The IRS has concluded in a recent private letter ruling (PLR 201308020) that the provision of software to clients in a like-kind exchange program does not affect a taxpayer's status as a qualified intermediary (QI).
The taxpayer requesting the ruling offered Section 1031 services to clients that engaged in a series of ongoing exchanges of tangible personal property (LKE programs). The taxpayer served as a QI for its clients and provided its in-house-developed software to clients in its LKE program. The software helped clients track and manage their exchanges, and helped the taxpayer to fulfill its obligations as a QI. Specifically, the software helped to:
- match relinquished and replacement property,
- prepare and submit 45-day identifications, and
- compute depreciation and gain or loss on the LKE program assets.
Treas. Reg. Sec. 1.1031(k)-1(g)(4)(iii) defines a QI as a person who (i) is not the taxpayer or a disqualified person, and (ii) enters into a written agreement with the taxpayer (the "exchange agreement") and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property and transfers the replacement property to the taxpayer.
Treas. Reg. Sec. 1.1031(k)-1(k)(2) defines a "disqualified person" to include an agent of the taxpayer at the time of the transaction. For this purpose, a person who has acted as the taxpayer's employee, attorney, accountant, investment banker or broker, or real estate agent or broker within the two-year period ending on the date of the transfer of the first of the relinquished properties is treated as an agent of the taxpayer at the time of the transaction.
The IRS concluded in the ruling that providing software to the taxpayer's LKE program clients did not make the taxpayer an agent of its clients. The software supplied by the taxpayer enabled an LKE program client to manage a high volume of exchange transactions. The software also assisted the taxpayer in fulfilling its obligations as a QI. The matching of relinquished and replacement properties, and the preparation and submission of 45-day identifications are services described in the regulations under Section 1031 that are not to be taken into account in determining whether a person is an agent.
In addition, although the software computed depreciation and the gain or loss from an LKE program client's transactions, these functions did not result in the taxpayer's being considered an accountant for its clients. The depreciation and gain or loss functions were essentially automated math calculations based on data input by the LKE program client and did not rise to the level of an accountant-client or other agency relationship. Accordingly, the taxpayer was not a disqualified person to an LKE program client under Treas. Reg. Sec. 1.1031(k)-1(k) as a result of providing software with the functions described.
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