Many taxpayers have found the like-kind exchange rules a considerable benefit when structuring business deals involving investment or business property. Generally, the courts have been very lenient towards taxpayers in cases involving like-kind exchanges because the intent of Congress, when it enacted this statute, was to facilitate the taxpayer's exchange of property. However, it has recently become clear that Congress wants to restrict many of these planning opportunities. In addition, new proposed regulations and several recent court decisions have actually changed the like-kind rules.

DEFINING A LIKE-KIND EXCHANGE

Background

Sec. 1031 provides that gain or loss realized from the exchange of trade, business, or investment property will not be recognized if the properties exchanged are of like-kind. This mandatory provision must be applied if three requirements are met.

* First, the property must be exchanged for other qualifying property.

* Second, the two properties exchanged must be of like-kind.

* Third, the property received and the property exchanged must be held for productive use in a trade or business, or for investment.

Example. Paul Planner has a parcel of real estate that he has held as an investment for 10 years. He has been unsuccessful at trying to sell the property for a year. He decides to exchange the property with Bob Broker for a piece of real estate that Bob owns because he believes Bob's parcel will be easier to sell. As soon as the exchange is completed, Paul places the new parcel for sale. This exchange does not qualify under Sec. 1031 because the property received in exchange is not held for investment purposes.

A similar result would occur if the taxpayer had planned to gift the property after the exchange. Taxpayer's intent at the time of exchange has proven to be the most important factor used by the courts in determining whether the property was held in a trade or business, or for investment. Another important aspect of Sec. 1031 is that the property obtained in an exchange receives a substituted basis equal to the basis the taxpayer had in the property exchanged. This substitution of basis has provided significant planning opportunities, especially for related parties.

The Like-kind Standard versus the Similar or Related Standard

Recently, Congress strongly considered restricting the type of exchanges that would qualify for preferential tax treatment under Sec. 1031. The current like-kind standard is quite lenient when contrasted to the standard used under Sec. 1033, which provides for nonrecognition of gain when property is involuntarily converted through destruction, theft, seizure, or condemnation. The standard under Sec. 1033 is that the replacement property acquired by the taxpayer must be "similar or related in service or use" to the converted property; the like-kind standard applies for condemnations of real estate. Under this standard, unimproved real estate could not be converted into improved real estate. Thus, the Sec. 1033 standard is much stricter than the Sec. 1031 standard.

The House believed that the like-kind standard was too broad, and in 1989 proposed that the "similar or related in service or use" standard also apply to Sec. 1031 exchanges. They felt that taxpayers were being granted nonrecognition relief in circumstances where they had substantially changed their investment, and that the similar or related in service or use" standard would better achieve the objectives of Congress. Although support for this provision seemed quite strong in Congress, it was not included in OBRA 89.

From a normative perspective, deciding which standard comes closer to meeting the objectives of tax policy is certainly debatable. Of course, the real estate industry is delighted that this proposed restriction did not survive in the final bill, because it would have severely limited tax planning alternatives. Some observers had hoped the inequity between Secs. 1031 and 1033 would have been eliminated by relaxing the Sec. 1033 standard. But no such luck.

Although Congress did not change the definition of a like-kind exchange in OBRA 89, property owners should be cognizant of the significant implications that such a limitation would have. In the present environment of pressure to reduce the budget deficit, the like- kind standard may not survive another round of legislation.

RECENT RESTRICTIONS ON THE LIKE-KIND PROVISIONS

Even though Congress did not change the definition of a like-kind exchange in OBRA 89, other tax law changes have restricted the opportunities for using these exchanges.

Deferred Like-Kind Exchanges

Problem of Deferring Exchanges. The first major restriction on Sec. 1031 was provided by TRA 84, which provided that the property to be received in a like-kind exchange must be identified by the taxpayer before the 45th day after the transfer of the property, and it must be received not more than 180 days after the transfer, or not later than the due date for filing the tax return for the year in which the transfer of the relinquished property occurs, whichever is earlier. TRA 86 amended the requirement of "before the 45th day" to "on or before the 45th day."

The change made by TRA 84 was a direct Congressional response to the Starker decision, in which the Court of Appeals, Ninth Circuit, allowed the taxpayer to select properties that were to be exchanged for his property over two years. Such an exchange is known as a deferred like- kind exchange. A deferred exchange is an exchange in which a taxpayer transfers property held for productive use in a trade or business or for investment and subsequently receives property to be held for the same purpose. The transfer must be an exchange of property for property, and not for money.

