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Is Your Q.I. Compromising Your Exchange?

By: Diane Schaefer, CES™ and President of Exchange Solutions, Inc.

This article is intended for all taxpayers, attorneys and certified public accounts that recommend and use qualified intermediaries for IRC Section 1031. I advise you to use and recommend only 1031 Accommodators who are Certified Exchange Specialists™ and/or are affiliated with the Federation of Exchange Accommodators. The FEA is a national trade organization which sets industry standards, promotes ethical conduct and educates Q.I.’s and the general public.

Recently, we were asked to compromise our code of ethics by releasing part of the funds back to the taxpayer prior to the 45-Day Identification Period, although the taxpayer had intentions of continuing with a partial exchange and acquiring property sometime this summer. The taxpayer’s attorney said that their regular Intermediary followed this format and honored these requests all the time. I was beside myself hearing that educated, business savvy people are using the services of dishonest, unethical Qualified Intermediaries. Perhaps the consumer gets a quick fix and in the short run gets what they demand from these companies. These consumers do not realize that if this Q.I. or the taxpayer is audited by the Service, not only is this one deal tainted, but the Service could rule that all the Q.I.’s taxpayers had just as much control over their exchange funds and those deals can be questioned. How would you like to have your deal ruined because the Q.I. compromised an exchange for a client, three taxpayers before your transaction? One bad apple can surely spoil the whole bunch.

A few days after that incident, a different taxpayer was attempting to work out a build-to-suit exchange in which only one week remained in the exchange period. The client’s representative explained that their ordinary Qualified Intermediary allows the taxpayer to form a limited liability company wherein the taxpayer is designated the sole member to complete the construction with exchange funds. Again, a potentially fatal move violating the Code and tainting yet another exchange transaction.

I don’t like being the bearer of bad news, but isn’t it better to structure the deal correctly and accept minor restrictions and inconveniences, then to be sitting at the desk of an auditor in the next couple of years and you, alone, will have to defend your exchange transaction..

I was more irritated with the attorneys and the other Q.I.’s for putting me in that position, than I was about soon losing a client. Who needs clients that want to jeopardize your business, your name and your principles? We, at Exchange Solutions, Inc., like to sleep at night knowing that we haven’t violated our ethical standards and proudly sponsor the Federation of Exchange Accommodators. When shopping for a reputable Q.I., please look for the FEA logo, the CES™ logo and visit the site at www.1031.org. Anyone can claim to be an Intermediary just because they are holding funds, however, knowledge of the Code and continuing education sets the standards of a professional Q.I. apart from a cheap service that cuts corners, takes your money and claims your exchange is structurally sound.

I wanted to take this opportunity to highlight the key principles of the FEA’s Code of Ethics. Please read to appreciate why it is important to seek out the better Intermediaries. You can read the Code of Ethics in full by visiting the Federation of Exchange Accommodators website at www.1031.org..

*Code of Ethics

ARTICLE I An Exchange Accommodator shall keep informed of laws, regulations, and legislation which affects I.R.C. §1031 exchanges and the Accommodator profession…

ARTICLE II Protection of the public against fraud, misrepresentation, and other illegal practices in the Exchange Accommodator profession shall be the responsibility of each Accommodator…

ARTICLE III It is the duty of an Exchange Accommodator to act in such a manner as to preserve the trust and confidence of its clients…

ARTICLE IV An Exchange Accommodator who is not licensed to practice law or accountancy shall not engage in activities which constitute such practice...

ARTICLE V An Exchange Accommodator shall not accept any remuneration paid directly or indirectly by the client without the client's knowledge and consent…

ARTICLE VI An Exchange Accommodator shall act in the best interest of its clients…

ARTICLE VII An Exchange Accommodator shall act in the best interest of its clients…

ARTICLE VIII An Exchange Accommodator shall cooperate fully with other Accommodators in all matters affecting the industry as a whole…

ARTICLE IX Except in the case of disclosure of conduct in violation of the Code of Ethics, or in the case of potential civil litigation the Exchange Accommodator shall never denigrate nor disparage the professional practices of a competitor…

ARTICLE X An Exchange Accommodator shall maintain, uphold and conform to this Code of Ethics and the rules, regulations, and By-Laws of the Federation, shall at all times positively reflect the professional standards of practice..

*Federation of Exchange Accommodators©



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