Unformatted text preview: NonRecognition Transactions Sold 252 Mortgages and received 305 in return FMV about $4.5 million essentially equal for both Realized a loss Cottage Savings wanted to recognize the losses, but they would have to record the losses for both book and tax purposes FHLBB permitted S&Ls to exchange substantially similar mortgages so that they could recognize losses for tax purposes and not book purposes The face valus of the participation interest that Cottage Savings gave up was $6.9 million and they tried to take a $2.4 million loss for tax purposes and didn't report the loss to the FHLBB Annual fluctuations in the value of property are no taxed, but are deferred until there is a realization event A sale or other disposition of property is a realization event Cottage Savings Cottage Savings was arguing whether the trasnferring of the mortgages was "an other disposition" the IRS said that a "other disposition" should be an exchange where the properties exchanged are "materially different" Commissioner says that materially different means having a difference in "economic substance" Commissioner argues, we should look to the attitudes of the parties, the evaluation of the interests by the secondary mortgage market, and the views of the FHLBB. Blackmun (dissenting) says "A material difference is one that has the capacity to influence a decision." This would work for this case, but the test is very cumbersome to apply across multiple situations Court's Test: different in kind or extent As long as the property entitlements are no identical, the petitioner and the comissioner can easily calculate G/L Cottage Savings Continued 1001
(a) Computation of gain or loss. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized. (c) Recognition of gain or loss. Except as otherwise provided in this subtitle, the entire amount of the gain or loss, determined under this section, on the sale or exchange of property shall be recognized. 1031(a)(1)
No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. 1031(a)(1): Redux
No gain or loss shall be recognized: (mandatory don't recognize if you fall w/in the requirements) On the exchange of property Held for productive use in a trade or business or for investment Solely for property of like kind Which is to be held either for productive use in a trade or business or for investment. 1031(a)(2) Exception. This subsection shall not apply to any exchange of (A) stock in trade or other property held primarily for sale, (B) stocks, bonds, or notes, (C) other securities or evidences of indebtedness or interest, (D) interests in a partnership, (E) certificates of trust or beneficial interests, or (F) choses in action. Rev. Ruling Guardian wanted to exchange property Local law prohibited exchange by guardian Guardian sold the property and had a predetermined purpose to use the proceeds to purchase like property The IRS said that the sale should be disregarded and that the whole intent of the transaction was for a like kind exchange Using substance over form Treas. Reg. 1.1031(a)1(b): "Like Kind" As used in section 1031(a), the words "like kind" have reference to the nature or character of the property and not to its grade or quality. One kind or class of property may not, under that section, be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Treas. Reg. 1.1031(a)1(c): Examples of "Like Kind" Real Estate The regulations indicate that the following exchanges of real estate are exchanges of "like kind" property: City real estate for a ranch or farm; Leasehold on real estate with 30 years or more to run for other real estate; and Improved real estate for unimproved real estate. ...
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- Fall '06
- Microsoft Exchange Server, Cottage Savings