Escrow Accounts, Trusts, and Other Funds Used During Deferred Exchanges of Like-Kind Property

News / Escrow Accounts, Trusts, and Other Funds Used During Deferred Exchanges of Like-Kind Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 468B of
the Internal Revenue Code (Code). The regulations provide rules
regarding the taxation of income earned on escrow accounts, trusts, and
other funds used during deferred like-kind exchanges of property, and
final regulations under section 7872 regarding below-market loans to
facilitators of these exchanges. The regulations affect taxpayers that
engage in deferred like-kind exchanges and escrow holders, trustees,
qualified intermediaries, and others that hold funds during deferred
like-kind exchanges.

DATES: Effective Date: These regulations are effective July 10, 2008.
Applicability Dates: For dates of applicability, see Sec. Sec.
1.468B-6(f), 1.7872-5(d), and 1.7872-16(g).

FOR FURTHER INFORMATION CONTACT: Concerning the final regulations under
section 468B, Jeffrey T. Rodrick, (202) 622-4930; concerning the final
regulations under section 7872, David B. Silber, (202) 622-3930 (not
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations (26
CFR part 1) regarding the taxation of qualified escrow accounts,
qualified trusts, and other escrow accounts, trusts, or funds used
during section 1031 deferred exchanges of like-kind property, and of
below-market loans to facilitators of these exchanges, under sections
468B(g) and 7872.
On February 7, 2006, a partial withdrawal of notice of proposed
rulemaking, a notice of proposed rulemaking, and notice of public
hearing were published in the Federal Register (REG-209619-93 and REG-
113365-04, 71 FR 6231). A public hearing was held on June 6, 2006. A
revised Initial Regulatory Flexibility Analysis (IRFA) for REG-113365-
04 was published in the Federal Register on March 20, 2007 (72 FR
13055). Written and electronic comments responding to the notice of
proposed rulemaking and the revised IRFA were received. After
consideration of all the comments, the proposed regulations are adopted
as amended by this Treasury decision. The comments and amendments are
discussed below.

Explanation of Provisions and Summary of Comments

1. Definitions

The proposed regulations define exchange funds as relinquished
property, cash, or cash equivalent that secures an obligation of the
transferee to transfer replacement property, or proceeds from a
transfer of relinquished property. A commentator suggested that the
definition of exchange funds as relinquished property, cash, or cash
equivalent that secures an obligation of the transferee to transfer
replacement property should be deleted as confusing and unnecessary,
because it is irrelevant whether amounts held in a qualified account or
fund secure or are intended to secure the obligations of the
transferee. The final regulations do not adopt this comment. This
definition of exchange funds is necessary because it encompasses
transactions contemplated in Sec. 1.1031(k)-1(g)(3) in which, for
example, a transferee of the relinquished property pays a deposit
before the property is transferred, or a transferee of the relinquished
property agrees to transfer replacement property and deposits funds to
secure the obligations of the transferee (see Sec. 1.468B-6(e),
Example 1). The definition is an alternative to the definition of
exchange funds as proceeds from a transfer of relinquished property,
and does not create a

[[Page 39615]]

requirement that exchange funds must secure the obligations of a
transferee.
The proposed regulations define transactional expenses as the usual
and customary expenses paid or incurred in connection with a deferred
exchange, including the cost of land surveys, appraisals, title
examinations, termite inspections, transfer taxes and recording fees. A
commentator suggested that transactional expenses should be defined by
reference to Sec. 1.1031(k)-1(g)(7), which provides that
``transactional items'' are those items that relate to the disposition
of the relinquished property or to the acquisition of replacement
property and appear under local standards in the typical closing
statements as the responsibility of a buyer or seller, such as
commissions, prorated taxes, recording or transfer taxes, and title
company fees. Therefore, for consistency, the final regulations provide
that transactional expenses means transactional items described in
Sec. 1.1031(k)-1(g)(7)(ii). The final regulations retain special rules
to determine whether fees paid to an exchange facilitator are
transactional expenses.

2. Taxable Year of Receipt of Income

The proposed regulations omit an example in proposed regulations
issued in 1999 that concluded that interest on a taxpayer's exchange
funds is taxable in the year earned or credited rather than in a later
year when the interest is paid. A commentator requested that the final
regulations include a similar example. An example in the final
regulations has been revised to illustrate this result.
Commentators suggested that the example in Sec. 1.7872-16 of the
proposed regulations conflicts with the constructive receipt rules of
Sec. 1.1031(k)-1(g)(6) because it posits that amounts are paid as
compensation to the exchange facilitator, and are retransferred as
imputed interest to the taxpayer, before the end of the exchange
period. The final regulations do not adopt this comment. The example
illustrates the mechanics of section 7872 in imputing interest and
treating a corresponding amount as deemed compensation in the case of a
compensation-related loan. This treatment is not inconsistent with
Sec. 1.1031(k)-1(g), which merely provides rules of administrative
convenience under which, if certain requirements are satisfied, a
taxpayer is deemed not to actually or constructively receive exchange
funds or to have an agency relationship with an exchange facilitator
solely for purposes of obtaining nonrecognition treatment under section
1031. For other taxation purposes, such as determining the timing for
including earnings or imputed amounts in income, general tax principles
apply, including timing principles under sections 7872 and 451. See
Sec. 1.1031(k)-1(n).

