Tax-Free Exchanges: The Fischer Article (Text p. 677) #1 Transfer of Unqualified PropertyPowerPoint Presentation#2 Receipt of Unqualified Property (Recall 1031(b)) (taxpayer actually receives cash) The Taxpayer must value the property receivedTransfer of Property Subject to a Liability and 1031 (taxpayer is deemed to receive cash)Transfer of Property Subject to a Liability and 1031 (deemed receipt of cash) (cont’d)Slide 6Slide 7Section 1031 RecapStarker v. United States (9th Cir. 1979)(Text p. 682) (Starker II)Starker I and Starker IIStarker II (the first two parcels—conveyance to TJ’s daughter)Timian (Residence) & Bi-Mart (Commercial)Starker II— IRS Arguments about the Timian (residence) Property Conveyed to T.J.’s DaughterStarker II: IRS Arguments About the Timian (residence) property conveyed to T.J.’s Daughter (cont’d)Starker II: Timing of Recognition as to Timian and Bi-MartStarker II: Timing of Recognition as to Timian and Bi-Mart (cont’d)Starker II and Section 1031(a)(3)Starker II: The Booth Property (commercial) (the third parcel—something was transferred to TJ)Starker II: The Booth PropertySlide 19Nonsimultaneous TransfersNonsimultaneous Transfers (cont’d)Final Thoughts on Starker IIFinal Thoughts on Starker II (cont’d)The Sale-Leaseback: Advantages to “Buyer”The Sale-Leaseback: Advantages to “Buyer” (cont’d)The Sale-Leaseback: Benefits and Burdens of “Tenant”The Sale-Leaseback: Benefits and Burdens of “Tenant” (cont’d)The Sale-Leaseback: Other Advantages to “Seller-Tenant”The Sale-Leaseback: Other Advantages to “Seller-Tenant” (cont’d)Some Recent DevelopmentsSale-Leasebacks as Equitable MortgagesConsequences if Substance Trumps FormSlide 33Bankruptcy or Insolvency of TenantBankruptcy or Insolvency of Tenant (cont’d)Slide 36Frank Lyon Company v. United States (Text p. 843)Frank Lyon (cont’d)Slide 39Frank Lyon (further facts)Slide 41Condemnation or DestructionBank Had Four Options to “repurchase” the buildingBank’s options to “repurchase” the building (cont’d)Bank’s Options to Repurchase the Building (cont’d)Possibilities if Bank Does Not Exercise Its Options to PurchaseBasic Possibilities SummarizedDistrict Court Permitted Lyon to Claim Depreciation DeductionsEighth Circuit Reversed the District CourtEighth Circuit Reversal (cont’d)Supreme Court reversed Eighth Circuit and Allowed Lyon the Depreciation DeductionsSupreme Court’s Points to Reverse the Eighth CircuitSupreme Court Emphasized RiskSome Other FactorsBlackmun on 2d Mortgages and OwnershipMore Blackmun PointsMore BlackmunThe “Black Letter” Law of Frank LyonJustice Stevens’ DissentStevens’ Dissent (cont’d)Slide 61Stevens’ Dissent (fin.)Idiosyncratic FactsHilton (Part I) (Supp. p. 244)Hilton (Part II)Hilton (cont’d)Hilton and Frank LyonSlide 68Genuinely Multi-Party?Genuinely Multi-Party? (cont’d)Slide 71Slide 72With Economic Substance?Slide 74The “Fatally Defective” Analysis of the Taxpayer’s Expert on Economic SubstanceThe Taxpayer’s Defective Expert on Economic Substance (cont’d)The Taxpayers’ Expert on Economic Substance (cont’d)The “Generally Persuasive” IRS ExpertThe “Generally Persuasive” IRS Expert (cont’d)IRS Expert on Sources of Profit to the PartnersSources of Profit to the Partners (cont’d)Slide 82Slide 83Sources of Profit to Partners (cont’d)Slide 85Slide 86Tax Court Wrap-upTax Court Wrap-up (cont’d)Slide 899th Circuit Affirms Tax Court with “Two specific caveats”9th Circuit Affirms with “Two specific caveats” (cont’d)Slide 92FASB Approaches GenerallyDonald J. Weidner1Tax-Free Exchanges: The Fischer Article (Text p. 677)#1 Transfer of Unqualified PropertyATX AA with a FMV of $11,000 RE with an AB of $10,000 Stock with a FMV of $2,000 with an AB of [$5,000]BATXBBARE with a FMV of $13,000A’s Basis in Property Received?A takes the $2,000 portion of BA A received for the stock with a basis of $2,000.A takes the $11,000 portion of BA A received for the real estate with a basis of $10,000. Tax consequences to A? Basic analysis : Bifurcate into two exchanges 1) “A is deemed to have received a $2,000 portion of the acquired real estate (BA) in exchange for the stock, since $2,000 is the FMV of the stock at the time of the exchange. A $3,000 loss is [realized and] recognized under section 1002 on the exchange of the stock for real estate.”2) “No gain or loss is recognized on the exchange of the real estate since the property received is of the type permitted to be received without recognition of gain or loss…”A’s basis in BA is $2,000 + $10,000 = $12,000Continued…Donald J. Weidner2A’s basis in BA is $2,000 + $10,000 = $12,000First Exchange2/13ths interestSecond Exchange11/13ths interestTotal basis in BAA’s total basis in BA is the sum of the bases A received in the two exchanges in which he received an 11/13 interest in BA and a 2/13 interest in BA.Full recognition on two exchanges would have been: $1,000 gain + $3,000 loss The loss is recognizedThe basis rules postpone the gain: take $13,000 FMV property at $12,000 basis.Donald J. Weidner3#2 Receipt of Unqualified Property (Recall 1031(b))(taxpayer actually receives cash)The Taxpayer must value the property receivedATX A Transfers RE with AB of $5,000B Transfers: RE [with FMV of $6,000] Cash of $2,000B Tax consequences to A? Here, A’s realized gain is computed AR = $8,000 [$6,000 FMV of RE + $2,000 cash]-AB = $5,000 [basis in RE transferred to B] GAIN = $3,000 Gain Realized“The gain [realized] from the transaction is $3,000, but is recognized only to the extent of the cash received of $2,000.”Recognition of the remaining gain is deferred under 1031(a).“The receipt of cash in partial consideration for the exchange of property is tantamount to a partial sale of the property and will cause the recognition of any gain accordingly.”A’s basis in the real property received (see 1031(d)) : AB in property given up $5,000+ Gain recognized 2,000- cash received 2,000- any loss recognized n/a Basis in real property received $5,000A takes 1. $2,000 cash with $2,000 basis; and 2. $6,000 FMV property with $5,000 basis. $1,000 additional gain remains to be recognizedDonald J. Weidner4Transfer of Property Subject to a Liability and 1031(taxpayer is deemed to receive cash)•See 1031(d): “For purposes of this section . . . where as part