable risk that other qualified intermediaries will fail, and hundreds, if not thousands, of additional taxpayers may find themselves in the same position as LandAmerica's current customers.

Taxpayers who are able to recover funds held by LandAmerica (or other failed qualified intermediaries) will generally wish to complete their like kind exchanges. However, LandAmerica has indicated that it will cease operations and may not honor exchange agreements. In such event, the most straightforward solution would be for LandAmerica customers to have replacement qualified intermediaries assume LandAmerica's duties under their exchange agreements (and take possession of sale proceeds currently held by LandAmerica). There is, however, no clear authority on the tax consequences of the bankruptcy of a qualified intermediary that is holding taxpayer funds. We are therefore concerned that the IRS will take the position that the use of a replacement qualified intermediary is not authorized under the qualified intermediary safe harbor and that an attempt to replace a bankrupt qualified intermediary would cause a deferred like kind exchange to be fully taxable.²

It would, of course, be unfair if customers of failed qualified intermediaries were not permitted to complete their like kind exchanges. We therefore respectfully request that the IRS issue a notice confirming that the assumption by a replacement qualified intermediary of the duties of a failed qualified intermediary under an exchange agreement will not cause a deferred like kind exchange to fall outside the qualified intermediary safe harbor at Treasury Regulation Section 1.1031(k)-1(g)(4).

Any guidance regarding failed qualified intermediaries should be issued as soon as possible. A taxpayer participating in a deferred like kind exchange must complete its exchange no later than the day which is 180 days after the date on which it transferred the relinquished property (and often sooner). Without immediate guidance, customers of failed qualified intermediaries may find it necessary to abandon their contemplated exchanges, in order to set aside funds needed to satisfy unanticipated tax liabilities.

We should emphasize that the relief that we are requesting is very limited in scope. We are not, for example, requesting that the Treasury Department extend the period within which taxpayers are required to complete their exchanges. That period is fixed by statute, and the Treasury Department may not unilaterally extend it.

We would be happy to provide you with further input on this issue at your convenience. Thank you for taking the time to consider our views.

² We understand that the IRS might permit customers of failed qualified intermediaries to complete their like kind exchanges with funds obtained from other sources, but such a solution would appear to be impractical for most customers.