Section 1031 as a Tax Shelter and its Impact on Advisors under Circular 230

Generally speaking, a tax shelter is any type of investment that allows someone to reduce their income taxes. Common examples of tax shelters include tax exempt municipal bonds or assets that generate depreciation deductions. In the 2001 tax year, the IRS reported that approximately 250,000 taxpayers included registered tax shelters on their tax returns, an estimated 40% increase over the prior year.

So how do ordinary "run of the mill" Section 1031 Exchanges become Tax Shelters, strip taxpayers of their reasonable cause civil tax penalty protection, subject professional advisors to sanctions, including censure, suspension, disbarment and monetary penalties?

Three ways:

1. Changes to the definition of Tax Shelters: Due to the Circular 230, even ordinary "run of the mill" Section 1031 exchanges are treated as Tax Shelters.

2. Changes to the Civil Tax Penalty Regime: This includes the practical elimination of the exception for civil tax penalties for taxpayers who reasonably rely on their professional advisors. Section 1031 exchanges will require qualified tax opinions to provide taxpayers with civil tax penalty protection to comply with Circular 230.

3. Changes in Circular 230: A tax Practitioner may be disciplined, including censure, suspension and disbarment for failure to comply with Circular 230. Section 1031 exchanges, as tax motivated transactions, will require Advisors to comply with Circular 230's written advice regarding tax motivated transactions.

What do Advisors need to do in order to comply with Circular 230?

Advisors must either (1) provide qualified written tax opinions for each and every Section 1031 exchange that their firm handles, or (2) may delegate this function to a Tax Expert in Section 1031 exchanges and Federal Tax Law. The penalty for non compliance under Circular 230 includes censure, suspension, disbarment and monetary penalties.

What can Advisors do to create a firewall to the oncoming IRS conflagration?

The client and their advisor can rely on a covered tax opinion by a Qualified Intermediary who is a Tax Expert in Section 1031 exchanges and Federal Tax Law.

At Strategic Property Exchanges, LLC, we can help you and your client's. With our full time practicing tax attorney and Board Certified as a Federal Tax Specialist, we provide, at no additional charge:

• A covered tax opinion to provide civil tax penalty protection for your clients and
• Circular 230 protection for you and your firm.

Stephen L. Robison, J.D., LL.M.





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More than just commercial property can be exchanged in a 1031 process. To learn more about the other items, read our page on What can be exchanged?