Favorable California Office of Tax Appeals Drop and Swap Decision Stands by CORY STIGILE
In 2018, Robert Horwitz posted a blog on the Appeal of Mitchell (8/2/2018), a favorable Office of Tax Appeals Opinion (the “Opinion”) that approved a “drop and swap” transaction. The FTB filed a Petition for Rehearing, which has been pending until last week when a majority Opinion on Petition for Rehearing concluded that the FTB had not shown good cause for a new hearing.
In addressing the FTB’s contention that the Opinion was contrary to the law because the Opinion failed to apply the substance-over-form doctrine, the Opinion on Petition for Rehearing described how since 1984, when Section 1031 was amended to prohibit exchanges of partnership interests, there has not been a clear path to guide partners who desire to continue their investment in like-kind property. The majority ultimately reiterated that the appellant, who relied on a lawyer’s advice, did not engage in an improper tax avoidance scheme, the transaction was not a sham, and the “parties engaged in a series of reasonable, necessary, and integrated transactions to accomplish a 1031 exchange.”
While it is not yet clear whether the Decision will be precedential, Mitchell provides a clear guide post in response to the FTB’s substance over form and other challenges to “drop and swap” transactions, while also bringing California Section 1031 authorities closer in line to the more liberal 9th Circuit federal interpretations.
CORY STIGILE – For more information please contact Cory Stigile – email@example.com Mr. Stigile is a principal at Hochman Salkin Toscher Perez P.C., a CPA licensed in California, the past-President of the Los Angeles Chapter of CalCPA and a Certified Specialist in Taxation Law by The State Bar of California, Board of Legal Specialization. Mr. Stigile specializes in tax controversies as well as tax, business, and international tax. His representation includes Federal and state tax controversy matters and litigation, including complex examinations for individuals, business enterprises, partnerships, limited liability companies, and corporations. Additional information is available at www.taxlitigator.com