Author's
note: This article comes from a letter to our local Realtor's association. Since
it was sent, we have received some good input regarding the "Nominee" language,
to-wit, the contract with "or Nominee" should ideally have an acceptance of
whoever may be the nominee as a condition of acceptance from the very start. We
are advised that simply putting "or Nominee" will not necessarily make any
nominee acceptable and without that acceptance, may introduce some kind of
potential conflict which does not need to be.
We also note that the input we requested has not yet had time to form. We will
post any significant responses or additions. Readers are invited to give such
input through our e-mail.
Over the past few years
we have had some reluctance on the part of a few Brokers in Arizona when our
exchange clients have not wished to disclose the potential for the exchange on
offers made for replacement property. The purpose of this letter is to discuss
the background of this issue, the tax law, the consequences of premature
disclosure and non-disclosure and to invite the local Realtor community to
respond where our knowledge may be deficient. The goal is to combine to form a
proper, well-rounded, legal and client-serving response to this issue. Perhaps
you could help this find its way to an appropriate forum?
After an evaluation of the
response, the combined information will be posted to our Website and all of the
country will hopefully benefit from a well-though-out and supportable policy to
draw from in this issue of disclosure. The Prescott Realtor community and our
firm will combine to be on the cutting edge of an area not well understood
around the country.
Background
The Internal Revenue Code and the Regulations under Section 1031 never
specifically require disclosure or cooperation from the non-exchanging party
(buyer or seller). They effectively require disclosure and cooperation as the
Intermediary must be assigned the taxpayer's interest in the escrow at hand.
This can not happen without the cooperating party's knowledge and consent and so
disclosure is a given at some time prior to close of escrow. The law requires
this before the close of escrow and does not specify any other requirement, such
as when disclosure must be made. When representing a seller, there is no reason
not to disclose the presence of the exchange and elicit cooperation from the
start. Disclosure on the sale side presents no problem whatsoever for the seller
or the buyer. There exists a very different situation for representation of
buyers in an exchange.
Consequences
When making an offer, if the existence of the exchange is disclosed, the
knowledgeable seller may reasonably assume that the buyer has some significant
tax consequences if the buyers do not end up closing. This is information which
is strictly confidential and can be damaging to the buyer's negotiating
position. For example, when those last little negotiations occur (which they
invariably do just before close) knowledge that the non-closing would be very
costly to the buyer could seriously weaken the buyer's negotiating position.
Some
important points of review
1. For an outside CPA or attorney, such personal tax information is held under
the strictest confidence and release of that information violates both
profession's standards. The question then stands: Is the real estate community
able to disclose personal tax information that the client's own tax and legal
advisors can not? It does not seem that this would be proper. Would it be
ethical to call the sellers tax preparer and inquire about their tax
consequences upon a sale? If the answer is (a resounding) "No," then how could
it be proper to simply give this same kind of information away at the outset?
2. In a standard tax-deferred exchange, the non-exchanging party has no costs,
delays or any other ramifications that would affect them as a result of the
exchange. Their deal is their deal whether an Intermediary is present or not.
This is very important, because if that were not so, we would obviously have an
affirmative requirement to disclose anything that could have a negative impact.
An exchange has no impact on the other party and therefore disclosure can do
nothing but undermine the buyers negotiating position.
3. Presentation of offers with the offeror ending in "or Nominee" will preserve
the right of the offeror to substitute the Intermediary prior to close of
escrow, but will not necessarily reveal any confidential information.
4. An exchangor has no obligation to any party to complete the exchange they may
have started. They have an obligation only to fulfill their purchase contract as
it is written. They may have new tax circumstances arise (like a capital loss)
or there might be a variety of other circumstances that will render the exchange
useless. They are free to make that choice as to how they will structure their
tax picture at any time up to and even after closing. How can there be an
obligation to disclose when there does not even exist the obligation to finish
an on-going exchange in the first place? Disclosure will be required prior to
close if the client wants to properly complete one, but up until that time, the
client should be allowed full flexibility to complete or dispense with their
exchange without suffering the negative impact of early disclosure.
5. A common sense approach aside from the confidentiality aspect would be
illustrated by these questions: Would a Realtor representing a buyer, tell the
seller's agent that the buyers are hopelessly in love with their property and
would be glad to pay well above what the stated offer was? Of course not. This
may be the absolute truth, but disclosure of such personal information would not
be in the best interests of the client. Similarly, does the duty to disclose
information which has essentially no effect on the other side surpass the duty
to protect the client's interest by simply preserving confidentiality? We would
have to say "no."
It has been our counsel to our clients that they make offers in their own names
plus "or Nominee" and once the significant contingencies are passed, disclosure
is made to allow the sellers and the title company to complete those minor
changes required to fulfill the law concerning exchanges. A caveat here, we
don't want to let our clients get into a position that all contingencies are
cleared including the stated closing date and then disclose the exchange. Courts
have ruled that having no disclosure with all elements of closing present could
negate an otherwise valid exchange. The simple solution: disclose as soon as the
risks of further negotiating points are passed, but with enough time to make
changes in escrow in an orderly fashion and certainly prior to the stated date
of closing.
Knowing the potentially dire consequences of disclosure too early, we are not
familiar with the professional ethics and legal requirements of the Realtors and
humbly request any input in this area to deal with both requirements and
continue to protect the interests of our mutual clients. It may well be that we
are ignorant of some important tenent of the Realtors code of ethics and need
education. We genuinely welcome that opportunity.
Please call us at 1-800-270-1031 and we will be grateful for any response.
Sincerely,
B P & A Holdings, Inc.
Bradley S. Penner, CPA
President
To Contact Us:
BP & A Holdings, Inc. P:
800-270-1031
142 North
Montezuma, Suite A
P: 928-778-9348
Prescott, Arizona
86301
F: 928-778-9361
Email
us
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