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Advisors with much like-kind exchange experience soon recognize what is usually the most difficult problem in a like-kind exchange: finding acceptable replacement property. Taxpayers are cautioned to avoid reverse exchanges whenever reasonably possible. Reverse exchanges are expensive, complicated transactions. A taxpayer normally should not undertake a reverse exchange if there is a readily available alternative. A reverse exchange is not the preferred way to close a like-kind exchange transaction. No authoritative law governs reverse exchanges. The Internal Revenue Service (IRS) has published Rev. Proc. 2000-37, 2000-2 CB 308. This Rev. Proc. sets forth an IRS safe harbor, which provides few fetters in structuring a parking transaction. This article, which discuses some of the practical issues in structuring a reverse exchange that complies with Rev. Proc. 2000-37, is designed to thrash out the highlights of reverse exchange. Taxpayers undertaking a reverse exchange are cautioned that they need capable, experienced tax and real estate counsel.

Like-kind exchanges are meat and potatoes work for many tax advisors and real estate attorneys. When the real estate market is hot, like-kind exchanges are hot. Like-kind exchanges permit taxpayers to accept favorable offers for their property and redeploy the equity in another asset. Likekind exchanges permit taxpayers to sell assets and to avoid paying tax. Advisors with much like-kind exchange experience soon recognize what is usually the most difficult problem in a like-kind exchange: finding acceptable replacement property. A taxpayer who finds acceptable replacement property does not want it to escape his or her grasp. This sometimes forces the taxpayer to acquire replacement property (or, at least, to "park" replacement property) prior to disposing of the relinquished property. These transactions are commonly referred to as "parking transactions" or "reverse exchanges."

Taxpayers are cautioned to avoid reverse exchanges whenever reasonably possible. Reverse exchanges are expensive, complicated transactions. A taxpayer normally should not undertake a reverse exchange if there is a readily available alternative. A reverse exchange is not the preferred way to close a like-kind exchange transaction.

Background. No authoritative law governs reverse exchanges (or parking transactions). The IRS has published Rev. Proc. 2000-37, 2000-2 CB 308.. This Rev. Proc. sets forth an IRS safe harbor, which provides few fetters in structuring a parking transaction. The most important fetter of Rev. Proc. 2000-37 for most taxpayers is that the safe harbor withers quickly: the exchange accommodation titleholder can hold replacement property for only 180 days.

Rev. Proc. 2000-37 at least says that (for a transaction that meets its requirements) "the Internal Revenue Service will not challenge (a) the qualification of property as either 'replacement property' or 'relinquished property' (as defined in section 1.1031(k)-1(a) of the Income Tax Regulations) for purposes of section 1031 of the Internal Revenue Code and the regulations thereunder or (b) the treatment of the'exchange accommodation titleholder' as the beneficial owner of such property for federal income tax purposes, if the property is held in a 'qualified exchange accommodation arrangement.'"

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A careful advisor might be skeptical of Rev. Proc. 2000-37's promise. Some advisors and many taxpayers do not trust the IRS. A taxpayer might not be able to enforce Rev. Proc. 200037's promise in court if an IRS agent reneges. Most advisors (who have considered the issue), nevertheless, accept what the safe harbor says on its face; they structure transactions based on Rev. Proc. 2000-37.

How much tax advisors can generalize substantive law principles from Rev. Proc. 2000-37 is unclear. A taxpayer presumably can rely on Rev. Proc. 2000-37 if his or her reverse exchange is fully within its safe harbor. How much the taxpayer can rely on Rev. Proc. 2000-37 if the transaction violates some of aspects it (but the taxpayer believes that those aspects are immaterial to the tax analysis), is unclear.

A court might extract some substantive principles from Rev. Proc. 2000-37 the Rev. Proc. creates a safe harbor. This safe harbor presumably is based on thoughtful consideration of substantive principles of tax law and not on pure folly or a subversion of the tax laws. A court might determine that many (perhaps all) of the principles of Rev. Proc. 2000-37 reflect principles of substantive law.

This article, which discusses some of the practical issues in structuring a reverse exchange that complies with Rev. Proc. 2000-37, is designed to thrash out the highlights of reverse exchanges. It is not comprehensive. It does not provide a complete discussion of reverse exchanges. Taxpayers undertaking a reverse exchange are cautioned that they need capable, experienced tax and real estate counsel.

The Players. These are the cast members:

* Prudence is the taxpayer.

* Prudence owns Piety Corner, which will be her relinquished property in the like-kind exchange.

* Brimstone Corner is Prudence's replacement property.

* Cedric currently owns Brimstone Corner.

* TriState Intermediary is an exchange intermediary.

* Parkco EAT is a wholly-owned subsidiary of TriState Intermediary that will act as an exchange accommodation titleholder (or "EAT").

