Definition of Disqualified Person

DEPARTMENT OF THE TREASURY 
Internal Revenue Service 26 CFR Part 1 [Reg-107175-00] RIN 1545-AY19

TITLE: Definition of Disqualified Person

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations to narrow the
definition of the term disqualified person for section 1031 like-
kind exchanges. The regulations are in response to recent changes in
the federal banking law, especially the repeal of section 20 of the
Glass-Steagall Act of 1933. The regulations will affect the
eligibility of certain persons to serve as escrow holders of
qualified escrow accounts, trustees of qualified trusts, or as
qualified intermediaries. This document also provides notice of a
public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by April 17,
2001. Requests to speak and outlines of topics to be discussed at
the public hearing scheduled for June 5, 2001 at 10:00 a.m. must be
received by May 15, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-107175-00), room
5226, Internal Revenue Service, Post Office Box 7604, Ben Franklin
Station, Washington, DC 20044. Submissions may be hand delivered
Monday through Friday between the hours of 8 a.m. and 5 p.m. to:
CC:M&SP:RU (REG-107175-00), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW, Washington, DC.
Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the "Tax Regs" option on the IRS Home Page, or
by submitting comments directly to the IRS Internet site at
http://www.irs.ustreas.gov/tax_regs/regslist.html. The public
hearing will be held in room 4718, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, J. Peter Baumgarten, at (202) 622-4950; concerning
submissions of comments, the hearing, or to be placed on the
building access list to attend the hearing, Mark McCoy, at (202)
622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) for the definition of disqualified
person under section 1.1031(k)-1(k). An exchange of property, like a
sale, usually results in the current recognition of gain or loss.
Section 1031(a) provides an exception to the general rule. Under
section 1031(a), no gain or loss is recognized if property held for
productive use in a trade or business or for investment is exchanged
solely for property of a like kind that is to be held either for
productive use in a trade or business or for investment. Taxpayers
may use a qualified escrow account, qualified trust, or qualified
intermediary (or any combination of the three) to facilitate a like-
kind exchange. A requirement common to qualified escrow accounts,
qualified trusts, and qualified intermediaries is that the escrow
holder, trustee, or intermediary may not be the taxpayer or a
disqualified person.

Section 1.1031(k)-1(k) defines a disqualified person to include a
person that is an agent of the taxpayer at the time of the
transaction. An agent includes a person that has acted as the
taxpayer's employee, attorney, accountant, investment banker or
broker, or real estate agent or broker within two years of the
taxpayer's transfer of relinquished property. However, in
determining whether a person is a disqualified person, services
provided by such person for the taxpayer with respect to section
1031 exchanges of property and routine financial, title insurance,
escrow, or trust services provided to the taxpayer by a financial
institution, title insurance company, or escrow company are not
taken into account. A person that is related to a disqualified
person, determined by using the attribution rules of sections 267(b)
and 707(b) but substituting 10 percent for 50 percent, is also
considered a disqualified person.

Under section 20 of the Banking Act of 1933 (12 U.S.C. 377) (the
Glass-Steagall Act), banks generally were proscribed from
affiliation with any corporation, association, business trust, or
other similar organization engaged principally in the issue,
flotation, underwriting, public sale, or distribution at wholesale
or retail or through syndicate participation of stocks, bonds,
debentures, notes, or other securities. However, last year Congress
enacted the Gramm-Leach-Bliley Act, Public Law 106-102 (November 12,
1999), 113 Stat.1341 (the GLB Act). Section 101 of the GLB Act
repeals section 20 of the Glass-Steagall Act. In addition, section
103 of the GLB Act amends section 4 of the Bank Holding Company Act
of 1956 (12 U.S.C. 1843) by adding new subsection (k).

Subsection (k) specifically authorizes qualifying financial
institutions to engage in activities that are financial in nature,
such as (1) providing financial, investment, or economic advisory
services, including advising an investment company (as defined in
section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3));
(2) issuing and selling instruments representing interests in pools
of assets permissible for a bank to hold directly; and (3)
underwriting, dealing in, and making a market in securities. As a
consequence of the GLB Act (and other changes in policy by the
Federal Reserve System in recent years), many banks and bank holding
companies are, or are in the process of becoming, members of
controlled groups that include investment banking and brokerage
firms. This, in turn, may cause the banks, bank holding companies,
and their subsidiaries to be disqualified persons for purposes of
section 1031 by virtue of the related party rule of
§1.1031(k)-1(k) (4).

Treasury and the Service believe that, in general, banks should be
permitted to serve as qualified intermediaries, escrow holders, or
trustees. Banks, as regulated institutions, have historically acted
in this role as neutral or independent holders of funds. These
regulations permit banks to continue in this role despite recent
legislative and regulatory changes.

In order to account for changes in the banking industry, the
proposed regulations generally provide that a bank that is a member
of a controlled group that includes an investment banking or
brokerage firm as a member will not be a disqualified person merely
because the investment banking or brokerage firm has provided
services to an exchange customer within a two-year period ending on
the date of the transfer of the relinquished property by that
customer.

Proposed Effective Date

The regulations are applicable for transfers of property made by a
taxpayer on or after [INSERT DATE OF PUBLICATION OF THIS DOCUMENT IN
THE FEDERAL REGISTER ].

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
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) does not apply to these
regulations, and, because the regulations do not impose a collection
of information on small entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments
that are submitted timely to the IRS. The IRS and the Treasury
Department request comments on the merits of the proposed
regulations and how the proposed regulations can be made clearer and
easier to understand. All comments will be available for public
inspection and copying.

A public hearing has been scheduled for March 1, 2001, beginning at
10:00 a.m. in room 4718 of the Internal Revenue Building, 1111
Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the main Constitution Avenue
entrance between 10 and 12 Streets, NW. In addition, all th th
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the
building access list to attend the hearing, see the "FOR FURTHER
INFORMATION CONTACT" section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic
or written comments and an outline of the topics to be discussed and
the time to be devoted to each topic by February 26, 2001. A period
of ten (10) minutes will be allotted to each person for making
comments. An agenda showing the scheduling of the speakers will be
prepared after the deadline for receiving the outlines has passed.
Copies of the agenda will be available free of charge at the
hearing.

Drafting Information

The principal author of these regulations is J. Peter Baumgarten of
the Office of Associate Chief Counsel (Income Tax & Accounting).
However, other personnel from the IRS and Treasury Department
participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and record keeping requirements.

Proposed Amendment to the Regulations Accordingly, 26 CFR part 1 is
proposed to be 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(k)-1 is amended by:

1. Revising paragraph (k)(4),

2. Adding a new Example 4 to paragraph (k)(5).

The revisions and additions read as follows: § 1.1031(k)-1
Treatment of deferred exchanges.

* * * * *

(k) * * *

(4) * * * However, with respect to transfers of relinquished
property made by a taxpayer on or after these regulations are
published as final regulations, this paragraph (k)(4) does not apply
to a bank (as defined in section 581) that is a member of a
controlled group (as determined under section 267(f)(1),
substituting "10 percent" for "50 percent" where it appears), where
a person described in paragraph (k)(2) of this section is an
investment banker or broker that has provided investment banking or
brokerage services to the taxpayer within the 2-year period and also
is a member of the controlled group.

* * * * *

Deputy Commissioner of Internal Revenue

SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.

2001 Regulations Main | IRS Regulations Main | Home