3. Earnings Attributable to Exchange Funds

The proposed regulations provide that exchange funds are treated,
generally, as loaned by a taxpayer to an exchange facilitator, and the
exchange facilitator takes into account all items of income, deduction,
and credit. If, however, the escrow agreement, trust agreement, or
exchange agreement specifies that all the earnings attributable to
exchange funds are payable to the taxpayer, the exchange funds are not
treated as loaned from the taxpayer to the exchange facilitator, and
the taxpayer takes into account all items of income, deduction, and
credit attributable to the exchange funds. If an exchange facilitator
commingles taxpayers' exchange funds (whether or not a taxpayer's funds
are held in a separate account) all earnings attributable to a
taxpayer's exchange funds are treated as paid to the taxpayer if all of
the earnings of the commingled funds, allocable on a pro rata basis to
a taxpayer, are paid to the taxpayer.
a. Separately Identified Accounts
Commentators noted that many exchange facilitators have a corporate
relationship with the institution in which the exchange facilitator
deposits exchange funds on behalf of taxpayers and questioned whether,
in addition to the stated earnings of the account in which the exchange
funds are deposited, a portion of the earnings the depository
institution receives in the ordinary course of investing customer
deposits as part of its trade or business operations should be treated
as earnings attributable to exchange funds if the depository
institution is part of the same corporate group as the exchange
facilitator. One group of commentators noted that it is common business
practice for a depository institution in the same corporate group as an
exchange facilitator to credit a portion of its revenues to the
exchange facilitator based on the amount of exchange funds deposited by
the exchange facilitator with the depository institution, and suggested
that these types of internal credits should be treated as earnings
attributable to exchange funds. However, other commentators argued that
these internal credits are similar to payments a depository institution
may make to an unrelated exchange facilitator for depositing funds with
the depository institution and therefore, should not be treated as
earnings attributable to exchange funds solely because the exchange
facilitator is related to the depository institution. Some commentators
noted that an exchange facilitator that maintains a master account that
includes individual sub-accounts in taxpayers' names and taxpayer
identification numbers (TIN) may earn additional interest in excess of
the interest paid on the sub-accounts, based on the amounts the
exchange facilitator deposits. To clarify what constitutes earnings
attributable to the exchange funds, one commentator recommended that
the final regulations provide that if exchange funds are held in a
segregated account for the benefit of the taxpayer, only the earnings
on the segregated account will be considered earnings attributable to
the exchange funds. The commentator suggested that this rule would
provide a simple, clear definition.
In response to these comments, the final regulations provide that,
if exchange funds are held with a depository institution in an account
(including a sub-account) that is separately identified with a
taxpayer's name and TIN, only the earnings on the account are treated
as earnings attributable to the exchange funds. The final regulations
provide examples to illustrate the application of this rule to exchange
facilitators related to depository institutions and to master/sub-
account arrangements.
b. Commingled Accounts
A commentator opined that the proposed rules for allocating
earnings in a commingled account are confusing because the rules apply
``whether or not the taxpayer's funds are in a segregated account.''
The commentator stated that, as a result, it is unclear whether all
funds an exchange facilitator deposits in a specific depository
institution constitute one commingled account, even if the funds are
maintained in separate accounts and derive from financial transactions
unrelated to exchange funds. The final regulations clarify that
separate accounts maintained in the names and TINs of unrelated
taxpayers do not constitute a commingled account.
c. Administrative Fees
Commentators suggested that fees paid by a bank to a related
exchange facilitator should be treated as earnings attributable to
exchange funds. Other commentators stated that these fees are
compensation for administrative services provided and are not earnings

[[Page 39616]]

attributable to the funds. The final regulations do not treat these
fees as earnings attributable to exchange funds. Fees for
administrative services provided by exchange facilitators to depository
institutions represent compensation for services provided by the
exchange facilitator as opposed to earnings on the exchange funds.

4. Loan Treatment

a. Characterization as Loan
Commentators opined that exchange funds should not be treated as
loaned from the taxpayer to the exchange facilitator because an
exchange facilitator's relationship with the taxpayer is primarily that
of a fiduciary. A commentator suggested that exchange facilitators are
similar to mortgage or payroll processing servicers that maintain
interest-bearing escrow accounts. The commentator also argued that the
receipt of exchange funds by an exchange facilitator is not a
compensation-related loan because the amount of interest required to be
imputed would be higher for a greater amount of funds or longer
exchange period, although the exchange facilitator would provide no
additional services. Another commentator noted that other transactions
in which payment is made before services are provided, such as pre-
payments to contractors, are not treated as loans. The commentator
asserted that the transaction between an exchange facilitator and its
customer is an installment sale rather than a loan. Other commentators
argued that treating exchange funds as loaned is inconsistent with the
regulations under section 1031, which generally require that a taxpayer
must not have any benefit of the exchange funds during the exchange
period to avoid actual or constructive receipt. Other commentators
agreed that an exchange facilitator's use of exchange funds properly
may be characterized as a compensation-related loan.
The final regulations retain the general rule that money held by an
exchange facilitator in a deferred exchange is treated as loaned by the
taxpayer to the exchange facilitator. When an exchange facilitator
benefits from the use of the taxpayer's exchange funds, characterizing
the exchange funds as having been loaned from the taxpayer to the
exchange facilitator is consistent with the substance of the
transaction and with the definition of loan in the legislative history
of section 7872. See H.R. Rep. 98-861 at 1018 (1984).
b. Application of Section 7872
Under the proposed regulations, an exchange facilitator loan must
be tested under section 7872 to determine whether it is a below-market
loan for purposes of that section. The proposed regulations further
provide that a taxpayer must use a special 182-day applicable Federal
rate (AFR) to test whether an exchange facilitator loan is a below-
market loan. If an exchange facilitator loan is a below-market loan,
the loan is treated as a compensation-related loan that is not exempt
from section 7872 as a loan without significant tax effect.
Commentators opined that these transactions should not be subject
to section 7872 for reasons including the lack of a significant tax
effect, exceptions provided under sections 483 and 1274 for short-term
loans, the general exemption from section 7872 for certain accounts or
withdrawable shares with a bank, the costs of complying with section
7872, and the lack of a tax avoidance purpose.
One suggestion submitted by commentators to mitigate the impact of
section 7872 on smaller transactions was the adoption of a rule that
would exempt certain exchange facilitator loans from section 7872. The
final regulations include an exemption from section 7872 for exchange
facilitator loans of $2 million or less while preserving the
application of section 7872 for larger transactions. This exemption
amount may be increased in future published guidance. The exemption is
limited to loans that are 6 months or less in duration.
c. Special AFR
One group of commentators believed that the special AFR in the
proposed regulations is unreasonably high and suggested a more
appropriate test rate would be a demand deposit rate. Other
commentators suggested that the special AFR rate in the proposed
regulations was appropriate.
For purposes of section 7872, the test rate allowed under section
1274(d)(1)(D) must be calculated by reference to United States Treasury
obligations, not demand deposit rates. See footnote 5 of H.R. Conf.
Rep. No. 99-250 at 15 (1985). However, in response to these comments,
the final regulations use a 91-day rate, which is the investment rate
on a 13-week (generally, 91-day) Treasury bill determined on the issue
date that is the same as the date the exchange facilitator loan is made
or, if the two dates are not the same, the issue date that most closely
precedes the date that the exchange facilitator loan is made. This rate
is based on semi-annual compounding and may be found at http://
www.treasurydirect.gov/RI/OFBills. Also, in recognition that the short-
term AFR may be lower than the 91-day rate, the final regulations
provide that taxpayers must apply the lower of the 91-day rate or the
short-term AFR when testing or imputing payments on an exchange
facilitator loan under section 7872.

