Final Regs Coordinate Deferred Like-Kind Exchange and Installment Sale Rules

 [4830-01-u]

 ACTION: Final and temporary regulations.

 SUMMARY: This document contains final income tax regulations under section 1031(a)(3) of the Internal Revenue Code of 1986 relating to the coordination of deferred like-kind exchanges described in section 1031(a)(3) with the installment sale rules of section 453. The final regulations affect taxpayers who engage in certain like-kind exchanges of property under section 1031.

 DATES: These regulations are effective April 20, 1994.

 For dates of applicability, see sections 1.1031(b)-2(d) and 1.1031(k)-1(j)(2) of the regulations.

 FOR FURTHER INFORMATION CONTACT: Christopher F. Kane at (202) 622-4950, not a toll-free call.

SUPPLEMENTARY INFORMATION:

BACKGROUND

On May 1, 1991, the IRS published in the Federal Register (56 FR 19933) final regulations under section 1031(a)(3) of the Internal Revenue Code relating to deferred like-kind exchanges. Section 1.1031(k)-1(i)(2) of the regulations, relating to the coordination of section 1031(a)(3) with the installment sale provisions of section 453, is reserved. On November 2, 1992, the IRS published a notice of proposed rulemaking in the Federal Register (57 FR 49432) coordinating section 1031(a)(3) with the installment sale provisions of section 453. After consideration of the written comments received regarding the proposed regulations, the regulations are adopted as amended by this Treasury decision. This Treasury decision amends section 1.1031(b)-2 of 26 CFR part 1, Income Tax Regulations, adds the text of section 1.1031(k)-1(i)(2), and amends section 15a.453-1(b)(3)(i) of 26 CFR part 15a.

TECHNICAL BACKGROUND

 In a typical deferred exchange, the taxpayer may require the transferee to secure its promise to acquire replacement property with a cash funded escrow account or trust. Alternatively, the taxpayer may retain an intermediary to arrange for the transfer of replacement property to the taxpayer. Section 1.1031(k)-1(g) provides certain safe harbors that, if followed, ensure that these arrangements do not cause the transaction to be treated as a taxable sale rather than a deferred exchange for purposes of section 1031. Section 453(a) generally provides that income from an installment sale is taken into account under the installment method as payments are made. Section 15a.453-1(b)(3)(i) of the regulations provides that the receipt of an evidence of indebtedness that is secured directly or indirectly by cash or a cash equivalent is treated as the receipt of a payment. That section also provides that a payment includes amounts actually or constructively received under an installment obligation.

 These final regulations provide rules that coordinate the safe harbor provisions of section 1.1031(k)-1(g) with the installment sale rules that determine when a taxpayer is in receipt of a payment under section 453 and section 15a.453-1(b)(3)(i).

DESCRIPTION OF PROVISIONS

 The final regulations under section 1.1031(k)-1(g)(3) and (4) provide certain safe harbors under which taxpayers are treated as not being in actual or constructive receipt of money or other property held in a qualified escrow account, qualified trust, or by a qualified intermediary. These final regulations generally adopt the same safe harbors for the purpose of determining whether a taxpayer is in receipt of payment under section 453 and section 15a.453-1(b)(3)(i) if, at the beginning of the exchange period, the taxpayer has a bona fide intent to enter into a deferred exchange. The qualified escrow account, qualified trust, or qualified intermediary is disregarded for purposes of section 453 and section 15a.453-1(b)(3)(i) until the earlier of (a) the time the safe harbor would otherwise cease to apply for purposes of section 1031 (e.g., when the taxpayer has the immediate right to receive the funds held in the qualified escrow account), or (b) the end of the exchange period. Thus, subject to the other requirements of sections 453 and 453A and the related regulations, taxpayers who use the safe harbors of the existing 1031 regulations and meet the requirements of these final regulations will be entitled to report gain recognized on the deferred exchange under the installment method.

