Tax Court Decision in Bartell – Does it Alter Current Planning of Build to Suit Exchanges? Not Much

By John A. Sikora

The long-awaited Tax Court decision in Estate of George H. Bartell, et al. v. Commissioner (briefs were filed in 2007) was issued recently (147 T.C. No. 5).  The court held that property to which an exchange “facilitator” engaged by a taxpayer takes legal title from a third party, but in which the facilitator does not hold burdens and benefits of ownership, is property the taxpayer can acquire to complete an exchange under Internal Revenue Code Section 1031.

Briefly stated, the principal facts of the case are that the taxpayer held appreciated real property (i.e., property having a value in excess of its tax basis) it wanted to transfer in a nonrecognition transaction under Section 1031 (such property, “relinquished property”).  The taxpayer located land on which it wanted to construct improvements, and then use in its business (such land and improvements, together, the “project”).  The taxpayer wanted to exchange the relinquished property for the project under Section 1031.  (The petitioners were the shareholders of an S corporation, Bartell Drug Co. (“Bartell Drug”), which was the subject of the tax examination; for convenience, references below to “taxpayer” are generally to Bartell Drug.)

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