5. Effective/Applicability Date

Commentators requested that the final regulations apply to exchange
agreements entered into, rather than transfers of property made, after
the publication of final regulations. Alternatively, commentators
requested that the applicability of the final regulations be deferred
to allow exchange facilitators sufficient time to make changes to
accounting, control, and reporting systems and to revise exchange
agreements to comply with the final regulations.
In response to these comments, the final regulations apply to
transfers of relinquished property made, and to exchange facilitator
loans issued, on or after October 8, 2008. For transfers of
relinquished property made by taxpayers after August 16, 1986, but
before October 8, 2008, the IRS will not challenge a reasonable,
consistently applied method of taxation for earnings attributable to
exchange funds.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. A final regulatory
flexibility analysis has been prepared for this final regulation under
5 U.S.C. 604. The analysis is set forth below under the heading ``Final
Regulatory Flexibility Analysis.'' Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking that preceded these final
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.

Final Regulatory Flexibility Analysis

Succinct Statement of the Need for, and Objectives of, the Final
Regulations

These final regulations are issued under the authority of sections
7805, 468B(g), and 7872. Section 468B(g) provides that nothing in any
provision of law shall be construed as providing that an escrow
account, settlement fund, or similar fund is not subject to current
income tax and that the Secretary shall

[[Page 39617]]

prescribe regulations providing for the taxation of such accounts or
funds whether as a grantor trust or otherwise.
The final regulations provide that exchange funds are treated,
generally, as loaned by a taxpayer to an exchange facilitator, and the
exchange facilitator takes into account all items of income, deduction,
and credit. If, however, the escrow agreement, trust agreement, or
exchange agreement specifies that all the earnings attributable to
exchange funds are payable to the taxpayer, the exchange funds are not
treated as loaned from the taxpayer to the exchange facilitator, and
the taxpayer takes into account all items of income, deduction, and
credit attributable to the exchange funds. The final regulations are
intended to provide greater certainty, enhance administrability, and
ensure consistent treatment of taxpayers. The final regulations contain
amendments to ease the economic impact of the final regulations on
small businesses.

Summary of Significant Issues Raised by Public Comments in Response to
the Initial Regulatory Flexibility Analysis, Assessment of Issues, and
Statement of Changes Made to the Proposed Regulations as a Result of
Comments

a. Administrative Burden Resulting From Loan Characterization
Under the final regulations, if exchange funds are treated as
loaned by the taxpayer to an exchange facilitator, interest generally
is imputed to the taxpayer under section 7872 unless the exchange
facilitator pays sufficient interest. If a loan between the taxpayer
and the exchange facilitator does not provide for sufficient interest
and the loan is not otherwise exempt from section 7872, interest income
is imputed to the taxpayer. Therefore, exchange facilitators must keep
records of the amount of income paid to a taxpayer and may be required
to report the income on Forms 1099. The revised IRFA estimated that
most small businesses subject to the proposed regulations currently
maintain records of the amount of income paid to the taxpayer and
report the payments on Forms 1099. The revised IRFA concluded that the
proposed regulations should not increase significantly the compliance
burden associated with keeping records and reporting income paid to the
taxpayer, based on the expectation that the proposed regulations may
have the effect of increasing the amount exchange facilitators report,
but not result in a significant increase in the number of forms
generated. The revised IRFA requested additional comments to assist in
quantifying any additional recordkeeping burdens and accounting costs
that may result.
A commentator responded that the proposed regulations impose new
and different reporting requirements than those that currently apply to
qualified intermediaries (QI) because QIs must determine if the
regulations apply to a particular transaction and may be required to
report imputed interest. The commentator provided a study (updated in a
follow-up submission) that concludes that the incremental workload to
comply with the proposed regulations is substantial and the software
needed to comply with the recordkeeping requirements is not available
at a cost affordable to many small businesses. The study offers
suggestions to mitigate these effects that include providing an
exception to section 7872 for certain transactions, revising the
special AFR, and including a transition period. The final regulations
incorporate all of these suggestions.
The study also suggested that the average daily balance
calculations required under the proposed regulations create substantial
administrative burdens and should be deleted. The final regulations do
not adopt this comment. The final regulations do not require average
daily balance calculations, but provide an example utilizing an average
daily balance calculation as only one acceptable method to determine
the earnings of a commingled account that are attributable to a
taxpayer's exchange funds. No other comments were received quantifying
a compliance burden resulting from the proposed regulations. A
commentator advised that the amount of additional time or expense that
would result from the application of the proposed regulations could not
be quantified yet. However, commentators requested that the
applicability of the final regulations be delayed to allow exchange
facilitators sufficient time to make required changes to accounting,
control, and reporting systems and to revise exchange agreements. In
response to these comments, the final regulations apply to transfers of
relinquished property made, and to exchange facilitator loans issued,
on or after October 8, 2008.
b. Economic Impact of Loan Characterization
Commentators on the proposed regulations asserted that the loan
characterization rules will cause a large number of small businesses to
suffer a substantial revenue loss and to fail or reduce their
workforces. They claimed that small business QIs would be
disproportionately affected because these QIs predominantly apply a
business model that would place them at a disadvantage under the
proposed regulations. Commentators stated that if businesses are
required to impute interest on exchange funds, taxpayers will demand
that this interest be paid to them. To compensate for this loss of
revenue, these commentators claim that small businesses will be
required to change their business practices to pay all income to the
taxpayer and to charge higher fees, while large, bank-affiliated QIs
generally will be unaffected. The revised IRFA requested specific
comments to assist in quantifying the number of businesses that would
change their business model as a result of the proposed regulations and
the effect a change in business model would have on revenues or
profits. No comments quantifying this effect were received.
The revised IRFA also requested specific comments on the
appropriateness and nature of a rule that would reduce the economic
impact of the regulations on small businesses by exempting certain
exchange transactions most likely to be engaged in by small businesses
from loan treatment. For this purpose, the revised IRFA requested
information on the average duration of exchange transactions and the
average dollar amount of exchange funds.
A commentator responded that in its QI business 76 percent of
exchange transactions closed within 60 days and 80 percent of exchange
transactions involved less than $250,000 of exchange funds. This
commentator advocated rules that would exempt from section 7872
transactions that either involved exchange funds of less than $250,000
or remained open for less than 60 days.
Another commentator cited the minimal revenue impact of allowing
interest retained by a QI to escape income inclusion to the taxpayer as
a reason supporting exempting certain deferred like-kind exchange
transactions. Because compensation paid to a QI must be capitalized as
an acquisition cost of the replacement property, the commentator
asserted that there is only a timing mismatch for the taxpayer if
current exclusion is not allowed, and that given the relatively short
time period during which interest accrues in typical section 1031
transactions, any revenue impact of the proposed regulations would be
outweighed by the increased compliance burden on taxpayers. This
commentator suggested that two separate rules, one which exempts
transactions of a certain amount ($1 million) and another which exempts
transactions of short duration (less than

