Winter 2004 Newsletter

The new year brings new opportunities.

We once read:

“One ship drives east
And another west
While the self-same breezes blow:
’Tis the set of the sail and not the gale
That bids them where to go.”

Be assured, our sail is set to ever improve our service to you. It is set to ever increase our ability to meet the needs of those who put their trust in us.

Jeff Helsdon, a partner at Sloan Bobrick Oldfield & Helsdon, P.S. greatly increases our ability to do just that. Not only is Jeff a bonus to the law firm, but he is the prime mover in the formation and operation of SB&OH Exchange Accommodators LLC. He brings a whole new package of experience in real estate, § 1031 exchanges of real estate and personal property and knowledge of land use and zoning issues to you.

Jeff was raised in Kansas City but once having seen the Northwest he never wanted to return to the Great Plains. He is one of us, moss and all. Jeff received an undergraduate degree from the University of Washington and worked his way through UPS law school to receive his J.D. in 1987.

Jeff is a precise and focused person committed to precision and knowledge in his law practice. This, always, with service as his guide. He has been a Qualified Intermediary for real estate investment exchanges under § 1031 of the Internal Revenue Code for 15 years. He is the only Certified Exchange Specialist ^R in Pierce County; so recognized by the Federation of Exchange Accommodators.

Please call Jeff should you have any need in his area of practice. Be assured there never is a charge for questions regarding § 1031 exchanges.

The 45 Day Rule by Jeff Helsdon

I have been asked, over the 15 years that I have been facilitating § 1031 exchanges, if there is some way to get around the 45 day rule. § 1031 requires the taxpayer to identify potential replacement properties within 45 days of the date that the taxpayer sells his relinquished property. The taxpayer’s failure to do so results in the complete failure of the transaction to qualify as a § 1031 exchange.

The harsh result that failure to comply with the 45 identification rule has for taxpayers has led many taxpayers to attempt to cheat on the 45 day rule. Faced with the failure of their exchange, some taxpayers have solicited either their real estate agent or their exchange facilitator to assist them in backdating the 45 day identification, or to take other steps to “get around” the 45 day rule. Those exchange facilitators who routinely engage in such conduct have quickly gained reputations which attract taxpayers who wish to “get around” the 45 day rule.

In fact, taxpayers who submit false 45 day declarations have been criminally prosecuted and found civilly liable for tax fraud. A real estate agent or exchange facilitator who assists a taxpayer in completing a false 45 day declaration could be subject to federal criminal conspiracy charges.

In Dobrich v. Commissioner, TC Memo 1997-477, the United States Tax Court was faced with an appeal by a taxpayer who had had a fraud penalty imposed against him by the IRS. The Dobriches sold 117 acres of property in Antioch, California, intending to dispose of the property in a like-kind exchange under § 1031. The Dobriches knew they had to identify replacement property within 45 days after they closed the sale.

The property closed on August 22, 1989, and the Dobriches had until October 6, 1989 to identify replacement property. The 180^th day to complete the exchange was in February 1990.

On October 12, 1989, after the 45-day identification period had expired, the Dobriches expressed to a real estate agent, Ms. Love, that they were interested in the Skyland property in Lake Tahoe, Nevada.

On January 11, 1990, a real estate agent, Mr. Van Voorhis, told the Dobriches that property in Pleasant Hill, California was for sale. On January 26, 1990, the Dobriches offered to purchase the Pleasant Hill property.

The Dobriches had been advised by their exchange facilitator and Mr. Van Voorhis to identify replacement property within the 45-day period. The Dobriches did not identify either Pleasant Hill or Skyland in writing within 45 days.

The Dobriches closed the Pleasant Hill transaction on February 15, 1990, within their 180-day period. They closed the Skyland property on the same day.

In January 1990, Mr. Dobrich asked Ms. Love to write a false letter addressed to the Dobriches purporting to acknowledge that the Dobriches had expressed an interest in purchasing the Skyland property to her as of September 1989. Ms. Love did so. Her letter was backdated to September 18, 1989 on Mr. Dobrich’s request to misrepresent the time by which Skyland was identified as replacement property. In January 1990, Mr. Dobrich also asked the seller of the Pleasant Hill property to write a similar letter falsifying identification of the Pleasant Hill property.

On January 8, 1990, the Dobriches received a sample letter from their exchange facilitator and lawyer, Mr. Clack, which was used to prepare the backdated Pleasant Hill and Skyland letters. The sample letter was dated September 5, 1989, and addressed to Mr. Dobrich.

In January 1990, Mr. Dobrich wrote a letter to Mr. Clack which purported to identify possible replacement properties, including the Pleasant Hill and Skyland properties. Mr. Dobrich backdated the letter to September 18, 1989.

The Dobriches reported the transfer of the Antioch property on their tax return as a § 1031 exchange and that they identified replacement property on September 18, 1989.

The Dobriches’ return was audited. The IRS disallowed the transaction under § 1031. During the audit of their tax returns, the Dobriches’ accountant provided to the IRS revenue agent a copy of the backdated letter that Mr. Dobrich wrote to Mr. Clack identifying the Pleasant Hill and Skyland properties.

Pursuant to a written plea agreement with the U.S. Department of Justice, Mr. Dobrich pleaded guilty to two counts of violating § 7207 for causing the delivery of false documents to the IRS. In addition, the IRS imposed a civil fraud penalty equal to 75 percent of the underpayment of tax that was due. The fraud penalty came to $774,307.

The Dobrich decision does not address what happened to the real estate agent or to the attorney/exchange facilitator who had assisted the Dobriches in their fraud. Clearly, such assistance amounts to criminal conspiracy, subjecting both to federal criminal prosecution.

Dobrich v. Commissioner stands as a stark warning to 1031 clients, real estate agents, and exchange facilitators alike. For the real estate agent whose client is considering a 1031 exchange, it is important to refer them to an exchange facilitator who has a reputation for refusing to assist in back-dating or “getting around” the 45-day rule. The 45-day rule is a serious, integral part of the statute, and efforts to “get around” it amount to criminal fraud. An ethical exchange facilitator will help the real estate agent keep himself or herself free from any question of impropriety later by the IRS in the event of scrutiny of the taxpayer’s return.