Starker had exchanged 1,843 acres of timberland in Oregon with a corporation. The corporation agreed to acquire and deed over to Starker qualifying like-kind property in Washington and Oregon over the following five years. Over an approximate two-year period, the corporation purchased 12 properties and deeded them to Starker to finalize the exchange. Only three of the parcels were actually identified and transferred in the same tax year in which Starker exchanged the timberland.

Congress felt that the Starker decision was inappropriate for several reasons. First, if a taxpayer can delay completion of an exchange for an indefinite period, it begins to resemble a sale of one property followed by a purchase of another at some later time.

Second, one of the original motives for Sec. 1031 was to alleviate the difficulty in valuing property given up for other property. However, this problem is less severe if an exchange is "left open" because a value must be placed on the transferred property to determine the value of the properties to be received in the future.

Third, Congress was concerned that a taxpayer could combine the like- kind exchange rules and the installment sales rules and defer the recognition of gain on an appreciated asset for a substantial period. Under the installment sales rules, even if non-like-kind property was eventually received, gain would not be recognized until the non-like- kind property was received.

As a response to the liberal interpretation of Starker, Congress implemented these additional time constraints to prevent transactions similar to Starker's from qualifying for preferential treatment.

Example. Bob transfers a rental building to jane on June 1. To qualify under Sec. 103 1, Jane must identify the property to be transferred to Bob either on or before July 16. Furthermore, the property must actually be received by Bob on or before November 28 in order to meet the 180-day requirement.

Congress did provide one exception to the above rule. When the taxpayer, on or before the 45th day after the transfer, identifies a limited number of alternative properties that can be transferred, Sec. 1031 will still be applicable, even if the final choice of the property is not made within the time constraints, if the final choice of property to be transferred is made by a third party. A common example of this would be if the choice of alternative properties to be received was to be made subject to the rezoning of one of the properties.

Proposed Regulations. New proposed regulations that remove some uncertainty concerning the deferred exchange rules were recently released. Prop. Reg. 1.1031(a)-3 simplifies the process of identifying property and provides safe-harbor rules for deferred exchanges involving the receipt of money or other property.

For property to be recognized as replacement property in a deferred exchange, it must be so designated in a written document signed by the taxpayer and hand delivered, mailed, telecopied, or otherwise sent to a person involved in the exchange other than the taxpayer or a related party. When identification is made in the written agreement for exchange of the properties, this provision will be satisfied. More than one property may be identified as replacement property, limited to either three properties or to any number of properties whose aggregate fair market value at the end of the identification period is not more than 200% of the aggregate fair market value of relinquished property. The identification may be revoked before the end of the identification period by notifying the person to whom identification was sent via a written document signed by the taxpayer.

When a taxpayer receives money or non-replacement property in the full amount of consideration for relinquished property before the replacement property is received, current rules characterize this transaction as a sale, not an exchange. This can create a problem if the transferee must guarantee or secure the obligation to transfer like-kind property. To ameliorate this situation, four safe harbor rules are provided to reduce uncertainty.

1. Buyer's obligation to transfer property acceptable to seller can be secured or guaranteed by a security interest in the property, a letter of credit, or a guarantee by a third party.

2. The obligation can be secured by transferring cash to an escrow account.

3. An intermediary can be used to acquire both seller's property and the property to be received.

4. The agreement can provide for interest because the transfer has been delayed.

Nonetheless, if a taxpayer has the ability or unrestricted right to receive money or other property before taxpayer receives the replacement property, these safe harbor rules will not apply.

The proposed regulations, if approved in their current form, will be effective for deferred exchanges involving transfers of property, after July 2, 1990, unless the transfer was subject to a written binding agreement as of Max, 16, 1990.

Planning Ideas. It may be possible to recognize a loss upon exchange of like-kind property if structured correctly. If a taxpayer exchanged like-kind property that would result in a realized loss, and then deliberately missed the 45- and/or 180-day requirements, the transaction would be kicked outside of Sec. 1031 and the loss could be recognized.

For planning purposes, pursuant to the 180-day requirement, when an individual is a calendar year taxpayer and transfer is made before October 17 (October 18 for leap years), the 180-day date will always fall before due date of the return. For transfers made after October 17, the date of the return will always be earlier unless an extension is filed.

