In the opinion issued by the U.S. Tax Court in Estate of Bartell v. Commissioner, 147 T.C. No. 5 filed August 10, 2016, the court ruled in favor of the taxpayer on the basis that the exchange intermediary had not acted as the taxpayer's agent where the transaction was structured as a non-safe harbor reverse construction exchange, the accommodator did not put any equity into the project, the accommodation period lasted for 17 months, and the taxpayer guaranteed the construction loan. The IRS unsuccessfully argued that the appropriate test for a non-safe harbor reverse exchange was whether the accommodator had the substantial benefits and burdens of ownership. The IRS has 90 days to appeal this decision and it is believed likely to do so.  While the outcome of any such appeal is uncertain, the decision, if affirmed, will certainly be considered a major victory for taxpayers who desire to structure construction or reverses exchanges completing outside of the 180-day safe harbor exchange period. Anyone operating outside of the safe harbor time periods will be well advised to avoid using language of agency in the exchange documents as well as provisions that could be argued to implicate an agency relationship.

Significant to the decision is the fact that the case lies within the Ninth Circuit to which any appeal of this case lies and that Circuit, as noted by the Tax Court, has  taken a different position than the IRS on the benefits and burdens issue stating:

As the Court of Appeals for the Ninth Circuit pointed out in Alderson v. Commissioner, 317 F.2d at 795: [O]ne need not assume the benefits and burdens of ownership in property before exchanging it but may properly acquire title solely for the purpose of exchange and accept title and transfer it in exchange for other like property, all as a part of the same transaction with no resulting gain which is recognizable under Section 1002 of the Internal Revenue Code of 1954.

Of particular interest to those dealing with the reasonable concerns regarding the time limits specified in Rev. Proc 2000-37 which sets out the safe harbor requirements for reverse exchanges the Tax Court States:

Given the inapplicability of Rev. Proc. 2000-37, supra, to the transaction at issue, the caselaw provides no specific limit on the period in which a third-party exchange facilitator may hold title to the replacement property before the titles to the relinquished and replacement properties are transferred in a reverse exchange. We express no opinion with respect to the applicability of section 1031 to a reverse exchange transaction that extends beyond the period at issue in these cases. In view of the finite periods in which the exchange facilitator in these cases could have held, and in fact did hold, title to the replacement property, we are satisfied that the transaction qualifies for section 1031 treatment under existing caselaw principles.

This case the perfect example of why STEC concentrates on safe harbor exchanges. While the case as it now stands resulted in a victory for the taxpayer...

1. The transaction initially closed in August of 2000, sixteen years ago.

2. This case was tried 10 years ago and the tax court just released its decision.

3. It likely isn't resolved yet as there is a very good probability that the IRS will appeal.

4. If that occurs, the taxpayer and the QI may not know where this transaction stands for almost two decades after closing.

5. Investors don't typically hold Internal Revenue Code Section 1031 property that long.

In this issue we will discuss two appellate cases, one in which the adjoiner was claiming damages for groundwater contamination and another where a minor, born out of wedlock, made claims as a sole intestate heir.

B S K Enters., Inc., v Beroth Oil Co.  (15-189) 3/1/2016

Adjoiners' Damages for Groundwater Contamination

The plaintiffs filed a complaint alleging that the defendant was strictly liable for contaminated groundwater under the plaintiffs' property, and sought damages to cover the cost of remediation or, in the alternative, of relocation of its business from the property. The court determined that when the cost of remediation greatly exceeds or is disproportionate to the diminution in value of affected property, the measure of damages should be the diminution in value to the property caused by the contamination. The opinion notes that plaintiffs have a compensable and protectable interest in the waters beneath their land and, therefore, have standing to bring an action to remediate groundwater contamination. In this case there was no evidence presented at trial supporting a defense by reason of a duty to mitigate and the opinion stated that the trial court did not err in denying the defendant's request to give a duty to mitigate instruction to the jury. The Court of Appeals also ruled that the trial court did not err in awarding damages for "...nuisance, trespass, and violation of NCOPHSCA [North Carolina's Oil Pollution and Hazardous Substances Control Act]," but not awarding damages for "stigma".

In re: Williams (15-619) 3/1/2016

Intestate Succession by Illegitimate Child

This was an appeal by a minor from an order holding he was not an heir to his putative father's (Williams's) estate. The minor unsuccessfully argued that the putative father had substantially complied with North Carolina's legitimization requirements and also challenged the constitutionality of the legitimization statute as applied. In a unanimous decision the Court of Appeals affirmed the trial court.

The putative father died in 2011and an estate was opened the following month. Three years later, the natural mother of the minor filed verified motions in the cause alleging that the minor was the sole heir to Williams's estate alleging that Williams was the minor's natural father. Attached to the verified motions were the minor's birth certificate and an Affidavit of Parentage for Child Born out of Wedlock proffered as evidence that the minor was the William's sole heir under N.C. Gen. Stat § 29-15(1). The administrators of Williams's estate filed an answer denying that Williams was the minor's natural father or that the minor was a beneficiary of Williams's estate.

The Clerk of Superior Court conducted a hearing on the motions and entered an order providing the following findings of fact and conclusions of law:

1. The minor child ... was born out of wedlock.

2. The putative father ... Williams had not legitimated the child pursuant to the provisions of G.S. 49-1 through 49-9 or the provision of G.S. 49-14 through 49-16. G.S. 29-19(b)(1).

3. The putative father ... Williams also did not comply with N.C.G.S. 29-19 by filing an appropriate written acknowledgment of paternity with the Clerk of Superior Court during his and the child's lifetimes.