 Several commentators requested that the bona fide intent requirement be clarified by providing either examples or presumptions. Whether a particular taxpayer has a bona fide intent to enter into a deferred exchange is determined on the basis of all relevant facts and circumstances. Because the presumptions suggested by commentators would emphasize certain factors that in many cases should not be determinative, the final regulations do not contain rules setting forth presumptions. However, the final regulations clarify that a taxpayer will be treated as having a bona fide intent only if it is reasonable to believe, based on all the facts and circumstances as of the beginning of the exchange period, that like- kind replacement property will be acquired before the end of the exchange period. In addition, two examples have been added to the final regulations in which the bona fide intent requirement is determined to have been satisfied. These examples are intended to be illustrative only, and do not represent either the minimum steps required to establish bona fide intent or safe harbors pursuant to which a bona fide intent will in other contexts be assumed to exist.

 The regulations provide a special rule for deferred exchanges involving qualified intermediaries. Under this rule, a taxpayer in receipt of an evidence of indebtedness of the qualified intermediary's transferee is treated as receiving an evidence of indebtedness of the transferee of the relinquished property, even though these regulations generally treat the qualified intermediary as having acquired and transferred the relinquished property for other purposes. Therefore, for purposes of section 453 and section 15a.453-1(b)(3)(i), the receipt by the taxpayer of such an evidence of indebtedness is treated as the receipt of an evidence of indebtedness of the person acquiring the relinquished property from the taxpayer and is not considered a payment under section 453.

 One commentator was concerned that the treatment provided by the special rule terminates at the end of the exchange period even if the note remains outstanding. The final regulations make clear that this rule applies beyond the end of the exchange period. Another commentator suggested that the special rule that treats indebtedness of the qualified intermediary's transferee as indebtedness of the person acquiring relinquished property from the taxpayer for purposes of section 453 and section 15a.453-1(b)(3)(i) should also apply to simultaneous exchanges under section 1.1031(b)-2. This comment has been adopted, as reflected in amendments to section 1.1031(b)-2.

 Another commentator recommended that the regulations provide that the distribution of an installment note to the taxpayer at any time by a qualified intermediary would not terminate the applicability of the qualified intermediary safe harbor. The Internal Revenue Service and the Treasury do not believe a special exception to the limitations contained in section 1.1031(k)-1(g)(4)(ii) and (vi) (relating to the taxpayer's right to receive or otherwise obtain the benefits of money or other property held by a qualified intermediary) should be provided for installment notes. Rather, section 1.1031(k)-1(g)(4)(vii) provides sufficient flexibility by permitting the receipt of money or other property (including an installment note) by the taxpayer directly from a transferee without affecting the applicability of the qualified intermediary safe harbor. Therefore, this comment has not been adopted.

 Another commentator suggested that certain interest payments made on the installment note during the exchange period be treated as fee income to the qualified intermediary and not as interest income to the taxpayer. Section 1.1031(k)-1(h)(2) specifies that interest payments received by the taxpayer, whether received in cash or property (including like-kind property), are to be treated as income to the taxpayer. The determination of whether interest payments retained by a qualified intermediary should be treated as received by the taxpayer, and thereby represent income to the taxpayer, is beyond the scope of this regulation and may be the subject of future guidance.

 One commentator requested that the regulations address the timing of gain recognition in deferred exchanges involving assumptions of liabilities. The Internal Revenue Service and the Treasury are currently studying the circumstances under which, and the extent to which, gain attributable to assumptions of liabilities in like-kind exchanges (including simultaneous exchanges) should be eligible for deferral under the installment method. Among other things, this process will include an examination of the rules proposed under section 453(f)(6) in 1984. Accordingly, this final regulation does not address these issues.

