When Your QI is Compromising Your Exchange, Qualified Intermediaries for IRC Section 1031
Written By Diane Schaefer, CES™ and President of Exchange Solutions, Inc., N.Y.
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 that sets industry standards, promotes ethical conduct and educates Q.I.’s and the general public. Recently, we were asked to compromise our ethics by releasing a substantial part of the exchange funds back to the taxpayer prior to the 45-day identifi cation period. The taxpayer had intentions of continuing with a partial exchange and acquiring property sometime this past 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 Qualifi ed Intermediaries.
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 qualifi ed 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, this is a potentially fatal move violating revenue procedures and tainting yet another exchange transaction. Perhaps the consumer gets a quick fix in the short run, but the taxpayer does not realize the potential pitfalls. The service could audit them and/or the Q.I. 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. 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. 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.