* Property Holding LLC is a singlemember limited liability company wholly owned by Parkco EAT. Property Holding is a disregarded entity.

* Stagecoach Bank is a national bank and the acquisition lender for the acquisition of Brimstone.

* Buildco is a construction contractor.

Purchase and Sale Agreement for Brimstone Corner. Prudence typically will enter into a purchase and sale agreement with Cedric. Under the purchase and sale agreement, Prudence agrees to purchase (and Cedric agrees to sell) Brimstone. The purchase and sale agreement should contain a carefully drawn exchange cooperation clause or, at least, an assignment clause. Prudence should be permitted to assign the purchase and sale agreement for Brimstone to Property Holding prior to closing.

An exchange cooperation clause should contain more than a general incantation that Cedric will cooperate with Prudence in closing the transaction as a like-kind exchange The clause should be clear that Prudence has the right to assign the purchase and sale agreement to Property Holding. Prudence should ensure that Cedric's continuing warranties and representations will inure to the benefit of both Property Holding and Prudence (especially after Prudence acquires title to Brimstone).

Exchange Accommodation Titleholder. Rev. Proc. 2000-37 provides for the exchange accommodation titleholder (Parkco) to hold Brimstone during a period not in excess of 180 days (the "parking period"); it prescribes that Parkco meet these requirements in order to qualify as exchange accommodation titleholder. Parkco:

* Cannot be the taxpayer.

* Cannot be a "disqualified person."

* Must be either

1. Subject to federal income tax, or

2. If Parkco is treated as a partnership or an S corporation for federal income tax purposes, more than 90% of the interests in or stock must be owned by partners or shareholders who are subject to federal income tax. (A disregarded entity cannot be an exchange accommodation titleholder, although Parkco can own Brimstone through a disregarded entity.)

* Must own "qualified indicia of ownership" of Brimstone (either directly or through a disregarded entity) at all times from the date of acquisition by Parkco or Property Holding until Brimstone is conveyed to Prudence.

* May own the "qualified indicia of ownership" of Brimstone through a disregarded entity (such as Property Holding).

* Must enter into a written qualified exchange accommodation agreement with Prudence within five business days after the transfer of "qualified indicia of ownership" of Brimstone to Parkco.

The typical exchange accommodation titleholder (like Parkco) is an affiliate of a commercial deferred exchange accommodator. Prudence can use a congenial third party or even a semirelated corporation (other than a "disqualified person") as an exchange accommodation titleholder.1

Parkco is a "disqualified person" if it "is the agent of [Prudence] at the time of the transaction. For this purpose, a person who has acted as [Prudence]'s employee, attorney, accountant, investment banker or broker, real estate agent or broker within the two-year period ending on the date of the transfer of the first of the relinquished properties is treated as an agent of [Prudence] at the time of the transaction."2 There are some slight ambiguities in the reference to "the time of the transaction" and whether it refers to the time of Prudence's forward like-kind exchange of Piety Corner, the time of the parking of Brimstone, or both. These transactions usually are close enough together that this subtlety of interpretation usually makes little difference.

Some services are blessed by the IRS and are not considered for purposes of determining whether a person is a "disqualified person." Such services include services for Prudence with respect to exchanges of property intended to qualify for nonrecognition of gain or loss under section 1031; and routine financial, title insurance, escrow, or trust services for Prudence by a financial institution, title insurance company, or escrow company.3

A bank or a bank affiliate (for this purpose, a bank affiliate is a corporation whose principal activity is rendering services to facilitate exchanges of property intended to qualify for nonrecognition of gain under section 1031) is not a "disqualified person" for this purpose on account of the provision of investment banking or brokerage services to Prudence.4

Parkco will be a "disqualified person" if Parkco and Prudence bear a relationship described in either section 267(b) or section 707(b). For this purpose, "10 percent" is substituted for "50 percent."

These are the rules of relationship of section 267(b) (as applied to defining "disqualified person"):

* Members of Prudence's family ["The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants"].

* An individual and a corporation more than 10% in value of the outstanding stock of which is owned, directly or indirectly, by or for the individual.

* Two corporations that are members of the same controlled group.

* A grantor and a fiduciary of any trust.

* A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts.

* A fiduciary of a trust and a beneficiary of the trust.

* A fiduciary of a trust and a beneficiary of another trust, if the same person is a grantor of both trusts.

* A fiduciary of a trust and a corporation more than 10% in value of the outstanding stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust.

* A person and an organization to which section 501 applies and which is controlled directly or indirectly by the person or (if the person is an individual) by members of the family of the individual.

* A corporation and a partnership if the same persons own (1) more than 10% in value of the outstanding stock of the corporation, and (2) more than 10% of the capital interest, or the profits interest, in the partnership.