 Two commentators requested that the regulations consider issues relating to the timing of receipt of income after the end of the exchange period in cases where the delivery of money or other property is delayed due to events such as breach of contract or bankruptcy. Because section 1031(a)(3) requires deferred exchanges to be completed by the end of the exchange period, the safe harbors from the constructive receipt rules provided by section 1.1031(k)-1(g)(3) and (4) have no application after that period. Whether a taxpayer is in receipt of money or other property held in a qualified escrow account or qualified trust or by a qualified intermediary after the end of the exchange period is determined under general principles of federal income tax law. Therefore, the final regulations do not provide specific guidance regarding the timing of receipt of income where delivery of the money or other property held in a qualified escrow account or a qualified trust, or by a qualified intermediary is delayed beyond the end of the exchange period.

 Several additional comments were received pertaining to issues that may arise when an installment note is used in a deferred like- kind exchange. Commentators suggested that guidance be provided on the tax consequences of making the installment note payable to a qualified intermediary. Commentators also wanted to know the consequences of a qualified intermediary's disposition of a note to a third party during the exchange period. Commentators requested guidance on the treatment of principal payments made on an installment note during the exchange period. One commentator requested guidance on the tax consequences of a reversion to the transferee of cash held in a qualified escrow account or qualified trust followed by the transferee's issuance of an installment note to the taxpayer at the end of the exchange period. Commentators also suggested that the final regulations address the treatment of issues arising from deferred exchanges of multiple assets.

 The issues raised by these comments are broader than the scope of these regulations. Resolution of these issues would affect not only deferred like-kind exchanges spanning more than one tax year, but also such exchanges taking place within one tax year. In addition, these issues may also involve the character of income rather than the timing of the receipt of income. Therefore, the final regulations do not address these comments. However, the Internal Revenue Service will take these issues into consideration in issuing further guidance in this area.

 Finally, under these regulations, taxpayers may choose to apply the safe harbors retroactively to transfers of property occurring on or after May 16, 1990. However, if taxpayers reported gain that qualifies for installment method reporting under these regulations in the year they transferred the relinquished property, they in effect elected out of the installment method. In the preamble to the proposed regulations, the Internal Revenue Service requested comments on whether the Service should publish a revenue procedure providing simplified procedures under which those taxpayers who elected out of the installment method could use the installment method in reporting gain on those transactions. Because commentators expressed only minimal interest in this revenue procedure, the Service will not issue such a revenue procedure or similar guidance.

SPECIAL ANALYSES

 It has been determined that these regulations are not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking published in the Federal Register on November 2, 1992 (57 FR 49432) was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

DRAFTING INFORMATION

 The principal author of these regulations is Christopher F. Kane of the Office of Assistant Chief Counsel (Income Tax and Accounting), Internal Revenue Service. However, other personnel from the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR PARTS 1 AND 15A

 Income taxes, Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENT TO THE REGULATIONS

Accordingly, 26 CFR parts 1 and 15a are amended as follows:

PART 1 -- INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.1031(b)-2 is amended as follows:

1. Paragraph (b) is revised.

2. Paragraphs (c) and (d) are added.

3. The added and revised provisions read as follows:

SECTION 1.1031(b)-(2) SAFE HARBOR FOR QUALIFIED INTERMEDIARIES.

* * * * *

(b) In the case of simultaneous exchanges of like-kind properties involving a qualified intermediary (as defined in section 1.1031(k)-1(g)(4)(iii)), the receipt by the taxpayer of an evidence of indebtedness of the transferee of the qualified intermediary is treated as the receipt of an evidence of indebtedness of the person acquiring property from the taxpayer for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter.

(c) Paragraph (a) of this section applies to transfers of property made by taxpayers on or after June 10, 1991.

(d) Paragraph (b) of this section applies to transfers of property made by taxpayers on or after [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]. A taxpayer may choose to apply paragraph (b) of this section to transfers of property made on or after June 10, 1991.

Par. 3. In section 1.1031(k)-1, the text of paragraph (j)(2) is added to read as follows:

SECTION 1.1031(k)-1 TREATMENT OF DEFERRED EXCHANGES.