[[Page 39618]]

90 days), are necessary because the available data suggests that there
is no correlation between the size of the deposited exchange funds and
the length of time the funds stay on deposit. This commentator also
requested that any exemption amounts be adjusted for inflation.
In response to these comments, the final regulations provide an
exemption from section 7872 for exchange transactions in which the
amount of exchange funds treated as loaned does not exceed $2 million
and the funds are held for 6 months or less. This exemption amount may
be increased in future published guidance. Based upon comments received
the $2 million amount is expected to exempt from the application of
section 7872 most deferred exchange transactions handled by small
business exchange facilitators.
c. Special AFR
The proposed regulations provide a special AFR, equal to the
investment rate on a 182-day Treasury bill, to test whether an exchange
facilitator loan pays sufficient interest as required by section 7872.
The special AFR was expected to result in fewer transactions requiring
the imputation of interest to taxpayers than the short-term AFR, thus
reducing the economic impact on small businesses. However, comments on
the proposed regulations claimed that the special AFR is
unrealistically high and inappropriate for these transactions. In order
to determine an appropriate rate for testing exchange facilitator loans
for sufficient interest, the revised IRFA requested specific comments
identifying the rate of return typically earned by small business QIs
on exchange funds and the interest rate QIs typically pay to taxpayers,
and solicited suggestions for an appropriate rate.
A commentator responded that the rate of return earned by a QI will
vary depending on the total amount of funds the QI aggregates, the
market in which the QI operates, the QI's reputation and relationship
with a depository institution, and the QI's choice of investment
vehicle. Thus, the commentator advised that it is difficult to
ascertain the rate of return earned by a small business QI on exchange
funds. The commentator stated that quantifying the interest rate that
QIs typically pay to taxpayers likewise is difficult because many
factors influence it.
Another commentator responding to the revised IRFA argued that the
182-day rate is inappropriate to test whether exchange facilitator
loans bear sufficient interest under section 7872 because exchange
funds held by a depository institution are demand deposits and rarely
are held for 180 days. This commentator identified three potential
alternative rates to the 182-day rate for a special AFR: (1) A rate
based on national demand deposit rates; (2) a rate that is 10 percent
of an established rate such as the Federal Funds rate; and (3) an
average of the minimum demand deposit savings rates offered by several
banks in a QI's home office region. Although this commentator
recognized the administrative burdens of publishing one of these
alternative rates, the commentator believed these alternatives more
readily reflected the economic reality of exchange fund transactions
than the 182-day rate.
In response to these comments and comments on the proposed
regulations, in lieu of the 182-day rate, the final regulations provide
a special AFR that is the investment rate on a 13-week (generally, 91-
day) Treasury bill. In addition, because the short-term AFR may be
lower than the 91-day rate, the final regulations provide that
taxpayers must apply the lower of the 91-day rate or the short-term AFR
when testing for sufficient interest under section 7872.
d. Earnings Attributable to Exchange Funds
The proposed regulations provide that a taxpayer's exchange funds
are not treated as loaned if all the earnings attributable to the
exchange funds are paid to the taxpayer but do not define the term
``earnings attributable to the exchange funds.'' Commentators have
asserted that the lack of specificity results in disparate treatment of
bank-affiliated QIs and independent QIs because of their different
business models and places the independent QIs, many of which are small
businesses, at an economic disadvantage.
Commentators advised that a portion of the earnings of a depository
institution may be credited to an exchange facilitator based on the
total amount of exchange funds the exchange facilitator deposits when
the exchange facilitator and the depository institution (generally
large businesses) are part of the same corporate group. The
commentators opined that the proposed regulations do not, but should,
treat this credit as earnings attributable to the exchange funds on
which it is calculated.
Another commentator noted that depository institutions also may pay
fees to unrelated exchange facilitators, including small businesses,
for depositing exchange funds. Furthermore, other commentators
described a business model used by some independent QIs, including some
small businesses, in which a QI deposits the exchange funds of multiple
taxpayers in sub-accounts under a master account that earns interest in
addition to the interest credited to the sub-accounts. The amount of
the additional interest credited to the QI is based on the total amount
of exchange funds the QI deposits. Commentators have expressed concern
that the proposed regulations treat this additional interest as
earnings attributable to the individual taxpayers' exchange funds, but
do not similarly treat earnings credited to a related QI based on total
amount deposited.
The commentators claim that as a result of this treatment
independent QIs will be forced to pay the additional interest that is
attributable to exchange funds to taxpayers to avoid loan treatment,
and thus will be required to correspondingly raise fees to compensate
for lost profits. They assert that because bank-affiliated QIs earn
profits by means of credits that are not attributed to exchange funds,
bank-affiliated QIs will not be required to raise fees, creating an
economic disparity between similarly situated bank-affiliated QIs and
independent QIs.
In response to these comments, the final regulations provide a
definitive test for determining earnings attributable to a taxpayer's
exchange funds when an exchange facilitator holds all of the taxpayer's
exchange funds in a separately identified account (or sub-account)
under that taxpayer's name and TIN. Under this rule, the earnings
attributable to the taxpayer's exchange funds include only the earnings
on the separately identified account. This rule equalizes the treatment
of independent, small business exchange facilitators and large exchange
facilitators by providing that neither earnings of a depository
institution that are credited to a related exchange facilitator nor the
additional interest paid in connection with a master account are
treated as earnings attributable to exchange funds when a taxpayer's
exchange funds are held in a separately identified account (or sub-
account).