* An S corporation and another S corporation if the same persons own more than 10% in value of the outstanding stock of each corporation.

* An S corporation and a C corporation, if the same persons own more than 10% in value of the outstanding stock of each corporation.

* An executor of an estate and a beneficiary of the estate.

Section 704(b) (as applied to defining "disqualified person") describes these relationships:

* A partnership and a person owning, directly or indirectly, more than 10% of the capital interest, or the profits interest, in the partnership, or

* Two partnerships in which the same persons own, directly or indirectly, more than 10% of ihe capital interests or profits interests.

QEAA. Rev. Proc. 2000-37 requires that Prudence and Parkco enter into a written qualified exchange accommodation agreement.5 (There possibly will be a problem if Property Holding rather than Parkco is the party to the QEAA.) This agreement will set forth the general terms of the parking arrangement.

Counsel should carefully review the QEAA since it establishes important legal relationships. Counsel should be vigilant; a reverse exchange is a substantial, complicated transaction. Counsel should not automatically assume that Parkco's standard documentation complies with Rev. Proc. 2000-37 or that it is commercially reasonable. Counsel is not simply a wooden marionette in a carnival sideshow. Off-the-shelf documents often are more protective of the legal and economic interests of Parkco than of Prudence.

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Prudence and Parkco must enter into the QEAA no later than five business days after the transfer of "qualified indicia of ownership" of Brimstone to Property Holding. Waiting until the sixth day after transfer will invalidate the safe harbor. It is not advisable. This provides a problem of interpretation. What is a "business day" in this context? The conventional meaning of "business day" is a day other than Saturday, Sunday, or a legal holiday.6 Legal holidays can differ from location to location. We can speculate that a day is not treated as a business day if it is a legal holiday at the taxpayer's tax residence. One nevertheless might argue that a day should be treated as a business day if it is a business day at the location of Brimstone-or perhaps at the location of Piety Corner. It nevertheless is conceivable that a day is a business day if Prudence herself has a business and is open for business on that day.

Taxpayers are discouraged from an overly aggressive interpretation of "business day." Beyond this, it rarely makes sense for Prudence to defer entering into the QEAA until after Parkco has acquired Brimstone. Prudence and Parkco normally should enter into the QEAA no later than the date on which Property Holding will acquire Brimstone.

Parkco can hold Brimstone under the QEAA for no more than 180 days if the like-kind exchange is to qualify under Rev. Proc. 2000-37. Rev. Proc. 2000-37 requires that: "No later than 180 days after the transfer of qualified indicia of ownership of the property to the exchange accommodation title-holder, (a) the property is transferred (either directly or indirectly through a qualified intermediary (as defined in section 1.1031(k)-l(g)(4))) to the taxpayer as replacement property; or (b) the property is transferred to a person who is not the taxpayer or a disqualified person as relinquished property.''' Rev. Proc. 2000-37 also requires that: "The combined time period that the relinquished property and the replacement property are held in a QEAA does not exceed 180 days."

There appears to be a flaw in the quoted passages. The first quoted passage suggests that Property Holding can own Brimstone for 181 days (the day of acquisition and 180 days thereafter). The second quoted passage requires that Property Holding can hold Brimstone for no more than 180 days. Precisely how this 180-day holding period (day-to-day or hour-to-hour or perhaps minute-to-minute?) is measured is not clear.

Some taxpayers have Property Holding rather than Parkco enter into the QEAA. Rev. Proc. 2000-37 requires Prudence and the exchange accommodation titleholder (Parkco) to enter into the QEAA. It is not clear whether this requirement is satisfied if Property Holding rather than Parkco enters into the QEAA. Some advisors believe that acts of Property Holding are imputed to Parkco and therefore, the requirements of Rev. Proc. 2000-37 are satisfied if Property Holding enters into the agreement. This matter has not yet been definitively resolved.

Prudence might control several entities any of which might wish to make like-kind exchanges and any of which might wish to use Brimstone as replacement property. Prudence might be unsure which of her entities (or Prudence herself) should enter into the QEAA. Prudence might seek to structure the parking arrangement with each of Prudence and several controlled entities entering into separate QEAAs with Parkco. The reverse exchange would be completed pursuant to one of these QEAAs and the others just would be forgotten.

This strategy has risks. Rev. Proc. 2000-37 is not clear on whether it permits overlapping QEAAs with different taxpayers. Overlapping QEAAs might be inconsistent with the representation that "the exchange accommodation titleholder is holding the property for the benefit of the taxpayer in order to facilitate an exchange under section 1031." It is not clear whether Parkco can simultaneously hold Brimstone for more than one taxpayer in order to facilitate a like-kind exchange.