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(j) * * *

(2) COORDINATION WITH SECTION 453 -- (i) QUALIFIED ESCROW ACCOUNTS AND QUALIFIED TRUSTS. Subject to the limitations of paragraphs (j)(2)(iv) and (v) of this section, in the case of a taxpayer's transfer of relinquished property in which the obligation of the taxpayer's transferee to transfer replacement property to the taxpayer is or may be secured by cash or a cash equivalent, the determination of whether the taxpayer has received a payment for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter will be made without regard to the fact that the obligation is or may be so secured if the cash or cash equivalent is held in a qualified escrow account or a qualified trust. This paragraph (j)(2)(i) ceases to apply at the earlier of --

(A) The time described in paragraph (g)(3)(iv) of this section; or

(B) The end of the exchange period.

(ii) QUALIFIED INTERMEDIARIES. Subject to the limitations of paragraphs (j)(2)(iv) and (v) of this section, in the case of a taxpayer's transfer of relinquished property involving a qualified intermediary, the determination of whether the taxpayer has received a payment for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter is made as if the qualified intermediary is not the agent of the taxpayer. For purposes of this paragraph (j)(2)(ii), a person who otherwise satisfies the definition of a qualified intermediary is treated as a qualified intermediary even though that person ultimately fails to acquire identified replacement property and transfer it to the taxpayer. This paragraph (j)(2)(ii) ceases to apply at the earlier of --

(A) The time described in paragraph (g)(4)(vi) of this section; or

(B) The end of the exchange period.

(iii) TRANSFEREE INDEBTEDNESS. In the case of a transaction described in paragraph (j)(2)(ii) of this section, the receipt by the taxpayer of an evidence of indebtedness of the transferee of the qualified intermediary is treated as the receipt of an evidence of indebtedness of the person acquiring property from the taxpayer for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter.

(iv) BONA FIDE INTENT REQUIREMENT. The provisions of paragraphs (j)(2)(i) and (ii) of this section do not apply unless the taxpayer has a bona fide intent to enter into a deferred exchange at the beginning of the exchange period. A taxpayer will be treated as having a bona fide intent only if it is reasonable to believe, based on all the facts and circumstances as of the beginning of the exchange period, that like-kind replacement property will be acquired before the end of the exchange period.

(v) DISQUALIFIED PROPERTY. The provisions of paragraphs (j)(2)(i) and (ii) of this section do not apply if the relinquished property is disqualified property. For purposes of this paragraph (j)(2), DISQUALIFIED PROPERTY means property that is not held for productive use in a trade or business or for investment or is property described in section 1031(a)(2).

(vi) EXAMPLES. This paragraph (j)(2) may be illustrated by the following examples. Unless otherwise provided in an example, the following facts are assumed: B is a calendar year taxpayer who agrees to enter into a deferred exchange. Pursuant to the agreement, B is to transfer real property X. Real property X, which has been held by B for investment, is unencumbered and has a fair market value of $100,000 at the time of transfer. B's adjusted basis in real property X at that time is $60,000. B identifies a single like-kind replacement property before the end of the identification period, and B receives the replacement property before the end of the exchange period. The transaction qualifies as a like-kind exchange under section 1031.

EXAMPLE 1. (i) On September 22, 1994, B transfers real property X to C and C agrees to acquire like-kind property and deliver it to B. On that date B has a bona fide intent to enter into a deferred exchange. C's obligation, which is not payable on demand or readily tradable, is secured by $100,000 in cash. The $100,000 is deposited by C in an escrow account that is a qualified escrow account under paragraph (g)(3) of this section. The escrow agreement provides that B has no rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash deposited in the escrow account until the earlier of the date the replacement property is delivered to B or the end of the exchange period. On March 11, 1995, C acquires replacement property having a fair market value of $80,000 and delivers the replacement property to B. The $20,000 in cash remaining in the qualified escrow account is distributed to B at that time.

