IRS Update
IRS LTR 200724007 does not consider Qualified Intermediary (QI) a disqualified person when less than 10% owned by disqualified persons or should QI pay a commission to a disqualified person such as an accountant or realtor.
June 15, 2007
The taxpayer plans to issue interests in a limited liability company, which will act as a qualified intermediary (QI) in tax deferred exchanges. The QI would be a partnership for federal income tax purposes. Shares in the QI will be offered to non-disqualified persons, as defined under Reg. §1.1031(k)-1(k). Shares may also be offered “disqualified persons” as to the QI’s customers; however, the LLC agreement contains provisions preventing anyone from holding more than a 5% interest in the profits and capital of the QI. The manager may waive the 5% ownership limitation if the holder does not beneficially own more than 10% interest in the capital or profits of the QI.
The QI will pay a commission to any “real estate broker, agent or other person in the real estate industry”, who directs an exchange customer to the QI. The recipient must enter into a “Finders Fee Agreement” with the QI. The payment of the commission will comply with applicable state and local licensing and other legal requirements. Commissions may be paid to persons who hold interests in the QI, including those holders who are disqualified persons. The commission paid to holders will be the same as the commission paid to nonholders. Thus, a holder (including those that are disqualified persons with respect to a customer of the QI) will be entitled to the share of QI’s profits attributable to its interest, and also to the commission for all customers referred to QI by such holder.
The IRS ruled that: (1) ownership of shares in the QI by a disqualified person of a customer of the QI will not cause the QI to be a disqualified person with respect to that customer, and (2) payment of a commission to a holder that is a disqualified person of the QI’s customer will not cause the QI to be considered a disqualified person with respect to that customer.
Comment: This ruling appears to have been obtained by someone clever who wants to create a QI owned by real estate agents. The real estate agents will refer clients to the QI and receive a commission as well as a share of the QI profits (as well as their regular commission). No real estate agent will own more than 10% so the QI is not a disqualified person as its customers. The commissions will comply with applicable law, which presumably means full disclosure to the client. Perhaps this clever person also sells TIC interests to these customers and the real estate agent would get a commission there too (assuming it complies with securities laws).
Provided by the Federation of Exchange Accommodators.