Transfers of Partnership Interests

TRA 84 Provisions. Congress also limited the scope of Sec. 1031 in TRA 84 by providing that partnership interests cannot be exchanged tax-free for interests in other partnerships. However, interests in the same partnership were allowed to be exchanged pursuant to Sec. 1031 at that time. This was consistent with the view of IRS in Rev. Rul. 78-135. The reason was that Congress believed partnership interests represent investments similar to shares of stock, which have always been excluded from Sec. 1031.

Also, allowance of the exchange of partnership interests had contributed to the growth of abusive tax shelters by allowing a partner to bail out of a burned-out tax shelter by exchanging a partnership interest for an interest that was not burned-out. A burned out tax shelter is one that contains a potential gain due to substantial deductions having been taken for nonrecourse debt that has not yet been paid off. Congress felt that removing partnership interests from the shelter of Sec. 1031 would place partners and shareholders on a more equal footing.

Proposed Regulation& The proposed regulations further restrict the ability to transfer partnership interests by stipulating that no exchange of partnership interests will be allowed, regardless of whether the interests exchanged are general or limited partnership interests or are interests in the same partnership or in different partnerships. This ruling is proposed to be effective for transfers made after July 2, 1990. However, an exception is provided for certain binding contracts.

Planning Recommendations. Changes to Sec. 1031 have virtually eliminated most planning strategies for partnership interests. Nonetheless, some opportunities still exist. For example, assume A is a partner in partnership X and B is a partner in partnership Y. X owns a parcel of land that B would like to own, and Y owns property that A would like to obtain. Although a direct exchange of the partnership interests would not qualify for preferential treatment, it appears that the properties could be distributed to the partners tax-free under Sec. 731 and then exchanged pursuant to Sec. 1031. In addition, the properties could then be contributed back to A's and B's respective partnerships under Sec. 721.

IMPORTANCE OF THE FORM OF THE TRANSACTION

Several recent decisions have also stressed importance of the manner in which an exchange is structured. Careless planning can prevent an otherwise qualifying transaction from receiving tax favored treatment.

Private Letter Ruling 8921058

Ruling. In PLR 8921058, a taxpayer owned land with an old rental building on it. Taxpayer deeded the property to a developer, who destroyed the old building and constructed two new rental buildings in its place. Developer then transferred one new rental building and the underlying lot back to the taxpayer. The net effect of this was that developer received the remaining land and taxpayer received a new rental building. Taxpayer was requesting like-kind exchange approval for this transaction.

The IRS ruled that this was not a tax-free exchange, reversing its opinion rendered previously in PLR 8847042 on the same fact scenario; it did not provide a rationale for the decision. Nonetheless, the IRS has ruled in similar situations that like-kind exchange treatment was not available because one party, in this case the developer, did not own anything to exchange before the transaction began. For example, in Bloomington Coca-Cola Bottling Co. v. CIR, taxpayer decided to replace its old bottling plant with a new one. Taxpayer entered into an agreement with a contractor to build the new plant. The contractor received cash and the taxpayer's old building and lot in exchange for his services. Taxpayer attempted to report part of the transaction as a like-kind exchange. However, the Tax Court ruled, and the Court of Appeals, Seventh Circuit, confirmed, that the transaction was a sale, because the contractor never owned like-kind property that he subsequently exchanged. If Bloomington is applied to this ruling, it appears that the taxpayer merely paid the developer for building the new rental building by giving him half the property, which would make like- kind treatment inapplicable.

Planning Points. Several alternative planning opportunities remain. For instance, if taxpayer and developer had rearranged the order of events, the tax result may have been more advantageous. If developer had acquired another lot and constructed a rental building on the lot, then the developer would have actually owned like-kind property that could have been exchanged under Sec. 1031. Next, the developer could have swapped the new property for the taxpayer's old building and property. Under this scenario, it is not likely that taxpayer would recognize any gain.

There is direct support for this scenario from the IRS. In Rev. Rul. 75-291, Y corporation acquired a tract of land and constructed a factory on the property to X corporation's specifications. The sole purpose for Y building the factory was to exchange the property and new factory for land that X owned and X's existing factory. IRS ruled that the transaction qualified as a like-kind exchange for X. On the other hand, since Y was not holding the newly constructed factory for productive use in a trade or business or for investment, Y did not fall under protection of Sec. 1031. The only gain to Y should be its normal return from building and selling property because it contracted to sell the building before construction began.