4. No DNA testing for paternity has ever been performed.

5. An Affidavit of Parentage for Child Born out of Wedlock appears to have been signed at the hospital by ... Williams . . .

6. Attorneys for the minor child made no argument for legitimation pursuant to the statute-G.S. 29-19-rather a U.S. Constitution, 14th Amendment, equal protection argument was made asserting that the State statute was unconstitutional in that equal protection was denied to illegitimate children.

As a result of the findings of fact, the Clerk of Superior Court made the following conclusions of law:

1. The minor child, Kamari A. The minor, has not been legitimated pursuant to the laws of this State.

2. The State has a substantial and important interest for the just and orderly disposition of property at death.

3. This State's statutory requirements do not violate the Equal Protection or Due Process Clauses of the U.S. Constitution. Estate of Stern v. Stern, 66 N.C. App. 507, 311 S.E.2d 909 (1984), appeal dismissed, 471 U.S. 1011 (1985).

The Clerk of Superior Court held that the minor was not an heir of Williams's estate based upon these findings of fact and conclusions of law. The minor appealed to the Superior Court and at the subsequent hearing contended that the proffered evidence of witness testimony, a certificate of live birth, and a signed Affidavit of Parentage by Williams proved that he is the natural son and sole legal heir of Williams. Additionally, he argued at the heir determination hearing that he was denied due process and equal protection of the laws because he could not inherit from Williams due to his illegitimate status.

The trial court affirmed the Clerk's order making extensive findings of fact and, in particular, the following:

1. The applicable statute as to whether the minor child ... is a legitimate heir of ... Williams is N.C. Gen. Stat. § 29-19. . . .

12. The Court finds that an "Affidavit of Parent for Child Born Out of Wedlock" appears to have been signed by ... Williams.

13. The Affidavit was not filed with the Clerk of Court.

14. The form Affidavit of Parentage for Child Born out Wedlock explains on the back that "[t]he execution and filing of this Affidavit with the registrar does not affect inheritance rights unless it is also filed with the clerk of the court in the county where the father resides. . . ."

17 That [the minor] does not meet the requirements for intestate succession set forth in N.C. Gen. Stat. § 29-19(b).

18. The constitutionality of N.C. Gen. Stat. § 29-19 has been previously upheld in Mitchell v. Freuler, 297 N.C. 206, 254 S.E.2d 762 (1979) and Outlaw v. Planters Nat. Bank &Trust Co., 41 . N.C. App. 571, 255 S.E.2d 189 (1979) finding that the Equal Protection and Due Process Clauses of the Constitution are not violated because the statute is substantially related to the permissible state interests the statute was to promote.

19. The Mitchell court identified the state's interests as follows: "(1) to mitigate the hardships created by our former law (which permitted illegitimates to inherit only

from the mother and from each other); (2) to equalize insofar as practical the inheritance rights of legitimate and illegitimate children; and (3) at the time to safeguard the just and orderly disposition of a decedent's property and the dependability of titles passing under intestate laws." Mitchell at 216, 254 S.E.2d 762.

20. The legislature amended N.C. Gen. Stat. § 29-19(b) in 2013 to add a new and additional method to legitimate a child born out of wedlock through the use of a DNA test for a "person who died prior to or within one year after the birth of the child." N.C. Gen. Stat. § 29-19(b)(3) (2013). . . . 22. N.C. Gen. Stat. § 29-19(b)(3) does not apply to [the minor] as the provision only applies to estates of persons who died after June 26, 2013.

23. Counsel for [the minor] argues that N.C. Gen. Stat. N.C. Gen. Stat. § 29-19 is unconstitutional in as much as it denies equal protection to illegitimate children.

24. [The minor] contends that [section] 29-19(b)(3) is unconstitutional as applied because it discriminates against illegitimate children with no apparent grounds for doing so and creates a separate class of individuals for whom the statute will not assist with no apparent grounds by excluding persons born prior to June 26, 2013 from utilizing this section of the statute. . . .

27. The Court is aware that the effective date of the statute prevents The minor from using the provisions of N.C. Gen. Stat. § 29-19(b)(3) (2013) and that this creates a harsh result. However, the Court finds this does not create an equal protection or due process violation.

28. The Court accordingly finds that the Clerk's conclusions of law are supported by the findings of fact and that the Order is consistent with the conclusions of law and applicable law.

The appellant's argument that Williams's substantial compliance with N.C. Gen. Stat. § 29-19(b)(2) should establish the minor as a legal heir of Williams's estate. Citing Hayes v. Dixon, 83 N.C. App. 52, (1986) as mandating a strict compliance standard, the Court opined that failure to meet all of the requirements of N.C. Gen. Stat. § 29-19(b) and, in particular, the filing of an Affidavit of Parentage with the office of the clerk of the superior count where either the father or child resides left the child in an illegitimate status for intestate succession purposes.

The Court distinguishes the case supporting the appellant's challenges the constitutionality of section 29-19(b)(2) under the Equal Protection Clause of the U.S. by noting that cases involving statutes that create classifications based on illegitimate status and prevent an illegitimate child from acquiring child support are readily distinguishable from cases involving classifications affecting an illegitimate child's ability to inherit via intestate succession. "The latter type of case involves a substantial state interest in just and orderly disposition of property at death, while the former type of case does not...Pursuant to the case law of the U.S. Supreme Court, the N.C. Supreme Court and this Court, Appellant's request to declare N.C. Gen. Stat. § 29-19(b)(2) unconstitutional must be denied."

This case is significant to real property attorneys because it is not uncommon for the question of the reported existence of children of a decedent father born out of wedlock. The case reinforces the reasonable reliance of an opining attorney upon strict compliance win N.C.G.S. Section 29-15.