## Facts

- X (calendar-year taxpayer) and Y (unrelated) entered a contract on May 14, 1989 requiring X to transfer Black Acre to Y and requiring Y to provide X like-kind property of equal fair market value.
- Black Acre was unencumbered real property held by X for productive use in X’s trade or business, with a fair market value of $1,000,000.
- The contract required X to identify replacement property within 45 days of transferring Black Acre and required Y to acquire and transfer the identified property to X by the earlier of 180 days after the transfer or X’s return due date (including extensions).
- The contract required Y to pay $1,000,000 to X if X failed to identify replacement property within the identification period or if Y failed to transfer the replacement property within the exchange period.
- On May 23, 1989, X transferred Black Acre to Y.
- On June 1, 1989, within the identification period, X properly identified Whiteacre, owned by Z (unrelated), as the replacement property.
- Whiteacre was unencumbered real property of like kind to Black Acre, with a fair market value of $1,000,000.
- On July 10, 1989, Y purchased Whiteacre from Z and directed Z to transfer legal title to Whiteacre directly to X within the exchange period; X thereafter held Whiteacre for productive use in its trade or business.
- Y never held legal title to Whiteacre.

## Issues

1. Whether X’s transaction qualifies for nonrecognition under I.R.C. § 1031 when X transfers relinquished property to Y, but the replacement property is deeded directly from Z to X and Y never holds legal title to the replacement property.

## Decision

- The IRS concluded the transaction qualified as to X for nonrecognition of gain or loss under I.R.C. § 1031.
- The IRS determined that Y’s failure to take legal title to Whiteacre did not prevent the arrangement from being an “exchange” for § 1031 purposes.

## Legal Principles

- Nonrecognition under I.R.C. § 1031(a)(1) applies when property held for productive use in a trade or business or for investment is exchanged solely for like-kind property to be held for qualifying purposes.
- An “exchange” may occur in a multiparty structure; the intermediary’s obligation to provide like-kind replacement property can be satisfied through acquisition from a third party with direct conveyance to the taxpayer.
- Direct deeding of replacement property to the taxpayer does not, by itself, disqualify § 1031 treatment when the steps form a single integrated exchange and the taxpayer receives only like-kind property (no cash or other non-like-kind property).
- Satisfaction of the identification and exchange timing requirements described in the arrangement supports exchange treatment, along with the taxpayer’s transfer of relinquished property and receipt of identified like-kind replacement property.

## Conclusion

The IRS treated the described three-party, direct-deed real estate transaction as a qualifying like-kind exchange under I.R.C. § 1031 for X, notwithstanding that Y never held legal title to the replacement property, because the arrangement functioned as an integrated exchange of like-kind property within the specified time limits.


Rev. Rul. 90-34, 1990-1 C.B. 154 (1990)