[Federal Register Volume 67, Number 22 (Friday, February 1, 2002)]
[Rules and Regulations]
[Pages 4907-4909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2532]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8982]
RIN 1545-AY19


Definition of Disqualified Person

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations narrowing the 
definition of the term disqualified person for section 1031 like-kind 
exchanges. The amendments in the regulations are in response to recent 
changes in the federal banking law, especially the repeal of section 20 
of the Banking Act of 1933 (commonly referred to as the Glass-Steagall 
Act). The regulations will affect the eligibility of certain persons to 
serve as escrow holders of qualified escrow accounts, trustees of 
qualified trusts, and qualified intermediaries.

DATES: Effective Date: These regulations are effective February 1, 
2002.
    Dates of Applicability: These regulations apply to transfers of 
property made by a taxpayer on or after January 17, 2001.

FOR FURTHER INFORMATION CONTACT: Brendan O'Hara, (202) 622-4920 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR Part 1) under Sec. 1.1031(k)-1. On January 17, 2001, the IRS and 
Treasury Department published in the Federal Register a notice of 
proposed rulemaking under section 1031 (66 FR 3924). The notice 
proposed to amend Sec. 1.1031(k)-1(k) by narrowing the definition of 
the term disqualified person. Comments responding to the notice were 
received, and a public hearing was held on June 5, 2001. After 
considering the comments received in response to the notice of proposed 
rulemaking and the statements made at the public hearing, the proposed 
regulations are adopted as revised by this Treasury decision. The 
comments and revisions are discussed below.

[[Page 4908]]

Explanation of Provisions

    Under section 1031 and the regulations thereunder, taxpayers may 
use a qualified escrow account, qualified trust, or qualified 
intermediary to facilitate a like-kind exchange. A requirement common 
to qualified escrow accounts, qualified trusts, and qualified 
intermediaries is that the escrow holder, trustee, or intermediary may 
not be the taxpayer or a disqualified person.
    Section 1.1031(k)-1(k) defines a disqualified person to include an 
agent of the taxpayer at the time of the transaction. An agent includes 
a person that has acted as the taxpayer's employee, attorney, 
accountant, investment banker or broker, or real estate agent or broker 
within two years of the taxpayer's transfer of relinquished property. 
However, in determining whether a person is a disqualified person, 
services provided by such person for the taxpayer with respect to 
section 1031 exchanges of property and routine financial, title 
insurance, escrow, or trust services provided to the taxpayer by a 
financial institution, title insurance company, or escrow company are 
not taken into account. Under Sec. 1.1031(k)-1(k)(4), a person that is 
related to a disqualified person, determined by using the attribution 
rules of sections 267(b) and 707(b), but substituting 10 percent for 50 
percent, is also considered a disqualified person.
    As a consequence of the Gramm-Leach-Bliley Act, Public Law 106-102 
(Nov. 12, 1999), 113 Stat. 1341, and other changes in policy by the 
Federal Reserve System in recent years, many banks are, or are in the 
process of becoming, members of controlled groups that include 
investment banking and brokerage firms. These new relationships between 
banks and investment banking and brokerage firms may make it difficult 
for some banks to continue their traditional practices of providing 
qualified escrow, qualified trust, and qualified intermediary services 
without violating the disqualified person rules. To allow banks to 
continue to perform these services, the proposed regulations provide 
that a bank that is a member of a controlled group that includes an 
investment banking or brokerage firm as a member will not be a 
disqualified person merely because the related investment banking or 
brokerage firm provided services to an exchange customer within a two-
year period ending on the date of the transfer of the relinquished 
property by that customer.
    Treasury and the IRS received several comments on the proposed 
regulations. Some commentators argued that the proposed exception to 
the disqualified person rules would not fulfill its intended purpose, 
because most banks use non-bank subsidiaries or affiliates to serve as 
escrow holders of qualified escrow accounts, trustees of qualified 
trusts, or qualified intermediaries. These commentators recommended 
that the proposed exception be extended to apply to subsidiaries and 
affiliates of banks. In response to these comments, the final 
regulations extend the proposed exception to bank affiliates as well as 
banks. For this purpose, a bank affiliate is a non-bank corporation 
whose principal activity is rendering services to facilitate exchanges 
of property intended to qualify for nonrecognition of gain under 
section 1031 and all of whose outstanding stock is owned by either a 
bank or a bank holding company (within the meaning of section 2(a) of 
the Bank Holding Company Act of 1956, 12 U.S.C. 1841(a)).
    Some commentators noted the discrepancy between the effective date 
set forth in the text of the proposed regulations (i.e., applicable to 
transfers of relinquished property on or after the date of the final 
regulations) and the effective date set forth in the Preamble to those 
regulations (i.e., applicable to transfers of relinquished property on 
or after January 17, 2001). In response to the comments, the final 
regulations adopt the earlier of the two effective dates, and thus 
apply in the case of transfers of relinquished property made by a 
taxpayer on or after January 17, 2001.
    Other commentators expressed opposition to the proposed 
regulations, requesting that the regulations be withdrawn. The 
commentators maintained that the existing regulations provide adequate 
exceptions to the definition of disqualified person, and that an 
exception for the banking industry will erode the integrity and purpose 
of the disqualified person concept.
    Treasury and the IRS continue to believe that the amendment to the 
regulations is appropriate and necessary for the reasons articulated in 
the Preamble to the proposed regulations. Banks and their affiliates 
are closely regulated institutions that have historically acted as 
neutral and independent holders of funds. Treasury and the IRS do not 
believe that recent changes to federal banking laws are likely to 
impinge on this role to any significant degree.
    Finally, one commentator requested that the final regulations 
include the exception from the disqualified person rule set forth in 
section 3.03 of Rev. Proc. 2000-37 (2000-40 I.R.B. 308). Rev. Proc. 
2000-37, published to facilitate reverse like-kind exchanges, provides 
a safe harbor for the qualification under section 1031 of certain 
arrangements between taxpayers and exchange accommodation titleholders 
and provides for the treatment of the exchange accommodation 
titleholder as the beneficial owner of the property for federal income 
tax purposes. Section 3.03 of the revenue procedure provides that 
services performed for the taxpayer in connection with a person's role 
as the exchange accommodation titleholder are not taken into account in 
determining whether that person or a related person is a disqualified 
person. Treasury and the IRS do not believe that this rule needs to be 
restated in these regulations. Consequently, the final regulations do 
not include the exception from the disqualified person rule set forth 
in Rev. Proc. 2000-37.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 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) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the 
notice of proposed rulemaking preceding these regulations was submitted 
to the Chief Counsel for Advocacy of the Small Business Administration 
for comment on its impact on small business.