Prudence and several controlled entities might each plan to acquire undivided interests in Brimstone as replacement property for like-kind exchanges undertaken by each. Then there apparently should be separate QEAAs between each taxpayer and Parkco describing different undivided interests as the parked property. This should work under Rev. Proc. 2000-37.

Rev. Proc. 2000-37 provides these technical requirements for a QEAA:

* It must be entered into between Prudence and Parkco no later than five business days after the transfer of "qualified indicia of ownership" of Brimstone to Parkco or Property Holding.

* It must be written.

* It must provide that Parkco is holding Brimstone for the benefit of Prudence in order to facilitate an exchange under section 1031 and Rev. Proc. 2000-37.

* It must provide that Prudence and Parkco agree to report the acquisition, holding, and disposition of Brimstone as provided in Rev. Proc. 2000-37.

* It must specify that Parkco will be treated as the beneficial owner of Brimstone for all federal income tax purposes.7

The QEAA should describe the general contours ot the parking arrangement. This might include, among other things:

* An agreement by Prudence and Parkco in which they covenant to report the federal income tax attributes of Brimstone on their federal income tax returns in a manner consistent with the QEAA.

* An option for Prudence to acquire Brimstone from Parkco.

* Certain indemnifications of Parkco by Prudence (including environmental indemnifications).

* A warranty by Parkco that Property Holding is a disregarded entity and a division of Parkco.

* A warranty by Parkco that it qualifies as an exchange accommodation titleholder with respect to Prudence.

* An agreement that arranges for the availability of the purchase price for Brimstone.

* Fees that Parkco will charge for its services as exchange accommodation titleholder.

* Representations by Parkco that it is not a "disqualified person."

* A recital by Prudence that it is her bona fide intent that Brimstone represent either replacement property or relinquished property in an exchange that is intended to qualify for nonrecognition of gain (in whole or in part) or loss under section 1031.

* An agreement by Parkco that it will cause Property Holding to lease Brimstone to Prudence during the parking period.

* A guarantee by TriState Intermediary or its ultimate parent of the obligations of Parkco under the QEAA.

* Reciprocal puts and calls permitting either Prudence or Parkco to force the transfer of Brimstone to Prudence.

Some QEAAs will refer to Parkco as Prudence's "agent for all purposes other than federal income tax purposes" and will provide that all acts undertaken by Parkco or Property Holding under the QEAA are acts as Prudence's agent. This language has been successful in some jurisdictions, such as New York, in avoiding documentary transfer tax on the conveyance of Brimstone to Prudence at the end of the parking transaction. The IRS has not issued any formal guidance on whether this is permitted under Rev. Proc. 2000-37. Some capable advisors appear to be comfortable with this language and, thus far, there is no evidence that it is being challenged by the IRS. This agency language well may not create a federal income tax problem if the transaction satisfies Rev. Proc. 2000-37. This agency language may create profound difficulties for Prudence if her transaction does not precisely satisfy Rev. Proc. 2000-37 and is challenged by the IRS.

Agency language may create nontax problems for the transaction. If Property Holding holds Brimstone merely as Prudence's agent, Stagecoach may be uncomfortable with whether Property Holding really owns Brimstone and is able to pledge it to secure the Stagecoach acquisition loan. Stagecoach may be concerned about the validity of the execution of its loan documents. The validity of a pledge of Brimstone to secure Prudence's loan to Property Holding may be uncertain if Property Holding is described as only acting as Prudence's agent. The validity of a lease of Brimstone by Property Holding to Prudence also may be uncertain. These and other questions of lending law, real estate law, and agency law have not been thoroughly vetted in case law.

Puts and Calls. Rev. Proc. 2000-37 permits Prudence to hold an option or call on Property Holding to cause Property Holding to sell Brimstone to Prudence. Rev. Proc. 2000-37 also permits Parkco or Property Holding to have a put on Prudence to cause Prudence to purchase Brimstone. These agreements may be entered at a fixed price or a formula price. These agreements, which are not required to incorporate arm'slength terms, may be effective for a period not in excess of 185 days from the date Property Holding acquires Brimstone. These put and call agreements might be incorporated in the QEAA or they might be in separate documents. They should be drafted so that the purchase price of Brimstone covers all of Parkco's and Property Holding's costs in the transaction.

The put (as permitted under Rev. Proc. 2000-37) may not be effective for a period in excess of 185 days from the date Property Holding acquires Brimstone. Rev. Proc. 2000-37 unfortunately is not clear on whether (1) the exercise period must terminate on this 185th day or (2) the put must close by this 185th day. The 185-day period in any case is restrictive and does not give Parkco much time to complete the transaction under the put if Prudence fails to exercise her call.

Other Permitted Arrangements. Rev. Proc. 2000-37 also permits these other agreements in connection with the parking arrangement.

