Borden: Tax-Law Analysis

Bradley T. Borden (Brooklyn; Google Scholar), Tax-Law Analysis:

Tax law has a unique analytical framework, which the nature of tax law requires. In areas of uncertainty, advisors and taxpayers are unable to predict the outcome of some reporting positions with perfect certainty. If a taxpayer takes a reporting position that results in the taxpayer paying less tax at the time a tax return is filed, the taxpayer runs the risk of being required to pay tax later upon an IRS audit. Congress recognizes that there are areas of uncertainty in tax law and only imposes penalties if the authority supporting a reporting position is weak. To determine the strength of a reporting position, a tax advisor must be able to identify and analyze legal authority that relates to the reporting position and determine whether the authority supports the desired reporting position or is contrary to it. 

Bradley T. Borden (Brooklyn; Google Scholar), Tax-Law Analysis Applied to Section 1031 Exchanges & Proximate Business Transactions:

The popularity of nonrecognition of gain under section 1031 of the Internal Revenue Code attracts advisors from several corners of the real estate industry, including real estate attorneys; real estate professionals, such as brokers; section 1031 qualified intermediaries; and tax advisors. The varying degrees of professional training often results in advice varying from one advisor to the next. Nowhere is this more apparent than with respect to so-called “drop-and-swap” and “swap-and-drop” transactions. Some advisors claim that property owners must hold property for a specific period of time before or after an exchange to qualify for section 1031 nonrecognition. Others advise property owners to hold property for some period of time as a precaution to help buoy up the support for claiming section 1031 nonrecognition.

This Article presents an overview of tax law analysis and the authority that governs section 1031 exchanges that occur in proximity to business transactions, i.e., drop-and-swaps and swap-and-drops. The Article shows that very strong authority supports section 1031 nonrecognition even if an exchanger receives exchange property in a tax-free distribution from an entity immediately before an exchange or transfers replacement property as a tax-free contribution to an entity immediately following an exchange. The same cannot be said for advice to hold property for a specific period of time before or after an exchange. In fact, such advice could expose exchangers to other tax and non-tax risks and could expose advisors to advisory risk. Given the popularity of drop-and-swaps and swap-and-drops, it is important that advisors look to the law when providing advice and that they apply tax-law analysis when considering authorities governing this area of the law. This Article provides the foundation for applying tax-law analysis and demonstrates its application to common exchanges that occur in proximity to business transactions.

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