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exchange. See sec. 1.1031(k)-1(j)(2)(i), (iv), Income Tax Regs.5
Accordingly, in such a circumstance, if all other conditions of
section 453 are satisfied, the taxpayer must recognize any gain
or loss from such a deferred exchange pursuant to the installment
sale rules of section 453.
5 The sec. 1031 regulations provide that, as a general rule:
The taxpayer is in constructive receipt of money or
property at the time the money or property is credited
to the taxpayer’s account, set apart for the taxpayer,
or otherwise made available so that the taxpayer may
draw upon it at any time or so that the taxpayer can
draw upon it if notice of intention to draw is given.
* * * [Sec. 1.1031(k)-1(f)(2), Income Tax Regs.]
Strictly construed and without any further refinement, the
principles expressed in these regulations might lead to the
conclusion that petitioner had actual receipt of property in 1994
(either by virtue of the escrow agent’s acting as his agent in
receiving the escrow funds or by virtue of petitioner’s receipt
of a property interest in the escrow account) or constructive
receipt of the sale proceeds. See Williams v. United States, 219
F.2d 523 (5th Cir. 1955) (taxpayers who sold standing timber and
had sale proceeds placed in an escrow account were in
constructive receipt of the proceeds at the time of the sale).
Under such an analysis, however, it might be difficult for
any deferred exchange involving an escrow account to qualify
under sec. 1031, because (1) the actual or constructive receipt
might indicate a sale rather than an exchange, and (2) the
property interest actually or constructively received at the
commencement of the deferred exchange would not necessarily be
like kind to the property relinquished. See 2 Bittker & Lokken,
Federal Taxation of Income, Estates and Gifts, par. 44.2.5 (3d
ed. 2000). To mitigate such problems, sec. 1.1031(k)-1(g),
Income Tax Regs., provides various safe harbors. See id. One of
these safe harbors provides that in the case of a deferred
exchange, the taxpayer is not in actual or constructive receipt
of money or property merely because cash or a cash equivalent is
held in a “qualified escrow account or in a qualified trust.”
Sec. 1.1031(k)-1(g)(3)(i), Income Tax Regs.
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