* An exchange accommodation titleholder that satisfies the requirements of the qualified intermediary safe harbor may enter into an exchange agreement with the taxpayer to serve as the qualified intermediary in a simultaneous or deferred exchange of the property under Section 1031;

* Prudence or a disqualified person may guarantee some or all of the obligations of Parkco's and Property Holding's obligations, including secured or unsecured debt incurred to acquire Brimstone, or may indemnify Parkco or Property Holding against costs and expenses;

* Prudence or a disqualified person may loan or advance funds to Parkco or Property Holding or may guarantee a loan or advance to Parkco or Property Holding;

* Property Holding may lease Brimstone to Prudence or to a disqualified person;

* Prudence or a disqualified person may manage Brimstone during the parking period, supervise improvement of Brimstone, act as a contractor, or otherwise provide services to Property Holding with respect to Brimstone.

* Prudence and Parkco or Property Holding may enter into agreements or arrangements relating to the purchase or sale of Brimstone, including puts and calls at fixed or formula prices, effective for a period not in excess of 185 days from the date Property Holding acquires Brimstone, is acquired by the exchange accommodation titleholder.

* Prudence and Parkco may enter into agreements or arrangements providing that any variation in the value of a relinquished property from the estimated value on the date of Parkco's receipt of the property be taken into account on Parkco's disposition of the relinquished property through the taxpayer s advance of funds to, or receipt of funds from, Parkco.

Financing Acquisition of Brimstone Corner. Parkco may be pleased to park Brimstone during the parking period, but it is unlikely that Parkco plans to arrange its own financing. Prudence might provide all acquisition financing or arrange for Stagecoach to provide some acquisition financing and for her to provide however much additional financing is required.

Stagecoach and its counsel presumably will ensure that its acquisition loan is properly documented. Property Holding should be the borrower from Stagecoach on the acquisition loan. Stagecoach normally will want to lend the acquisition loan to the new owner of Brimstone. It may require Prudence to guarantee the loan or to guarantee nonrecourse carve-outs under the loan. Stagecoach typically will secure its acquisition loan with a first lien mortgage or deed of trust to Brimstone. They may insist that Property Holding be formed as a special purpose entity with very limited powers and standard special purpose entity provisions that regulate its conduct and permit Property Holding to own only Brimstone. Special purpose entity provisions may prohibit Property Holding from incurring any other indebtedness. The Stagecoach indebtedness may prohibit Property Holding from further encumbering Brimstone.

The situation will be complicated if there are payments on the Stagecoach loan during the parking period; the best solution is to try to avoid payments during the parking period. If there are actual payments on the Stagecoach loan during the parking period, Prudence will likely have to loan those payments to Property Holding. These advances then will be included in the purchase price.

The Stagecoach loan should not accelerate when Property Holding transfers Brimstone to Prudence or Parkco transfers the membership interests in Property Holding to Prudence.

Because Stagecoach rarely will lend Property Holding 100% of the purchase price of Brimstone, Prudence typically will have to lend the remaining purchase price. Prudence typically will make a zero interest loan to finance the remaining portion of the purchase price of Brimstone (remaining after application of the Stagecoach acquisition loan). Rev. Proc. 2000-37, which specifically authorizes this loan (by either Prudence or a disqualified person), will respect the loan,"regardless of whether such arrangements contain terms that typically would result from arm's length bargaining between unrelated parties with respect to such arrangements."

The problem is how to structure Prudence's loan. She might lend the remaining purchase money directly to Property Holding. The loan could be secured by a second lien mortgage or deed of trust to Brimstone. However, there may be several problems with this strategy in certain circumstances. The documents evidencing the Stagecoach loan may contain an anti-encumbrance clause. Such a clause would prohibit further encumbrance of the Brimstone property and would make it impractical for Prudence to make a secured loan to Property Holding.

While Prudence still might make an unsecured loan to Property Holding, such a loan would expose her to all of the dangers of an unsecured loan. Prudence may feel uncomfortable about an unsecured loan. Perhaps an asset-laden parent of TriState Intermediary will guarantee this unsecured loan. Such a guarantee often will not be available. Also, if Stagecoach has required Property Holding to be structured as a special purpose entity, the operating agreement of Property Holding should prohibit Prudence's loan to Property Holding.

Circumstances likely will force Prudence to make her loan to Parkco. Parkco then will contribute the funds to Property Holding. This loan often is made as an unsecured loan, although, again, Prudence understandably may be uncomfortable with making an unsecured loan to Parkco. The loan might be secured by an accommodation pledge of Brimstone, but that pledge is unlikely to be permitted by the Stagecoach loan documents or the special purpose entity restrictions in the Property Holding operating agreement. In appropriate circumstances, an asset-laden parent of TriState Intermediary will guarantee this unsecured loan, but such guarantee typically will not be available.