(ii) Under section 1031(b), B recognizes gain to the extent of the $20,000 in cash that B receives in the exchange. Under paragraph (j)(2)(i) of this section, the qualified escrow account is disregarded for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter in determining whether B is in receipt of payment. Accordingly, B's receipt of C's obligation on September 22, 1994, does not constitute a payment. Instead, B is treated as receiving payment on March 11, 1995, on receipt of the $20,000 in cash from the qualified escrow account. Subject to the other requirements of sections 453 and 453A, B may report the $20,000 gain in 1995 under the installment method. See section 453(f)(6) for special rules for determining total contract price and gross profit in the case of an exchange described in section 1031(b).

EXAMPLE 2. (i) D offers to purchase real property X but is unwilling to participate in a like-kind exchange. B thus enters into an exchange agreement with C whereby B retains C to facilitate an exchange with respect to real property X. On September 22, 1994, pursuant to the agreement, B transfers real property X to C who transfers it to D for $100,000 in cash. On that date B has a bona fide intent to enter into a deferred exchange. C is a qualified intermediary under paragraph (g)(4) of this section. The exchange agreement provides that B has no rights to receive, pledge, borrow, or otherwise obtain the benefits of the money held by C until the earlier of the date the replacement property is delivered to B or the end of the exchange period. On March 11, 1995, C acquires replacement property having a fair market value of $80,000 and delivers it, along with the remaining $20,000 from the transfer of real property X, to B.

(ii) Under section 1031(b), B recognizes gain to the extent of the $20,000 cash B receives in the exchange. Under paragraph (j)(2)(ii) of this section, any agency relationship between B and C is disregarded for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter in determining whether B is in receipt of payment. Accordingly, B is not treated as having received payment on September 22, 1994, on C's receipt of payment from D for the relinquished property. Instead, B is treated as receiving payment on March 11, 1995, on receipt of the $20,000 in cash from C. Subject to the other requirements of sections 453 and 453A, B may report the $20,000 gain in 1995 under the installment method.

EXAMPLE 3. (i) D offers to purchase real property X but is unwilling to participate in a like-kind exchange. B enters into an exchange agreement with C whereby B retains C as a qualified intermediary to facilitate an exchange with respect to real property X. On December 1, 1994, pursuant to the agreement, B transfers real property X to C who transfers it to D for $100,000 in cash. On that date B has a bona fide intent to enter into a deferred exchange. The exchange agreement provides that B has no rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash held by C until the earliest of the end of the identification period if B has not identified replacement property, the date the replacement property is delivered to B, or the end of the exchange period. Although B has a bona fide intent to enter into a deferred exchange at the beginning of the exchange period, B does not identify or acquire any replacement property. In 1995, at the end of the identification period, C delivers the entire $100,000 from the sale of real property X to B.

(ii) Under section 1001, B realizes gain to the extent of the amount realized ($100,000) over the adjusted basis in real property X ($60,000), or $40,000. Because B has a bona fide intent at the beginning of the exchange period to enter into a deferred exchange, paragraph (j)(2)(iv) of this section does not make paragraph (j)(2)(ii) of this section inapplicable even though B fails to acquire replacement property. Further, under paragraph (j)(2)(ii) of this section, C is a qualified intermediary even though C does not acquire and transfer replacement property to B. Thus, any agency relationship between B and C is disregarded for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter in determining whether B is in receipt of payment. Accordingly, B is not treated as having received payment on December 1, 1994, on C's receipt of payment from D for the relinquished property. Instead, B is treated as receiving payment at the end of the identification period in 1995 on receipt of the $100,000 in cash from C. Subject to the other requirements of sections 453 and 453A, B may report the $40,000 gain in 1995 under the installment method.

EXAMPLE 4. (i) D offers to purchase real property X but is unwilling to participate in a like-kind exchange. B thus enters into an exchange agreement with C whereby B retains C to facilitate an exchange with respect to real property X. C is a qualified intermediary under paragraph (g)(4) of this section. On September 22, 1994, pursuant to the agreement, B transfers real property X to C who then transfers it to D for $80,000 in cash and D's 10-year installment obligation for $20,000. On that date B has a bona fide intent to enter into a deferred exchange. The exchange agreement provides that B has no rights to receive, pledge, borrow, or otherwise obtain the benefits of the money or other property held by C until the earlier of the date the replacement property is delivered to B or the end of the exchange period. D's obligation bears adequate stated interest and is not payable on demand or readily tradable. On March 11, 1995, C acquires replacement property having a fair market value of $80,000 and delivers it, along with the $20,000 installment obligation, to B.

