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the investment, and the original exchange should not be accorded
nonrecognition treatment.” Id. This policy is reflected in
section 1031(f), as enacted in the Omnibus Budget Reconciliation
Act of 1989, Pub. L. 101-239, sec. 7601(a), 103 Stat. 2370.
Congress was also concerned that related persons not be able
to circumvent the purposes of this rule by using an unrelated
third party:
Nonrecognition will not be accorded to any
exchange which is part of a transaction or series of
transactions structured to avoid the purposes of the
related party rules. For example, if a taxpayer,
pursuant to a prearranged plan, transfers property to
an unrelated party who then exchanges the property with
a party related to the taxpayer within 2 years of the
previous transfer in a transaction otherwise qualifying
under section 1031, the related party will not be
entitled to nonrecognition treatment under section
1031. [H. Rept. 101-247, supra at 1341.]
Equating a qualified intermediary with the “unrelated party”
referred to in the above-quoted example, respondent reads the
example to mean that a deferred exchange between related parties,
involving a qualified intermediary, should be recast as a direct
exchange between the related parties. If section 1031(f)(1)
would preclude nonrecognition treatment for the recast
transaction, respondent concludes, then the deferred exchange
should be deemed to have been structured to avoid the purposes of
section 1031(f). Respondent suggests that such an analysis ends
the inquiry under section 1031(f)(4).
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