SECTION 7. DRAFTING

INFORMATION

The principal author of this revenue procedure is J. Peter Baumgarten of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue procedure, contact Mr. Baumgarten at (202) 622–4920 (not a toll-free call).

market value of $150x and an adjusted basis of $50x. D enters into an agreement with QI, a qualified intermediary, to facilitate a deferred like-kind exchange. On May 6, Year 1, D transfers Property 1 to QI and QI transfers Property 1 to a third party in exchange for $150x. D intends that the $150x held by QI be used by QI to acquire D ’s replacement property. On June 1, Year 1, D identifies Property 2 as replacement property. On June 15, Year 1, QI notifies D that it has filed for bankruptcy protection and cannot acquire replacement property. Consequently, D fails to acquire Property 2 or any other replacement property within the exchange period. As of December 31, Year 1, QI ’s bankruptcy proceedings are on-going and D has received none of the $150x proceeds from QI or any other source. On July 1, Year 2, QI exits from bankruptcy and the bankruptcy court approves the trustee’s final report, which shows that D will be paid, in August of Year 3, $130x in full satisfaction of QI ’s obligation under the exchange agreement. D receives the $130x payment on August 1, Year 3 and does not receive any other payment attributable to the relinquished property. Assume that the selling price of Property 1 is less than $250,000 and that, based on § 483, $5x of the $130x payment is unstated interest.

D is within the scope of this revenue procedure and thus may report the failed like-kind exchange due to the QI default in accordance with this section 4. D is not required to recognize gain in Year 1 or Year 2 because D did not receive any payments attributable to the relinquished property in those years. Further, § 483 applies to D ’s Year 3 payment because the payment was due more than 6 months after the safe harbor sale date and D received the payment more than 1 year after such date. See § 483(c). Under section 4.09(1) of this revenue procedure, D ’s selling price is $125x ($130x minus the $5x of unstated interest). D ’s contract price also is $125x because there is no assumed or satisfied indebtedness. D ’s gross profit is $75x (the selling price ($125x) minus the adjusted basis ($50x)). D ’s gross profit ratio is 75/125 (the gross profit over the contract price). D must recognize gain in Year 3 of $75x (the payment attributable to the relinquished property ($125x) multiplied by D ’s gross profit ratio (75/125)). In addition, D must include $5x of the $130x payment in income in Year 3 as interest income. See § 1.446–2. Furthermore, even though the payment attributable to the relinquished property ($125x) is less than the $150x proceeds re

ceived by the QI, D is not entitled to a § 165 loss deduction because the payment attributable to the relinquished property exceeds D ’s adjusted basis in the relinquished property ($50x).