When structuring a transaction to meet requirements of Rev. Rul. 75- 291, note that Y could terminate the agreement if the costs of purchasing the land and building the factory exceeded a specified amount. Thus, it may be prudent to include a similar provision in a building contract.

Estate of Bowers

Facts. A recent Tax Court decision highlights the importance of proper planning. In Estate of Bowers the taxpayer owned an oil and gas lease that he agreed to sell for $2 million. He received earnest money of $400,000 and agreed to assign the lease within a year. At that time, the additional $1.6 million would be due. Three months later, in a completely separate transaction, Bowers agreed to purchase a farm for $1.1 million.

In 1983, taxpayer attempted to complete these transactions as an exchange of one for the other. They were structured so that the farm was soli to purchaser of the oil and gas lease, who then assigned the interest in the farm to Bowers. Nonetheless, Bowers reported income and deductions from the farm on his 1982 income tax return.

The Tax Court determined that Bowers had sold the oil and gas lease and had purchased the farm. Consequently, Sec. 1031 treatment was not allowed. The scenario presented in this case is a very common one known as a three-party exchange in which the person who wishes to obtain taxpayer's property does not have property to exchange. In this situation, the person desiring taxpayer's property may purchase exchangeable property from a third-party. Taxpayer erred by reporting income and deductions from the farm on his 1982 return. The court invoked the "substantial implementation" test, and ruled that Bowers had substantially implemented acquisition of the farm before the alleged like-kind exchange occurred. Planning Advice The lesson to be learned is that although the courts have, in general, been lenient for three-party exchanges, it is imperative that the exchange be contemplated before substantially implementing sale of the old property or purchase of new property.

Rev. Rul. 90-34

The IRS recently provided additional guidance for taxpayers attempting to structure a three-party exchange in Rev. Rul. 90-34. This ruling should be helpful to taxpayers because it provides that a transaction can qualify as a Sec. 1031 like-kind exchange even if legal title to the property received by the taxpayer was transferred directly from a third- party. The context of this ruling is as follows. Two taxpayers (A and B), want to acquire new property. A wishes to exchange Whiteacre for Blackacre. A has a large unrealized gain in Whiteacre and wishes to qualify the exchange for like-kind treatment to avoid paying tax on the built-in appreciation. B is interested in acquiring Whiteacre but does not own Blackacre. A and B enter into a contract under which A agrees to locate and identify the new property (Blackacre) within 45 days of transfer of Whiteacre to B. B agrees to purchase Blackacre and transfer it to A before the earlier of 180 days from date of transfer of Whiteacre or the due date for A's return for the tax year in which the transfer of Whiteacre occurs. Blackacre is owned by C. B purchases Blackacre from C, and legal title transfers to A within the 180-day statutory period. However, C transfers legal title in Blackacre directly to A. Consequently, B never has legal title to Blackacre. The IRS ruled that this transaction qualifies for like-kind treatment under Sec. 1031. Moreover, A ends up with Blackacre and no tax liability, and B ends up with Whiteacre, which is what each party wanted before the transaction began.

This result provides planning opportunities for property owners because it lessens a number of potential pitfalls that can doom an exchange not structured carefully. The ruling also diminishes costs of the transaction; legal fees and transfer taxes will be less because title now only has to pass once during the transaction.

ADDITIONAL PROPOSED REGULATIONS

In addition to Prop. Reg. 1.1031(a)-3, the Treasury has recently released Prop. Reg. 1.1031(f)-', dealing with transfers of multiple assets, and netting of liabilities, and Prop. Reg. 1.1031(a)-2 addressing status of personal property.

Transfers of Multiple Assets

In Rev. Rul. 89-121, the IRS ruled that in determining the like-kind status of property received in an exchange of multiple assets, the underlying assets exchanged must be examined. For example, if two television stations exchange assets, it is not sufficient to simply conclude that the group of assets are similar because they are owned by similar businesses. The character of the underlying assets must be analyzed to determine if like-kind standards have been met.

Prop. Reg. 1.1031(f)-1 has provided shortcuts for evaluating multiple asset exchanges and specific rules to clarify several issues that had been left unanswered by the earlier ruling. The three main provisions of the proposed regulation are as follows.

* First, assets should be grouped into "exchange groups" before comparisons are made. Each exchange group consists of property given up and property received that is like-kind. Each exchange group is then analyzed as a separate exchange for purposes of computing gains and losses.