The best solution often is for Prudence to make her loan to Parkco and to secure that loan with a pledge of membership interests in Property Holding (and all proceeds of the membership interests). Interests in an LLC perhaps are not perfect collateral, but these interests should be much better as collateral than Prudence will have if she makes an unsecured loan to Parkco. Counsel documenting the security agreement should be careful to use a security agreement specially adapted to LLC interests as collateral. Counsel certainly should be careful properly to perfect a security interest in the pledged LLC interests under the Uniform Commercial Code. It is useful in this regard to enlist counsel that has experience in making loans secured by partnership or LLC interests.

Prudence might use two devices to enhance her security. She might insist on special purpose entity restrictions in the operating agreement for Property Holding, even though Stagecoach has not insisted on special purpose entity restrictions. Or she may insist that Property Holding be formed with an independent manager or perhaps an independent member with no economic interest. The vote of the independent manager or independent member would be required for a bankruptcy filing and certain additional acts by Property Holding, such as incurring indebtedness or selling or encumbering Brimstone.

Prudence, if well advised, likely will want to use an industrial-strength promissory note and security agreement and will not necessarily wish to rely on Parkco's off-the-shelf form documents. Using Parkco's forms may prove false economy.

Identification of Relinquished Property. Rev. Proc. 2000-37 requires Prudence to identify her relinquished property no later than 45 days after the transfer of "qualified indicia of ownership" of Brimstone to Property Holding. This seems like a simple mechanical rule, but extensions are granted only in the case of presidentially-dedared national disasters or terrorist or military action.8 It is extraordinarily easy for Prudence and her counsel to become distracted and to lose track of the 45-day period. This is not advisable.

The 45-day term counts all calendar days, which includes Saturdays, Sundays, and holidays. The time for performance presumably is not extended to the next business day if the 45-day term ends on Saturday, Sunday, or a holiday.

There often is ambiguity concerning when Parkco acquires Brimstone. This should be the date on which the burdens and benefits of ownership are transferred and is not necessarily the date on which the deed is signed or dated, as deeds often are signed and dated in advance of closing. The closing date often is the date of recordation of the deed, but that is not invariably the case.

Rev. Proc. 2000-37 specifies that the identification be made by Prudence following the identification rules under the deferred exchange regulations. She must identify relinquished property in a manner consistent with the principles described for identification in the deferred exchange regulations.9 Prudence may identify alternative and multiple properties.10

The identification notice for relinquished property -

* Must be written.

* Must be signed by Prudence.

* Must be hand delivered, mailed, telecopied, or otherwise sent before the end of the identification period to either (1) Parkco EAT, or (2) any other person involved in the exchange other than Prudence or a disqualified person.11

* Must be sent no later than the 45th day after Property Holding LLC acquired Brimstone Corner.

It is unclear whether Prudence must sign the identification notice personally or whether the identification notice can be signed under a power of attorney or by her conservator.

The regulations do not contain any retention requirement for the identification. Taxpayers are generally welladvised to retain copies of the identification as part of their permanent tax files.

Persons involved in the exchange include any of the parties to the exchange, an intermediary, an escrow agent, and a title company.12

The forward like-kind exchange rules provide that "any replacement property that is received by the taxpayer before the end of the identification period will in all events be treated as identified before the end of the identification period."13 This provision does not have an immediately clear use for designating relinquished property under Rev. Proc. 2000-37.

The identification notice must "unambiguously describe[]" the relinquished property.14 Real property may be unambiguously described by:

* Legal description;

* Street address;

* Distinguishable name (e.g., the Mayfair Apartment Building).

Prudence will identify Piety Corner as relinquished property by both legal description and street address.

If the exchange is a personal property exchange, the relinquished personal property generally is unambiguously described if it is described by a specific description of the particular type of property. A truck generally is unambiguously described if it is described by a specific make, model, and year.

There are several common problems with identifications. There is not yet any authority concerning typographical errors in identifications. Advisors and taxpayers are cautioned to proof their identifications carefully. There can be a surprising amount of confusion concerning correct street addresses. Taxpayers may make mistakes concerning the correct address when they are badly informed. There is particular uncertainty in the street addresses of apartment buildings and office buildings; their correct addresses often include several different street addresses, even if there is only a single street address that is commonly used. It also is unclear how a court would deal with an identification by legal description if there are survey or other errors in the legal description. A court might well bend over backwards to save Prudence's identification of relinquished property, since the universe of relinquished properties is necessarily limited to properties that Prudence already owns. The consideration that relinquished property must already be owned by Prudence may be a basis of greater liberality for rnisidentifications of relinquished property than for misidentifications of replacement property.

