IRS Allows
Reverse Exchanges

The tax deferred status of Reverse Parking Exchanges has been recognized by the IRS effective September 15, 2000 if the transactions fall within the scope of the new announced IRC Section 1031 safe harbor. The new reverse exchange revenue ruling (Rev. Proc. 2000-37) states that the IRS will not challenge the tax deferred status of any reverse exchange that is structured as a qualified exchange accommodation arrangement. A reverse exchange is the flip side of a standard deferred exchange. In a reverse exchange the Exchanger directly or indirectly acquires a like kind replacement aircraft before disposing of a relinquished aircraft.

Allowing reverse exchanges significantly aids Exchangers whose transfer of a relinquished aircraft is delayed or whose acquisition of a replacement is accelerated before the Exchanger is able to complete the disposition of a relinquished aircraft. The new reverse exchange ruling gives Exchangers a useful tool to side step such timing problems and complete a legitimate exchange.

Summary of Key Points:

Parking Title - An Exchanger, who will be the ultimate owner of the parked aircraft, must enter into a "qualified exchange accommodation arrangement" ("QEAA"). An Exchanger also must engage the services of an "exchange accommodation titleholder" ("AT") under a written agreement (a "QEA agreement"). (A Qualified Intermediary may, by various holding entities, perform both services.) The QEA agreement must be entered into no later than five (5) business days after the AT first acquires qualified indicia of ownership of the parked aircraft (legal title). The AT must also meet the same qualifications as a Qualified Intermediary in a regular deferred exchange.

Duration of Parking Period - A safe harbor reverse exchange must be completed within 180 days after the parked aircraft is first acquired by the AT.

Mandatory Identification Requirements - The Exchanger does not need to identify any specific aircraft as the target relinquished aircraft at the time the QEA agreement is signed. However, within 45 days after the replacement aircraft is first acquired by the AT, the Exchanger is required to identify one or more relinquished properties.  Rev. Proc. 2000-37 adopts the same identification rules that apply in deferred exchanges, which require written identification be delivered to another party to the exchange and limit the number of alternative and multiple properties that can be identified.

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