Description and Estimate of the Number of Small Businesses to Which the
Final Regulations Will Apply

The final regulations affect exchange facilitators that hold
exchange funds for taxpayers engaging in deferred exchanges of like-
kind property. The revised IRFA concludes that the applicable size
standard for determining what constitutes a small business for purposes
of the proposed regulations is

[[Page 39619]]

$2 million in annual gross receipts, the SBA's definition of a small
business for North American Industry Classification System (NAICS) code
531390, and estimates that there are approximately 325 businesses
(mostly QIs) that are full-time exchange facilitators.
The revised IRFA requested additional information on the number of
small businesses engaged in the QI industry, and requested specific
comments from QIs engaged exclusively in that business indicating
whether their annual gross receipts are $2 million or less, or more
than $2 million. A commentator advised that the number of QIs is very
large, but many QIs do not identify themselves as such or engage in
that business full-time. The commentator reported that the annual gross
receipts of its QI business are well below $2 million. Another
commentator opined that the information requested could not be
quantified. No other comments were received on the number of small
businesses in the industry or the general appropriateness of the size
standard. Therefore, the estimate of approximately 325 businesses that
are full-time exchange facilitators, the applicable size standard for
determining what constitutes a small business with respect to these
regulations of $2 million in annual gross receipts, and the conclusion
that a significant portion of the QI industry consists of small
businesses under this standard, are unchanged.

Description of Compliance Requirements and Estimate of the Classes of
Small Businesses That Will Be Subject to the Compliance Requirements

As discussed, under current law exchange facilitators must keep
records of the amount of income paid to taxpayers and may be required
to report the income on Forms 1099. The final regulations provide that
if the exchange funds are treated as loaned from the taxpayer to the QI
and the loan is a below-market loan that does not qualify for an
exemption from section 7872, income is deemed transferred to the
exchange facilitator as compensation and retransferred to the taxpayer
as interest. The exchange facilitator has income from the imputed
compensation and an offsetting deduction for the interest deemed paid
to the taxpayer.
The final regulations provide an exemption from section 7872 for
exchange facilitator loans that do not exceed $2 million and provide
that this exemption amount may be increased in future published
guidance. Based on available data, this exemption from section 7872 is
expected to apply to the majority of exchange transactions engaged in
by small business exchange facilitators. Additionally, the final
regulations revise the special AFR that determines whether a loan pays
sufficient interest, which should reduce the number of transactions in
which interest is imputed. Therefore, for most small businesses the
final regulations are not expected to increase significantly the
compliance burden associated with keeping records and reporting income
paid to the taxpayer.

Actions To Minimize the Significant Economic Impact on Small Businesses
and Reasons for Selecting Alternatives Reflected in the Final
Regulations and for Rejecting Other Significant Alternatives

The final regulations provide a reasonable balance between the
statutory requirements of sections 468B and 7872, the economic impact
of a strict application of those provisions, and the need to provide
clear and administrable rules. The inclusion of a $2 million exemption
from section 7872, the adjustment of the special AFR, and the delayed
applicability date reflect a judgment that the revenue effects are
small and are outweighed by the compliance burden and other economic
impacts of the regulations on small businesses.

Drafting Information

The principal authors of these regulations are Jeffrey T. Rodrick
of the Office of Associate Chief Counsel (Income Tax & Accounting) and
David B. Silber of the Office of Associate Chief Counsel (Financial
Institutions & Products). However, other personnel from the IRS and the
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

Income Taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:

Authority: 26 U.S.C. 7805 * * *
Section 1.468B-6 also issued under 26 U.S.C. 468B(g). * * *
Section 1.7872-5 also issued under 26 U.S.C. 7872. * * * Section
1.7872-16 also issued under 26 U.S.C. 7872. * * *

0
Par. 2. Section 1.468B-0 is amended by adding entries for Sec. 1.468B-
6 to read as follows:

Sec. 1.468B-0 Table of contents.

* * * * *

Sec. 1.468B-6 Escrow accounts, trusts, and other funds used during
deferred exchanges of like-kind property under section 1031(a)(3).

(a) Scope.
(b) Definitions.
(1) In general.
(2) Exchange funds.
(3) Exchange facilitator.
(4) Transactional expenses.
(i) In general.
(ii) Special rule for certain fees for exchange facilitator
services.
(c) Taxation of exchange funds.
(1) Exchange funds generally treated as loaned to an exchange
facilitator.[FEDREG][VOL]*[/VOL][NO]*[/NO][DATE]*[/
DATE][RULES][RULE][PREAMB][AGENCY]*[/AGENCY][SUBJECT]*[/SUBJECT][/
PREAMB][SUPLINF][HED]*[/HED][REGTEXT][EXTRACT][P]*[/P]
(2) Exchange funds not treated as loaned to an exchange
facilitator.
(i) Scope.
(ii) Earnings attributable to the taxpayer's exchange funds.
(A) Separately identified account.
(B) Allocation of earnings in commingled accounts.
(C) Transactional expenses.
(iii) Treatment of the taxpayer.
(d) Information reporting requirements.
(e) Examples.
(f) Effective/applicability dates.
(1) In general.
(2) Transition rule.
* * * * *

0
Par. 3. Section 1.468B-6 is added to read as follows:

Sec. 1.468B-6 Escrow accounts, trusts, and other funds used during
deferred exchanges of like-kind property under section 1031(a)(3).

(a) Scope. This section provides rules under section 468B(g)
relating to the current taxation of escrow accounts, trusts, and other
funds used during deferred exchanges.
(b) Definitions. The definitions in this paragraph (b) apply for
purposes of this section.
(1) In general. Deferred exchange, escrow agreement, escrow holder,
exchange agreement, qualified escrow account, qualified intermediary,
qualified trust, relinquished property, replacement property, taxpayer,
trust agreement, and trustee have the same meanings as in Sec.
1.1031(k)-1; deferred exchange also includes any exchange intended to
qualify as a deferred exchange, and qualified intermediary also
includes any person or entity intended by a taxpayer to be a qualified
intermediary within the meaning of Sec. 1.1031(k)-1(g)(4).
(2) Exchange funds. Exchange funds means relinquished property,
cash, or cash equivalent that secures an