Identifying Multiple or Alternative Properties. Rev. Proc. 2000-37 incorporates the deferred exchange rules for multiple or alternative properties. The clarity of the Rev. Proc. would have been considerably improved if it had set forth precise requirements for identifying relinquished property. Instead, Rev. Proc. 2000-37 merely incorporates identification rules for replacement property under the deferred exchange regulations; this inappropriate practice typically leads to coniusion.

Prudence may identify three relinquished properties without regard to the fair market values of the properties (the "3-property rule").15 Other than uncertainty over what constitutes a "property," this rule should be fairly clear. Taxpayers and advisors are well advised to use this rule whenever possible. This is perhaps the only multiple property rule that is clear for reverse exchanges.

Prudence has only one relinquished property. Thus, she will identify only Piety Corner as relinquished property.

The deferred exchange regulations provide this alternative rule for designating replacement property: "Any number of properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200 percent of the aggregate fair market value of all the relinquished properties as of the date the relinquished properties were transferred by the taxpayer (the'200-percent rule')."16 This identification rule might be adapted for relinquished property to provide that: "Prudence may identify any number of relinquished properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200% of the aggregate fair market value of all of [Prudence's] replacement properties [including Brimstone Corner and any other replacement properties] as of the date the relinquished properties were transferred by Prudence." The identification rule alternatively might be adapted to provide that: "Prudence may identify any number of relinquished properties as long as their aggregate fair market value as of the end of the identification period does not exceed 200% of the aggregate fair market value of Brimstone Corner as of the date the relinquished properties were transferred by Prudence." It is not clear which of these adaptations is correct. The rule under Rev. Proc. 2000-37 would benefit from some clarification.

The 95% rule under the deferred exchange regulations permits identification of: "Any replacement property identified before the end of the identification period and received before the end of the exchange period, but only if the taxpayer receives before the end of the exchange period identified replacement property the fair market value of which is at least 95 percent of the aggregate fair market value of all identified replacement properties (the '95-percent rule')." Applied to reverse exchanges, this rule might become: Prudence can identify any relinquished property identified before the end of the identification period and disposed of before the end of the exchange period, but only if Prudence disposes of, before the end of the exchange period, identified relinquished property the fair market value of which is at least 95% of the aggregate fair market value of all identified relinquished properties. Whether this is a correct modification of the 95-percent rule so that it could be applied to reverse exchanges could be debated.

The deferred exchange regulations treat Prudence as having properly identified as replacement property "[a]ny replacement property received by [her] before the end of the identification period."17 We know from Rev. Proc. 2000-37 that: "Identification must be made in a manner consistent with the principles described in section 1.1031(k)-1l(c). For purposes of this section, [Prudence] may properly identify alternative and multiple properties, as described in section 1.1031(k)-1(c)(4)" It is not entirely clear how the rule that accepts as properly identified "[a]ny replacement property received by [Prudence] before the end of the identification period" applies to relinquished property in a reverse exchange. It is possible that any relinquished property transferred by Prudence within the 45-day identification period will qualify as properly identified under Rev. Proc. 2000-37. It is also possible this particular rule is not available for designating relinquished property in reverse exchanges.

Financing Improvements to Brimstone Corner. Prudence may contemplate that improvements will be made to Brimstone during the parking period during which Property Holding owns Brimstone. It will be necessary to finance these improvements. These funds might come from either Stagecoach Bank or from Prudence. In either case, the promissory note should be drafted in such a manner as to permit subsequent draws. This can be accomplished, for example, by a "grid" promissory note with an exhibit evidencing subsequent draws. Subsequent draws on the note will be entered manually on an exhibit to the promissory note.

Closing of Acquisition of Brimstone Corner. Prudence should assign the purchase and sale agreement for Brimstone to Property Holding before the acquisition closes. Prudence also should assign any interest in the closing escrow, if there is any, to Property Holding. Property Holding should be substituted as the purchaser of Brimstone and Property Holding should be shown as the purchaser on the closing statement for the acquisition of Brimstone. Property Holding will take title to Brimstone in its name. In this regard, title insurance should ensure title in the name of Property Holding. If Prudence plans later to take title directly to Brimstone, she should make arrangements with the title insurance company for a future endorsement of the policy and she should make sure that she understands how much this endorsement will cost.

Lease of Brimstone Corner to Prudence. Rev. Proc. 2000-37 permits Property Holding to lease Brimstone to Prudence during the parking period and the lease will be respected regardless of whether it has arm's-length terms. Prudence typically will insist on this lease so that she will have operational control during the parking period.

