Exchanges Summary

Contract Modification Is Involuntary Conversion�
The Service has ruled that the abrogation of a timber company's contract to harvest timber was an involuntary conversion, and that replacement contracts qualified as replacement property.
A forest products company, which harvests standing timber and manufactures lumber products, reached a 50-year agreement with a state agency to purchase timber within a particular state locality. Afterwards, Congress enacted a law that made unilateral changes to the contract. In particular, the quantity of timber that could be cut and its price were legislatively changed. The company received a lump sum settlement after filing suit in federal court. As replacement property, the company proposed to enter one or more timber cutting contracts with third parties.
The Service concluded that the enactment and implementation of the law was an involuntary conversion. Citing Rev. Rul. 64-237, 1965- 2 C.B. 319, the Service said that the new contracts to harvest timber qualified as replacement property because they were functionally "similar or related in use to the converted property". Finally, the Service made a distinction between contracts that granted the right to cut timber, and the timber that the contracts granted the right to cut. The latter, the Service said, would not satisfy the functional use requirement of section 1033.
Full Text: LTR 9911048

Exchange Qualifies as Like-Kind�
The Service has ruled that an exchange with a related party of an undivided interest in a portion of old-growth timberlands held for investment for a 100 percent interest in one-half of the timberlands to be held for investment is a like-kind exchange under section 1031. A husband and wife owned timberlands for investment purposes. After they divorced and the husband died, the wife and her ex-husband's estate held the property as tenants-in-common. A holding company, more than 50 percent owned by the wife, has an option to acquire the estate's undivided one-half interest in the timberlands.
After the holding company acquires the estate's interest, the parties propose to enter into a like-kind exchange of portions of their undivided interests in old-growth timberlands so that each party will be the sole owner of one-half of the timberlands. The holding company plans to harvest timber from its portion because it is in the business of harvesting timber. The wife, however, doesn't want to harvest the timber but hold onto the property as an investment.
The Service determined that the proposed transaction is an exchange of undivided interests in old growth timberlands that will enable each party, as sole owner of their parcel, to determine whether to hold, use, or dispose of the property. The wife's exchange, ruled the Service, is a like-kind exchange under section 1031. In addition, the Service ruled that the holding company's plan to cut the timber on its acquired timberland within two years of the exchange wouldn't trigger recognition of gain or loss for the wife under section 1031(f)(1).
Full Text: LTR 9926045