(ii) Under section 1031(b), $20,000 of B's gain (i.e., the amount of the installment obligation B receives in the exchange) does not qualify for nonrecognition under section 1031(a). Under paragraphs (j)(2)(ii) and (iii) of this section, B's receipt of D's obligation is treated as the receipt of an obligation of the person acquiring the property for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter in determining whether B is in receipt of payment. Accordingly, B's receipt of the obligation is not treated as a payment. Subject to the other requirements of sections 453 and 453A, B may report the $20,000 gain under the installment method on receiving payments from D on the obligation.

EXAMPLE 5. (i) B is a corporation that has held real property X to expand its manufacturing operations. However, at a meeting in November 1994, B's directors decide that real property X is not suitable for the planned expansion, and authorize a like-kind exchange of this property for property that would be suitable for the planned expansion. B enters into an exchange agreement with C whereby B retains C as a qualified intermediary to facilitate an exchange with respect to real property X. On November 28, 1994, pursuant to the agreement, B transfers real property X to C, who then transfers it to D for $100,000 in cash. The exchange agreement does not include any limitations or conditions that make it unreasonable to believe that like-kind replacement property will be acquired before the end of the exchange period. The exchange agreement provides that B has no rights to receive, pledge, borrow, or otherwise obtain the benefits of the cash held by C until the earliest of the end of the identification period, if B has not identified replacement property, the date the replacement property is delivered to B, or the end of the exchange period. In early January 1995, B's directors meet and decide that it is not feasible to proceed with the planned expansion due to a business downturn reflected in B's preliminary financial reports for the last quarter of 1994. Thus, B's directors instruct C to stop seeking replacement property. C delivers the $100,000 cash to B on January 12, 1995, at the end of the identification period. Both the decision to exchange real property X for other property and the decision to cease seeking replacement property because of B's business downturn are recorded in the minutes of the directors' meetings. There are no other facts or circumstances that would indicate whether, on November 28, 1994, B had a bona fide intent to enter into a deferred like-kind exchange.

(ii) Under section 1001, B realizes gain to the extent of the amount realized ($100,000) over the adjusted basis of real property X ($60,000), or $40,000. The directors' authorization of a like-kind exchange, the terms of the exchange agreement with C, and the absence of other relevant facts, indicate that B had a bona fide intent at the beginning of the exchange period to enter into a deferred like-kind exchange. Thus, paragraph (j)(2)(iv) of this section does not make paragraph (j)(2)(ii) of this section inapplicable, even though B fails to acquire replacement property. Further, under paragraph (j)(2)(ii) of this section, C is a qualified intermediary, even though C does not transfer replacement property to B. Thus, any agency relationship between B and C is disregarded for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter in determining whether B is in receipt of payment. Accordingly, B is not treated as having received payment until January 12, 1995, on receipt of the $100,000 cash from C. Subject to the other requirements of sections 453 and 453A, B may report the $40,000 gain in 1995 under the installment method.

