[Federal Register Volume 59, Number 76 (Wednesday, April 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9557]


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[Federal Register: April 20, 1994]


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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