Drafting Information

    The principal author of the regulations is Brendan O'Hara, Office 
of Associate Chief Counsel (Income Tax and Accounting). However, other 
personnel from the IRS and Treasury Department participated in the 
development of the regulations.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

[[Page 4909]]

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. In Sec. 1.1031(k)-1, paragraph (k)(4) is revised to read as 
follows:


Sec. 1.1031(k)-1  Treatment of deferred exchanges.

* * * * *
    (k) * * *
    (4)(i) Except as provided in paragraph (k)(4)(ii) of this section, 
the person and a person described in paragraph (k)(2) of this section 
bear a relationship described in either section 267(b) or 707(b) 
(determined by substituting in each section ``10 percent'' for ``50 
percent'' each place it appears).
    (ii) In the case of a transfer of relinquished property made by a 
taxpayer on or after January 17, 2001, paragraph (k)(4)(i) of this 
section does not apply to a bank (as defined in section 581) or a bank 
affiliate if, but for this paragraph (k)(4)(ii), the bank or bank 
affiliate would be a disqualified person under paragraph (k)(4)(i) of 
this section solely because it is a member of the same controlled group 
(as determined under section 267(f)(1), substituting ``10 percent'' for 
``50 percent' where it appears) as a person that has provided 
investment banking or brokerage services to the taxpayer within the 2-
year period described in paragraph (k)(2) of this section. For purposes 
of this paragraph (k)(4)(ii), a bank affiliate is a corporation whose 
principal activity is rendering services to facilitate exchanges of 
property intended to qualify for nonrecognition of gain under section 
1031 and all of whose stock is owned by either a bank or a bank holding 
company (within the meaning of section 2(a) of the Bank Holding Company 
Act of 1956 (12 U.S.C. 1841(a)).
* * * * *

    Approved: January 25, 2002.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Mark Weinberger,
Assistant Secretary of the Treasury.
[FR Doc. 02-2532 Filed 1-31-02; 8:45 am]
BILLING CODE 4830-01-P