EXAMPLE 6. (i) B has held real property X for use in its trade or business, but decides to transfer that property because it is no longer suitable for B's planned expansion of its commercial enterprise. B and D agree to enter into a deferred exchange. Pursuant to their agreement, B transfers real property X to D on September 22, 1994, and D deposits $100,000 cash in a qualified escrow account as security for D's obligation under the agreement to transfer replacement property to B before the end of the exchange period. D's obligation is not payable on demand or readily tradable. The agreement provides that B is not required to accept any property that is not zoned for commercial use. Before the end of the identification period, B identifies real properties J, K, and L, all zoned for residential use, as replacement properties. Any one of these properties, rezoned for commercial use, would be suitable for B's planned expansion. In recent years, the zoning board with jurisdiction over properties J, K, and L has rezoned similar properties for commercial use. The escrow agreement provides that B has no rights to receive, pledge, borrow, or otherwise obtain the benefits of the money in the escrow account until the earlier of the time that the zoning board determines, after the end of the identification period, that it will not rezone the properties for commercial use or the end of the exchange period. On January 5, 1995, the zoning board decides that none of the properties will be rezoned for commercial use. Pursuant to the exchange agreement, B receives the $100,000 cash from the escrow on January 5, 1995. There are no other facts or circumstances that would indicate whether, on September 22, 1994, B had a bona fide intent to enter into a deferred like-kind exchange.

(ii) Under section 1001, B realizes gain to the extent of the amount realized ($100,000) over the adjusted basis of real property X ($60,000), or $40,000. The terms of the exchange agreement with D, the identification of properties J, K, and L, the efforts to have those properties rezoned for commercial purposes, and the absence of other relevant facts, indicate that B had a bona fide intent at the beginning of the exchange period to enter into a deferred exchange. Moreover, the limitations imposed in the exchange agreement on acceptable replacement property do not make it unreasonable to believe that like-kind replacement property would be acquired before the end of the exchange period. Therefore, paragraph (j)(2)(iv) of this section does not make paragraph (j)(2)(i) of this section inapplicable even though B fails to acquire replacement property. Thus, for purposes of section 453 and section 15a.453-1(b)(3)(i) of this chapter, the qualified escrow account is disregarded in determining whether B is in receipt of payment. Accordingly, B is not treated as having received payment on September 22, 1994, on D's deposit of the $100,000 cash into the qualified escrow account. Instead, B is treated as receiving payment on January 5, 1995. Subject to the other requirements of sections 453 and 453A, B may report the $40,000 gain in 1995 under the installment method.

(vii) EFFECTIVE DATE. This paragraph (j)(2) is effective for transfers of property occurring on or after [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER]. Taxpayers may apply this paragraph (j)(2) to transfers of property occurring before [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN THE FEDERAL REGISTER] but on or after June 10, 1991, if those transfers otherwise meet the requirements of section 1.1031(k)- 1. In addition, taxpayers may apply this paragraph (j)(2) to transfers of property occurring before June 10, 1991, but on or after May 16, 1990, if those transfers otherwise meet the requirements of section 1.1031(k)-1 or follow the guidance of IA-237-84 published in 1990-1, C.B. See section 601.601(d)(2)(ii)(b) of this chapter. PART 15a -- TEMPORARY INCOME TAX REGULATIONS UNDER THE INSTALLMENT SALES REVISION ACT

Par. 4. The authority citation for part 15a is revised to read as follows:

Authority: 26 U.S.C. 453(i) and 7805.

Par. 5. In section 15a.453-1, paragraph (b)(3)(i) is amended by adding a sentence after the current first sentence, after the current third sentence, and after the current fourth sentence, respectively, to read as follows:

SECTION 15a.453-1 INSTALLMENT METHOD REPORTING FOR SALES OF REAL PROPERTY AND CASUAL SALES OF PERSONAL PROPERTY.

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(b) * * *

(3) PAYMENT -- (i) IN GENERAL. * * * For special rules regarding the receipt of an evidence of indebtedness of a transferee of a qualified intermediary, see sections 1.1031(b)-2(b) and 1.1031(k)- 1(j)(2)(iii) of this chapter. * * * For a special rule regarding a transfer of property to a qualified intermediary followed by the sale of such property by the qualified intermediary, see section 1.1031(k)-1(j)(2)(ii) of this chapter. * * * For a special rule regarding a transfer of property in exchange for an obligation that is secured by cash or a cash equivalent held in a qualified escrow account or a qualified trust, see section 1.1031(k)-1(j)(2)(i) of this chapter. * * *

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