[[Page 39620]]

obligation of a transferee to transfer replacement property, or
proceeds from a transfer of relinquished property, held in a qualified
escrow account, qualified trust, or other escrow account, trust, or
fund in a deferred exchange.
(3) Exchange facilitator. Exchange facilitator means a qualified
intermediary, transferee, escrow holder, trustee, or other party that
holds exchange funds for a taxpayer in a deferred exchange pursuant to
an escrow agreement, trust agreement, or exchange agreement.
(4) Transactional expenses--(i) In general. Except as provided in
paragraph (b)(4)(ii) of this section, transactional expenses means
transactional items within the meaning of Sec. 1.1031(k)-1(g)(7)(ii).
(ii) Special rule for certain fees for exchange facilitator
services. The fee for the services of an exchange facilitator is not a
transactional expense unless the escrow agreement, trust agreement, or
exchange agreement, as applicable, provides that--
(A) The amount of the fee payable to the exchange facilitator is
fixed on or before the date of the transfer of the relinquished
property by the taxpayer (either by stating the fee as a fixed dollar
amount in the agreement or determining the fee by a formula, the result
of which is known on or before the transfer of the relinquished
property by the taxpayer); and
(B) The amount of the fee is payable by the taxpayer regardless of
whether the earnings attributable to the exchange funds are sufficient
to pay the fee.
(c) Taxation of exchange funds--(1) Exchange funds generally
treated as loaned to an exchange facilitator. Except as provided in
paragraph (c)(2) of this section, exchange funds are treated as loaned
from a taxpayer to an exchange facilitator (exchange facilitator loan).
If a transaction is treated as an exchange facilitator loan under this
paragraph (c)(1), the exchange facilitator must take into account all
items of income, deduction, and credit (including capital gains and
losses) attributable to the exchange funds. See Sec. 1.7872-16 to
determine if an exchange facilitator loan is a below-market loan for
purposes of section 7872 and Sec. 1.7872-5(b)(16) to determine if an
exchange facilitator loan is exempt from section 7872.
(2) Exchange funds not treated as loaned to an exchange
facilitator--(i) Scope. This paragraph (c)(2) applies if, in accordance
with an escrow agreement, trust agreement, or exchange agreement, as
applicable, all the earnings attributable to a taxpayer's exchange
funds are paid to the taxpayer.
(ii) Earnings attributable to the taxpayer's exchange funds--(A)
Separately identified account. If an exchange facilitator holds all of
the taxpayer's exchange funds in a separately identified account, the
earnings credited to that account are deemed to be all the earnings
attributable to the taxpayer's exchange funds for purposes of paragraph
(c)(2)(i) of this section. In general, a separately identified account
is an account established under the taxpayer's name and taxpayer
identification number with a depository institution. For purposes of
paragraph (c)(2)(i) of this section, a sub-account will be treated as a
separately identified account if the master account under which the
sub-account is created is established with a depository institution,
the depository institution identifies the sub-account by the taxpayer's
name and taxpayer identification number, and the depository institution
specifically credits earnings to the sub-account.
(B) Allocation of earnings in commingled accounts. If an exchange
facilitator commingles (for investment or otherwise) the taxpayer's
exchange funds with other funds or assets, all the earnings
attributable to the taxpayer's exchange funds are paid to the taxpayer
if all of the earnings attributable to the commingled funds or assets
that are allocable on a pro-rata basis (using a reasonable method that
takes into account the time that the exchange funds are in the
commingled account, actual rate or rates of return, and the respective
account balances) to the taxpayer's exchange funds either are paid to
the taxpayer or are treated as paid to the taxpayer under paragraph
(c)(2)(ii)(C) of this section.
(C) Transactional expenses. Any payment from the taxpayer's
exchange funds, or from the earnings attributable to the taxpayer's
exchange funds, for a transactional expense of the taxpayer (as defined
in paragraph (b)(4) of this section) is treated as first paid to the
taxpayer and then paid by the taxpayer to the recipient.
(iii) Treatment of the taxpayer. If this paragraph (c)(2) applies,
exchange funds are not treated as loaned from a taxpayer to an exchange
facilitator. The taxpayer must take into account all items of income,
deduction, and credit (including capital gains and losses) attributable
to the exchange funds.
(d) Information reporting requirements. A payor (as defined in
Sec. 1.6041-1) must report the income attributable to exchange funds
to the extent required by the information reporting provisions of
subpart B, Part III, subchapter A, chapter 61, Subtitle F of the
Internal Revenue Code, and the regulations under those provisions. See
Sec. 1.6041-1(f) for rules relating to the amount to be reported when
fees, expenses or commissions owed by a payee to a third party are
deducted from a payment.
(e) Examples. The provisions of this section are illustrated by the
following examples in which T is a taxpayer that uses a calendar
taxable year and the cash receipts and disbursements method of
accounting. The examples are as follows:

Example 1. All earnings attributable to exchange funds paid to
taxpayer. (i) T enters into a deferred exchange with R. The sales
agreement provides that T will transfer property (the relinquished
property) to R and R will transfer replacement property to T. R's
obligation to transfer replacement property to T is secured by cash
equal to the fair market value of the relinquished property, which R
will deposit into a qualified escrow account that T establishes with
B, a depository institution. T enters into an escrow agreement with
B that provides that all the earnings attributable to the exchange
funds will be paid to T.
(ii) On November 1, 2008, T transfers property to R and R
deposits $2,100,000 in T's qualified escrow account with B. Between
November 1 and December 31, 2008, B credits T's account with $14,000
of interest. During January 2009, B credits T's account with $7000
of interest. On February 1, 2009, R transfers replacement property
worth $2,100,000 to T and B pays $2,100,000 from the qualified
escrow account to R. Additionally, on February 1, 2009, B pays the
$21,000 of interest to T.
(iii) Under paragraph (b) of this section, the $2,100,000
deposited with B constitutes exchange funds and B is an exchange
facilitator. Because all the earnings attributable to the exchange
funds are paid to T in accordance with the escrow agreement,
paragraph (c)(2) of this section applies. The exchange funds are not
treated as loaned from T to B. T must take into account in computing
T's income tax liability for 2008 the $14,000 of earnings credited
to the qualified escrow account in 2008 and for 2009 the $7,000 of
earnings credited to the qualified escrow account in 2009.
Example 2. Payment of transactional expenses from earnings. (i)
The facts are the same as in Example 1, except that the escrow
agreement provides that, prior to paying the earnings to T, B may
deduct any amounts B has paid to third parties for T's transactional
expenses. B pays a third party $350 on behalf of T for a survey of
the replacement property. After deducting $350 from the earnings
attributable to T's qualified escrow account, B pays T the remainder
($20,650) of the earnings.
(ii) Under paragraph (b)(4) of this section, the cost of the
survey is a transactional expense. Under paragraph (c)(2)(ii)(C) of
this section, the $350 that B pays for the survey is treated as
first paid to T and then from T to the third party. Therefore, all
the earnings attributable to T's exchange funds are paid or