Advisors too often pay little attention to the lease of Brimstone Corner; this lease establishes important rights and obligations. Prudence may not be satisfied with Parkco's off-the-shelf lease. The lease of Brimstone Corner should be thought through carefully and drafted by experienced real estate counsel. It typically will be a zero rent lease and normally will be structured as a triple net lease or a bondable net lease.18 Prudence will not want Property Holding to have any right to terminate the Brimstone lease. Parkco will want the lease to obligate Prudence to obtain casualty insurance with specified minimum limits and perhaps will establish standards for the issuing insurance company. Parkco may require that Parkco and Property Holding be named as additional insureds. The lease likely will contain environmental indemnifications and perhaps will contain limitations of use related to environmental concerns. Prudence likely will want to have considerable flexibility with respect to the use of Brimstone; she normally will want to have the right to sublease this replacement property.

Prudence may wish to form a single-member LLC (owned by Prudence) to act as the lessee from Property Holding. This will help to protect Prudence from liability to sublessees of Brimstone.

Construction. Prudence may want to undertake construction during the parking period. Property Holding (not Prudence) will then enter into a construction agreement with Buildco. Prudence may guarantee Property Holding's performance under the construction agreement. The construction agreement normally should give Prudence rights to approve construction and plans and specifications. Construction will be funded by draws on the loan from Prudence or the loan from Stagecoach.

Forward Exchange of Piety Corner. A forward like-kind exchange of Piety Corner is an essential part of the reverse exchange of Brimstone Corner. Prudence must comply with all of the forward like-kind exchange requirements for this aspect of the transaction. This includes the need for Prudence to identify Brimstone as her replacement property for Piety, even though she already has identified Piety as relinquished property. The exchange balance will be deposited with TriState Intermediary as Prudence's exchange intermediary. Rev. Proc. 2000-37 permits Prudence to use Parkco as both exchange intermediary and exchange accommodation titleholder, but Prudence does not elect this option.

Prudence's Acquisition of Brimstone Corner. Prudence will acquire Brimstone at the end of the reverse exchange. This usually is a comparatively straightforward part of the transaction.

Prudence needs to decide whether she would prefer to acquire title to Brimstone directly or whether she would prefer to take title to all of the membership interests in Property Holding. In some jurisdictions, Prudence may be able to avoid the documentary transfer tax by taking title to membership interests in Property Holding. The membership interests in Property Holding should qualify as replacement property for Piety, since Property Holding is a disregarded entity. There also may be some advantages in assigning service contracts if Prudence takes title to membership interests rather than real property. Some taxpayers, however, prefer to acquire direct title to the replacement real property.

Prudence should enter into a simple purchase and sale agreement with Parkco. She will assign this purchase and sale agreement to TriState Intermediary immediately before she acquires Brimstone.

When the time comes for Prudence to close on Brimstone, the transaction will be handled as a forward like-kind exchange. Prudence assigns the purchase and sale agreement to TriState Intermediary. She also assigns the purchaser's rights to the escrow, if any, to TriState, who will fund the purchase escrow with the exchange balance. Prudence will contribute whatever additional cash is required to complete the purchase price. The purchase price of Brimstone will be set to make Parkco whole on the transaction and to permit Parkco to repay its loan from Prudence.

Either Property Holding will deed Brimstone at closing to Prudence, subject to the Stagecoach loan, or, alternatively, Parkco will transfer all of the membership interests in Property Holding at closing to Prudence, with Property Holding still owning Brimstone and the Stagecoach loan still secured by Brimstone.

The closing must be arranged so that Prudence acquires Brimstone within the 180-day period provided for in Rev. Proc. 2000-37. There is tremendous pressure on Prudence to close her acquisition of Brimstone within the 180-day period. If she fails to qualify within the 180-day period, she will have squandered her best chance for a qualifying like-kind exchange. An exchange that meets all of the requirements of Rev. Proc. 2000-37 other than closing within this 180-day exchange period will not clearly receive the benefit of any favorable presumption by satisfying some of the requirements of Rev. Proc. 2000-37. What use courts will make of Rev. Proc. 2000-37 in tax litigation is still a matter of conjecture. But failing to meet the 180-day deadline may transform Prudence's Brimstone exchange from a routine transaction to a perilous transaction.

Conclusion

Rev. Proc. 2000-37 sets forth a general structure that Prudence should be able to use reliably to qualify her reverse exchanges under section 1031. However, she should be careful to avoid the natural infatuation with an intermediary's standard forms. These forms usually (although not always) satisfy the requirements of Rev. Proc. 2000-37 and normally do a good job of protecting the interests of the exchange accommodation titleholder. However, they often do a poor job of protecting the taxpayer's interests. Accordingly, Prudence's counsel, as in any other real estate purchase and sale and leasing transaction, should diligently handle and document the Brimstone parking transaction. If they do a good job of protecting her interests and if Prudence can satisfy Rev. Proc. 2000-37, the transaction should not be challenged by the IRS.