* Second, all property not placed in an exchange group is placed in a residual group. This would include partnership interests, money received or exchanged, and other non-qualifying property. Gain or loss for each of these properties is then computed separately

* Third, when liabilities are involved in the exchange, the liabilities transferred and received are first netted. Where taxpayer assumes more liabilities than he transfers, the excess is allocated among exchange groups in proportion to the value of property received in each group.

Example. Assume that Bill has a computer (asset class 00.12) and an automobile (asset class 00.22) that are used in his business. He exchanges these assets with Tom for a printer (asset class 00.12) and a pick-up truck (asset class 00.22), both of which are also used in his business. The assets have the following characteristics:

AdjustedFairMarket

BasisValue

Computer$500$2,000

Automobile$3,000$4,000

Printer$2,500

Truck$3,500

The first exchange group consists of the computer and the printer and the second consists of the automobile and the truck. Exchange group one has a surplus to Tom of $500 and the second has a deficiency of $500. The amount of gain realized on the first exchange is the excess of the fair market value of the computer, $2,000, over its $500 adjusted basis, or $1,500. The amount of recognized gain is the lesser of the realized gain or the exchange group deficiency, which is zero in this case. Realized gain on the second exchange is $ 1,000 ($4,000 - $3,000). The recognized gain is the lesser of $1,000 or the exchange group deficiency, $500. The total amount of recognized gain is $500 ($0 + 500).

The basis of the printer received in the exchange is the basis of the computer, $500, plus the gain recognized with respect to the computer, $0, plus the amount of the exchange group surplus, $500, and plus the amount of excess liabilities assumed allocated to that exchange group, $0, or $1,000. Similarly, the basis of the truck is $3,000 ($3,000 + $500 - $500 + 0).

Netting of Liabilities

Under current law if a taxpayer is relieved of liabilities in an exchange, the taxpayer is treated as having received cash and must recognize gain up to the amount of cash received. However, where both parties transfer and receive liabilities, taxpayers can net the liabilities transferred and received, and gain is only recognized up to the amount of the excess of liabilities transferred over those assumed.

The proposed regulations stipulate that any liabilities that are incurred "in anticipation" of an exchange cannot be netted against liabilities received. Transfer of these liabilities would be treated just like boot.

Example. Assume that Jack owns a farm with fair market value of $250,000 and basis of $50,000. Bob also owns a farm with fair market value of $250,000, a basis of $50,000, and a mortgage of $75,000. Jack and Bob want to trade farms, and to facilitate the exchange Jack takes out a mortgage of $75,000 on his farm. The farms are exchanged and each assumes the other's liability. Under current rules, no gain would be recognized because the liabilities would offset one another. However, under proposed regulations, Jack must recognize $75,000 of gain on the exchange in the form of boot.

The taxpayers may be able to avoid this result if Bob can decrease the liability on his farm before the exchange. In the event Bob does not have resources to do this, Jack may be able to loan the funds to Bob to accomplish this, taking back a mortgage on the farm.

Personal Property

Like-kind rules for personal property have not been as well defined as rules for real property. The proposed regulations provide more specific guidelines about what types of personal property are considered like- kind. The regulations explain that personal, depreciable property used in a trade or business will meet the like-kind requirements if exchanged either for property of a like-kind or of a like-class. Properties are of a like-class where they are in the same General Business Asset Class or the same Product Class. There are 13 classes for assets frequently used in businesses. Intangibles, personal property held for investment, and non-depreciable personal property are not assigned to classes. Intangible rights are like-kind if the type of rights and the underlying properties are similar. In general, goodwill is never eligible for like- kind treatment.

OMNIBUS BUDGET RECONCILIATION ACT OF 1989 (OBRA 89)

Congress has limited the applicability of Sec. 1031 in OBRA 89. The bill originally passed by the House restricted three different aspects of Sec. 1031: the "like-kind" exchange standard, related party exchanges, and holding period requirements. However, the final OBRA 89 only retained restrictions on related party exchanges. Thus, the original tightening was not as severe as many had feared.

Related Party Exchanges

Under prior law, when related parties engaged in a Sec. 1031 exchange, transferee could subsequently dispose of transferred property without affecting non-taxability of the Sec. 1031 exchange. This treatment was not consistent with other areas of the IRC, such as Sec. 453 relating to installment sales. Under this section, if after an installment sale between related parties, buyer disposes of the property, gain reportable by the original seller is accelerated.