[[Page 39621]]

treated as paid to T in accordance with the escrow agreement, and
paragraph (c)(2) of this section applies. The exchange funds are not
treated as loaned from T to B, and T must take into account in
computing T's income tax liability the $21,000 of earnings credited
to the qualified escrow account.
Example 3. Earnings retained by exchange facilitator as
compensation for services. (i) The facts are the same as in Example
1, except that the escrow agreement provides that B also may deduct
any outstanding fees owed by T for B's services in facilitating the
deferred exchange. In accordance with paragraph (b)(4)(ii) of this
section, the escrow agreement provides for a fixed fee of $1,200 for
B's services, which is payable by T regardless of the amount of
earnings attributable to the exchange funds. Because the earnings on
the exchange funds in this case exceed $1,200, B retains $1,200 as
the unpaid portion of its fee and pays T the remainder ($19,800) of
the earnings.
(ii) Under paragraph (b)(4) of this section, B's fee is treated
as a transactional expense. Under paragraph (c)(2)(ii)(C) of this
section, the $1200 that B retains for its fee is treated as first
paid to T and then from T to B. Therefore, all the earnings
attributable to T's exchange funds are paid or treated as paid to T
in accordance with the escrow agreement, and paragraph (c)(2) of
this section applies. The exchange funds are not treated as loaned
from T to B, and T must take into account in computing T's income
tax liability the $21,000 of earnings credited to the qualified
escrow account.
Example 4. Exchange funds deposited by exchange facilitator with
related depository institution in account in taxpayer's name. (i)
The facts are the same as in Example 1 except that, instead of
entering into an escrow agreement, T enters into an exchange
agreement with QI, a qualified intermediary. The exchange agreement
provides that R will pay $2,100,000 to QI, QI will deposit
$2,100,000 into an account with a depository institution under T's
name and taxpayer identification number (TIN), and all the earnings
attributable to the account will be paid to T.
(ii) On May 1, 2008, T transfers property to QI, QI transfers
the property to R, R delivers $2,100,000 to QI, and QI deposits
$2,100,000 into a money market account with depository institution B
under T's name and TIN. B and QI are members of the same
consolidated group of corporations within the meaning of section
1501. Between May 1 and September 1, 2008, the account earns $28,000
of interest at the stated rate established by B. During the period
May 1 to September 1, 2008, B invests T's exchange funds and earns
$40,000. On September 1, 2008, QI uses $2,100,000 of the funds in
the account to purchase replacement property identified by T and
transfers the replacement property to T. B pays to T the $28,000 of
interest earned on the money market account at the stated rate.
(iii) Under paragraph (b) of this section, the $2,100,000 QI
receives from R for the relinquished property is exchange funds and
QI is an exchange facilitator. B is not an exchange facilitator. T
has not entered into an escrow agreement, trust agreement, or
exchange agreement with B, and QI, not B, holds the exchange funds
on behalf of T. Under paragraph (c)(2)(ii)(A) of this section, the
$40,000 B earns from investing T's exchange funds are not treated as
earnings attributable to T's exchange funds. Because all the
earnings attributable to T's exchange funds are paid to T in
accordance with the exchange agreement, paragraph (c)(2) of this
section applies. The exchange funds are not treated as loaned from T
to QI, and T must take into account in computing T's income tax
liability for 2008 the $28,000 of interest earned on the money
market account.
Example 5. Earnings of related depository institution credited
to exchange facilitator. (i) The facts are the same as in Example 4,
except that at the end of each taxable year, B credits a portion of
its earnings on deposits to QI. The amount credited is based on the
total amount of exchange funds QI has deposited with B during the
year. At the end of the 2008 taxable year, B credits $152,500 of B's
earnings to QI.
(ii) Under paragraph (c)(2)(ii)(A) of this section, no part of
the $152,500 credited by B to QI is earnings attributable to T's
exchange funds. Therefore, all of the earnings attributable to the
exchange funds are paid to T in accordance with the exchange
agreement, and paragraph (c)(2) of this section applies. The
exchange funds are not treated as loaned from T to QI, and T must
take into account in computing T's income tax liability for 2008 the
$28,000 of interest earned on T's account.
Example 6. Exchange funds deposited by exchange facilitator with
unrelated depository institution in sub-account in taxpayer's name.
(i) The facts are the same as in Example 4, except that QI and B are
unrelated and the money market account in which QI deposits the
$2,100,000 received from T is a sub-account within a master account
QI maintains with B in QI's name and TIN. The master account
includes other sub-accounts, each in the name and TIN of a taxpayer
that has entered into an exchange agreement with QI, into which QI
deposits each taxpayer's exchange funds. Each month, B transfers to
QI's master account an additional amount of interest based upon the
average daily balance of all exchange funds within the master
account during the month. At the end of the 2008 taxable year, B has
credited $152,500 of additional interest to QI.
(ii) Under paragraph (c)(2)(ii)(A) of this section, no part of
the $152,500 credited by B to QI is earnings attributable to T's
exchange funds. Therefore, all of the earnings attributable to the
exchange funds are paid to T in accordance with the exchange
agreement, and paragraph (c)(2) of this section applies. The
exchange funds are not treated as loaned from T to QI, and T must
take into account in computing T's income tax liability for 2008 the
$28,000 of interest earned on T's account.
Example 7. Marketing fee paid to exchange facilitator. (i) The
facts are the same as in Example 4, except that at the end of each
taxable year, B pays a marketing fee to QI for using B as its
depository institution for exchange funds. The amount of the fee is
based on the total amount of exchange funds QI has deposited with B
during the year.
(ii) Under paragraph (c)(2)(ii)(A) of this section, no part of
the marketing fee that B pays to QI is earnings attributable to T's
exchange funds. Therefore, all of the earnings attributable to the
exchange funds are paid to T in accordance with the exchange
agreement, and paragraph (c)(2) of this section applies. The
exchange funds are not treated as loaned from T to QI, and T must
take into account in computing T's income tax liability for 2008 the
$28,000 of interest earned on T's account.
Example 8. Stated rate of interest on account less than earnings
attributable to exchange funds. (i) The facts are the same as in
Example 4, except that the exchange agreement provides only that QI
will pay T a stated rate of interest. QI invests the exchange funds
and earns $40,000. The exchange funds earn $28,000 at the stated
rate of interest, and QI pays the $28,000 to T.
(ii) Paragraph (c)(1) of this section applies and the exchange
funds are treated as loaned from T to QI. QI must take into account
in computing QI's income tax liability all items of income,
deduction, and credit (including capital gains and losses)
attributable to the exchange funds. Paragraph (c)(2) of this section
does not apply because QI does not pay all the earnings attributable
to the exchange funds to T. See Sec. Sec. 1.7872-5 and 1.7872-16
for rules relating to exchange facilitator loans.
Example 9. All earnings attributable to commingled exchange
funds paid to taxpayer. (i) The facts are the same as in Example 4,
except that the exchange agreement does not specify how the
$2,100,000 QI receives from R must be invested.
(ii) On May 1, 2008, QI deposits the $2,100,000 with B in a pre-
existing interest-bearing account under QI's name and TIN. The
account has a total balance of $5,275,000 immediately thereafter. On
the last day of each month between May and September, 2008, the
account earns interest as follows: $17,583 in May, $17,642 in June,
$18,756 in July, and $17,472 in August. On July 11, 2008, QI
deposits $500,000 in the account. On August 15, 2008, QI withdraws
$1,175,000 from the account.
(iii) QI calculates T's pro-rata share of the earnings allocable
to the $2,100,000 based on the actual return, the average daily
principal balances, and a 30-day month convention, as follows:

