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Tax-Free Exchanges of Aircraft Under Section 1031

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Step 1: The qualified intermediary and the taxpayer enter into an exchange agreement.

Step 2: The taxpayer assigns its rights under the contract to sell the relinquished property to the intermediary; the intermediary accepts the assignment; the other party to the contract is notified of the assignment.

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Step 3: The intermediary participates in the transfer of the relinquished property to the buyer of that property; the transfer may be accomplished by direct deeding from the taxpayer to the buyer.

Step 4: Within forty-five calendar days from the date of closing on the relinquished property, the taxpayer provides notice to the intermediary of the identity of the replacement property.

Step 5: The taxpayer negotiates a purchase contract for the replacement property and assigns its rights under the purchase contract to the intermediary; the intermediary accepts the assignment; the other party to the contract is notified of the assignment.

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Step 6: After the assignment of the purchase contract to the intermediary, the intermediary makes the necessary deposit.

Step 7: The intermediary participates in the transfer of the replacement property to the taxpayer; at closing, direct deeding from the seller to the taxpayer is permitted.

Footnotes:

1. Please note that as a general rule Private Letter Rulings ("PLRs") may not be cited as precedent. PLRs, however, do tend to reveal the position of the IRS on controversial areas and are useful for planning purposes even if they technically can not be used in matters in controversy.

2. Revenue Rulings, while reflective of the position of the IRS and eligible for use as precedent, are not binding on courts and have a more limited precedential value in such proceedings than court cases. SDI Netherlands B.V. v. Commissioner, 107 T.C. 161 (1996).

3. Texas, Delaware, New York and Maryland are all examples of states whose laws now provide for the formation of single member LLC's. There is little authority or reason to believe that other states will not respect the distinct nature of such LLCs or the limitation on liability, subject to the rules governing the piercing of the corporate veil. In fact, it is arguable whether a state could deny single member LLCs recognition without running afoul of the U.S. Constitution.

4. These regulations and the attendant prohibition on like kind exchange treatment should also apply to interests in LLCs that are treated as partnerships for federal tax purposes.

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