There was a clear incentive under prior law for related parties to exchange high basis property for low basis property because each property would receive a substituted basis. Property that had the original low basis would now have a substituted high basis, and when that property was sold, the gain recognized would be much less than if the exchange had never occurred.

Example. A and B are related parties. A owns property X with a fair market value of $100,000 and an adjusted basis of $10,000. B owns property Y with a fair market value of $100,000 and an adjusted basis of $70,000. A wishes to sell his property, but this will result in a taxable gain of $90,000. Therefore, A and B exchange properties under Sec. 1031. B then sells property X for $100,000, which results in only $30,000 of gain, and the related group has deferred taxation on $60,000 of gain ($70,000 - $10,000). Similarly, related parties could also use basis shifting to accelerate loss recognition on a property.

To prevent this tax avoidance under the new law, if a related party exchange occurs, and within two years of the date of transfer, either party disposes of the property received in the exchange, then the original exchange will not qualify under Sec. 1031. Any gain or loss not recognized on the original transfer will be recognized as of the date of subsequent disposition. Any loss recognized will be subject to loss limitation rules of Sec. 267. Also, related parties are defined as in Sec. 267.

A disposition of property by transferee includes all transfers of the property, including tax-free transfers to a corporation under Sec. 351 or to a partnership under Sec. 721. An exception is provided where the Secretary of the Treasury determines that subsequent disposition did not have as one of its principal purposes avoidance of taxation. The Senate Report adds that this exception will generally apply to: 1) transactions involving certain exchanges of undivided interests; 2) dispositions in nonrecognition transactions; and 3) transactions that do not involve the shifting of basis between properties. An exception is also provided if the subsequent disposition is due to death of either party or involuntary conversion of the property.

The House Report also contains an all-encompassing rule stating that the nonrecognition provisions will not apply to any exchange that is a part of a series of transactions that have been structured to avoid the related party rules. The new related party rules also apply to indirect subsequent dispositions of the property by means of disposition of stock or of interests in a partnership if the corporation or partnership owns the tainted property. Of course, this provision is very broad, and it effectively eliminates tax avoidance opportunities for related parties via Sec. 1031 exchanges.

Foreign Real Property

OBRA 89 also provides that foreign real property and U.S. real property are not like-kind for purposes of Sec. 1631. However, this rule does not apply to involuntary conversion rules of Sec. 1033(g).

Holding Period Requirements

In Bolker v. Commissioner, the court ruled that if a taxpayer received property from liquidation of a corporation, and thereafter exchanged it for like-kind property, then the property was held by tax-payer for use in a trade or business or for investment, and the gain realized on exchange was not recognized. Nonetheless, IRS had ruled just the opposite under very similar facts in Rev. Rul. 7733744. As a result, the Bolker decision created confusion as to the length of time property must be held by taxpayer to qualify for Sec. 1031 treatment.

In the drafting of OBRA 89, consideration was given to prescribing holding periods both before and after the exchange. OBRA 89 did not retain this change. Consequently, uncertainty and confusion remain. Nevertheless, taxpayers may have a stronger stance in relying on the Bolker decision given that Congress had an opportunity, to respond to that decision and declined to take advantage of it.

Effective Dates

The provisions discussed that were enacted by OBRA 89 are effective for transfers or dispositions after July 10, 1989. Certain exceptions are provided for written binding contracts as of July 10, 1989.

Tax Planning Considerations

The changes made by OBRA 89 concerning related party transactions are significant; nonetheless, some planning opportunities remain. That is, even though the related party rules are pervasive in that the term "related party" is defined broadly, related parties may still be able to shift tax benefits if willing to wait two years after the initial exchange for transferee to dispose of the property. On the other hand, the IRS could still challenge this transaction because of the all- encompassing rule. We will have to see how vigorously IRS uses this rule to disqualify transactions that meet the specific requirements of the statute.

Gregory A. Carnes, MS, CPA, is a KPMG Peat Manwick Doctoral Fellow at Georgia State University. Mr. Carnes is a member of the AICPA and the Tennessee Society of CPAs. He bas previously written for professional publications; including The CPA journal.

Ted D. Englebrecht, PhD, is the KPMG Peat Marwick Professor of Accountancy at Georgia State University and bas published articles in professional publications, including The CPA journal.