--------------------------------------------------------------------------------------------------------------------------------------------------------
Account's avg. T's avg. daily T's share*
Month daily bal. bal. (percent) Monthly interest T's end. bal.**
--------------------------------------------------------------------------------------------------------------------------------------------------------
May...................................................... $5,275,000 $2,100,000 39.8 $17,583 $2,106,998

[[Page 39622]]

June..................................................... 5,292,583 2,106,998 39.8 17,642 2,114,020
July..................................................... 5,643,558 2,114,020 37.5 18,756 2,121,054
August................................................... 5,035,647 2,121,054 42.1 17,472 2,128,410
--------------------------------------------------------------------------------------------------------------------------------------------------------
* T's Average Daily Balance / Account's Average Daily Balance.
** T's beginning balance + [(T's share) (Monthly Interest)].

(iv) On September 1, 2008, QI uses $2,100,000 of the funds to
purchase replacement property identified by T and transfers the
property to T. QI pays $28,410, the earnings of the account allocated
to T's exchange funds, to T.
(v) Because QI uses a reasonable method to calculate the pro-rata
share of account earnings allocable to T's exchange funds in accordance
with paragraph (c)(2)(ii)(B) of this section, and pays all those
earnings to T, paragraph (c)(2) of this section applies. The exchange
funds are not treated as loaned from T to QI. T must take into account
in computing T's income tax liability for 2008 the $28,410 of earnings
attributable to T's exchange funds.

(f) Effective/applicability dates--(1) In general. This section
applies to transfers of relinquished property made by taxpayers on or
after October 8, 2008.
(2) Transition rule. With respect to transfers of relinquished
property made by taxpayers after August 16, 1986, but before October 8,
2008, the Internal Revenue Service will not challenge a reasonable,
consistently applied method of taxation for income attributable to
exchange funds.

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Par. 4. Section 1.1031(k)-1 is amended by adding a sentence at the end
of paragraph (h)(2) to read as follows:

Sec. 1.1031(k)-1 Treatment of deferred exchanges.

* * * * *
(h) * * *
(2) * * * For rules under section 468B(g) relating to the current
taxation of qualified escrow accounts, qualified trusts, and other
escrow accounts, trusts, and funds used during deferred exchanges of
like-kind property, see Sec. 1.468B-6.
* * * * *
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Par. 5. Section 1.7872-5 is added to read as follows:

Sec. 1.7872-5 Exempted loans.

(a) In general--(1) General rule. Except as provided in paragraph
(a)(2) of this section, notwithstanding any other provision of section
7872 and the regulations under that section, section 7872 does not
apply to the loans listed in paragraph (b) of this section because the
interest arrangements do not have a significant effect on the Federal
tax liability of the borrower or the lender.
(2) No exemption for tax avoidance loans. If a taxpayer structures
a transaction to be a loan described in paragraph (b) of this section
and one of the principal purposes of so structuring the transaction is
the avoidance of Federal tax, then the transaction will be
recharacterized as a tax avoidance loan as defined in section
7872(c)(1)(D).
(b) List of exemptions. Except as provided in paragraph (a) of this
section, the following transactions are exempt from section 7872:
(1) through (15) [Reserved]. For further guidance, see Sec.
1.7872-5T(b)(1) through (15).
(16) An exchange facilitator loan (within the meaning of Sec.
1.468B-6(c)(1)) if the amount of the exchange funds (as defined in
Sec. 1.468B-6(b)(2)) treated as loaned does not exceed $2,000,000 and
the duration of the loan is 6 months or less. The Commissioner may
increase this $2,000,000 loan exemption amount in published guidance of
general applicability, see Sec. 601.601(d)(2) of this chapter.
(c) [Reserved]. For further guidance, see Sec. 1.7872-5T(c).
(d) Effective/applicability date. This section applies to exchange
facilitator loans issued on or after October 8, 2008.
0
Par. 6. Section 1.7872-16 is added to read as follows:

Sec. 1.7872-16 Loans to an exchange facilitator under Sec. 1.468B-6.

(a) Exchange facilitator loans. This section provides rules in
applying section 7872 to an exchange facilitator loan (within the
meaning of Sec. 1.468B-6(c)(1)). For purposes of this section, the
terms deferred exchange, exchange agreement, exchange facilitator,
exchange funds, qualified intermediary, replacement property, and
taxpayer have the same meanings as in Sec. 1.468B-6(b).
(b) Treatment as demand loans. For purposes of section 7872, except
as provided in paragraph (d) of this section, an exchange facilitator
loan is a demand loan.
(c) Treatment as compensation-related loans. If an exchange
facilitator loan is a below-market loan, the loan is a compensation-
related loan under section 7872(c)(1)(B).
(d) Applicable Federal rate (AFR) for exchange facilitator loans.
For purposes of section 7872, in the case of an exchange facilitator
loan, the applicable Federal rate is the lower of the short-term AFR in
effect under section 1274(d)(1) (as of the day on which the loan is
made), compounded semiannually, or the 91-day rate. For purposes of the
preceding sentence, the 91-day rate is equal to the investment rate on
a 13-week (generally 91-day) Treasury bill with an issue date that is
the same as the date that the exchange facilitator loan is made or, if
the two dates are not the same, with an issue date that most closely
precedes the date that the exchange facilitator loan is made.
(e) Use of approximate method permitted. The taxpayer and exchange
facilitator may use the approximate method to determine the amount of
forgone interest on any exchange facilitator loan.
(f) Exemption for certain below-market exchange facilitator loans.
If an exchange facilitator loan is a below-market loan, the loan is not
eligible for the exemptions from section 7872 listed under Sec.
1.7872-5T. However, the loan m