Wednesday, June 11, 2014

Your Son The Lawyer Should Not Be Your Exchange Facilitator

It is very sad to see someone getting hammered by two non-recognition provisions in the same case, but that is what happened to Frank Blangiardo in a recent Tax Court decision.  Code Section 1031  (like-kind exchange) would have helped him avoid recognition of a large capital gain, but a fairly obvious flaw in the execution of his plan threw his transaction outside of the comfortable safe harbor into the howling winds of gain recognition.  Code Section 1041 (Transfer of property between spouses or incident to divorce) worked exactly as it is supposed to, but sadly it worked not for Mr. Blangiardo, but against him.  The magic of Section 1041 had worked for Mr. Blangiardo's ex-spouses, who did not have to recognize gain when he transferred cash to them, but as Rumplestilkin/Mr. Gold is wont to remark – All magic comes with a price

The price of non-recognition for the ex-spouses was that Mr. Blangiardo did not get additional basis in his property for the $580,000 in cash that he had paid his exes.

Who can be your exchange facilitator?

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