Exchange Fails when Taxpayer Uses Attorney Son as Qualified Intermediary

In Blangiardo v. Commissioner, T.C., No. 11978-13, T.C. Memo. 2014-110, 6/9/14, the Taxpayer owed tax on a $1,366,993 gain as well as accuracy-related penalty of $273,397.20 related to a deficiency on his 2008 Federal income tax return, the year he reported a 1031 tax-deferred exchange.

Here a few facts about the case:

    • In 1988, Taxpayer Frank Blangiardo and his wife purchased a residential property for $488,000.
    • Taxpayer divorced and paid ex-wife $500,000 as part of settlement in 2000. She agreed to waive all rights to the property.
    • Taxpayer remarried and then divorced another wife in 2006. She was paid $80,000 and agreed to waive all rights to the property.
    • As part of a 1031 exchange, Taxpayer sold the property for $2,250,000 and acquired unimproved land as replacement property.
    • Taxpayer used his son who is an attorney to serve as the Qualified Intermediary (QI).
    • Taxpayer claimed the $580,000 paid to his ex-wives increased his basis in the relinquished property under section 1041 (transfers of property between spouses).

On March 12, 2014, IRS filed a partial summary and the Court granted the IRS’s motion for a deficiency of $1,366,993 in petitioner's 2008 Federal income tax and an accuracy-related penalty of $273,397.20.  The exchange was disallowed because the taxpayer’s son is a disqualified person under Treasury Regs. §1.1031-1(k)(3) and the Court did not examine whether the exchange would have qualified outside of the qualified intermediary safe harbor.  A QI cannot be the Taxpayer or his attorney, accountant, real estate professional, financial advisor, partner, employee or close relatives (ancestors, lineal descendants and siblings).

The Court also stated the $580,000 paid to taxpayer’s ex-wives as part of his divorce settlements did not increase his basis in the relinquished property. The judge said Section 1041 explicitly treated the transfers as gifts, and that basis in the property doesn't change.

As for the basis increase, the Court stated there is no basis increase when a taxpayer receives a spouse's interest in property pursuant to a divorce, regardless of whether it was for consideration paid. The rules regarding transfers pursuant to divorce are found under IRC §1041.


This case reminds all taxpayers and their advisors of the importance of a Qualified Intermediary in a 1031 exchange transaction.