Funds Used During Exchanges of Like-Kind Property

The Office of Advocacy sent a comment letter to the Department of Treasury and Internal Revenue Service (IRS),in response to their notice of proposed rulemaking entitled, Escrow Accounts, Trusts and Other Funds Used During Exchanges of Like-Kind Property. Advocacy has advised Treasury and IRS to publish in the Federal Register an amended initial regulatory flexible analysis (IRFA).

• The Internal Revenue Code (Code) allows taxpayers to engage in like-kind exchanges of business
  property under section 1031. The use of a Qualified Intermediaries (QI) is a safe harbor that
  permits taxpayers to complete a deferred like-kind exchange.
• QIs hold the proceeds of a sale of business property while the taxpayer locates replacement
  business property. In general, QIs generate revenue by charging a fee and retaining all or a portion
  of the interest earned on the exchange proceeds that they manage. The revenue earned from
  interest accounts for a significant amount of the QIs overall revenue.
• The Treasury and IRS have proposed treating the funds held by QIs as a loan from the exchanging
  taxpayer to the QI. If the QI does not remit the entire earnings on the funds they manage to the
  exchanging taxpayer, then the Treasury and IRS will deem the transaction to be a below market
  rate loan, which triggers imputed interest at a rate equal to the 182-day Treasury bill.
• According to an industry survey, small business QIs rely on the interest earned on the funds they
  manage for a significant percentage of their total revenue.
• The proposed rule contained an IRFA, which simply requested economic impact analysis and less
  burdensome alternatives without providing this information for the regulated industry to respond.
  Advocacy explained the importance of a complete IRFA and encouraged Treasury and IRS to
  publish an amended IRFA in the Federal Register for public comment.

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