A few weeks back, the Internal Revenue Service and the Tax Division of the Justice Department took action to encourage potential exchangers to comply with the rules of Section 1031. (In reality, the IRS had little choice given
the blatant fraud that was allegedly perpetrated.)
A gentleman named William Franklin Jones of Park Rapids, Minnesota, is accused of reporting bogus Section 1031 tax-deferred like-kind exchanges of property that he owned. The allegations contained in the indictment indicate that Mr. Jones sold property that he owned, initiated a Section 1031 tax-deferred like-kind exchange, identified replacement property that he already owned, then “purchased” the property he had identified, allowing him to take the cash from the sales tax-free, a flagrant violation of the rules of Section 1031.
The scheme: Mr. Jones has not been convicted as of this date, so he is entitled to the presumption of innocence. That being said, the scheme went something like this: Mr. Jones sold properties that he owned. The funds from the sale of those properties were placed into exchange accounts held by a qualified intermediary. (It is unclear whether the intermediary was part of the scheme or was unaware of what was taking place.) Mr. Jones then proceeded to identify his replacement properties, which were actually properties that he already owned. The “sellers” of those properties were actually friends of Mr. Jones. Those “sellers” signed Quit Claim Deeds transferring the properties to Mr. Jones. The qualified intermediary who was holding the funds transferred those funds into accounts that Mr. Jones opened in the names of the “sellers.” The net effect of these actions was to allow Mr. Jones to sell his properties and avoid the capital gain taxes that should have been paid on those sales, end up with the cash in his own pocket (with the assistance of his friends, the “sellers”), and wind up owning the other property that he actually already owned.
Hardly proper, and hardly something that the IRS could ignore once they learned of it. Mr. Jones now faces 21-27 months in the Graybar Hotel for his attempts to avoid the $90,000 in taxes he should have paid.
A word to the wise—Section 1031 tax-deferred like-kind exchanges are a powerful tool for the creation of wealth, but do not abuse them.
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Please consider IOWA EQUITY EXCHANGE as your source for answers to your questions about Section 1031 like-kind tax-deferred exchanges. Contact us at your convenience for prompt, accurate information. Please think of us for your next exchange.
Ken Tharp
Providing Qualified Intermediary services for Section 1031 tax deferred exchanges all over the United States. Headquartered in Iowa, our services are available in Missouri, Kansas, Nebraska, Colorado, North Dakota, South Dakota, Minnesota, Wisconsin, Illinois, and all other states.
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Copyright © 2008 By Ken Tharp, All Rights Reserved. * IRS Subtly Encourages Compliance – An Example * Contact Ken Tharp for information on Section 1031 tax-deferred exchanges anywhere in the United States.
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