THE 1031 EXCHANGE INSTITUTE

Hi Woody,

I'm sorry to hear that you got caught in this horrible situation. Here are some of my thougths, although the situation is very fluid and chaning by the day at this point in time.

There are certainly many legal issues involved here, and many more that have probably not even been discovered yet. We issued a press release on the subject. You can read the full press release at: http://www.exeter1031.com/news_landamerica_1031_exchange.aspx.

The investment language included in their 1031 tax deferred like kind exchange agreement will certainly be a key issue in what they were permitted to do with the clients' 1031 exchange funds versus where they actually invested the clients' 1031 exchange funds in order to determine if there was any breach of contract and/or their fiduciary duty.

Aside from the legal or fiduciary issues is the issue of the prudent investor rule or requirement. Is the Auction Rate Security a prudent investment for an extremely short-term type transaction like a 1031 exchange? We were approached by countless securities brokers when the Auction Rate Securities first came out. We were told they were the next best thing since sliced bread, that they were highly liquid, ultra safe, etc.

We chose not to implement them because we did not want to stray from our ultra conservative approach of using only commercial bank deposit accounts with commericial banks that have agreed to allow us to review their financials at least quarterly to ensure that we can adequately protect our clients' 1031 exchange funds. But, we were also concerned that the ARS was a brand new and untested security and we are always skeptical of "Wallstreet's" new gimics. Wallstreet gets way too creative for investors' own good. And, as we have seen once again, Wallstreet has created an investment that has not gotten people in trouble.

The disclosure of SunTrust Bank I think is a problem as well. Using just the name SunTrust Bank is deceptive and misleading as to what the 1031 exchange funds are really invested in. It should have been fully disclosed as to which entity the funds are really held with. It would also be interesting to know if SunTrust Bank was the brokerage firm that talked them into these securities in the first place. I would also like to know the answer to your question as to which executive actually made this horrible decision. It certainly increased their yield (and therefore the risk to the investor).

I understand that clients were provided with a guarantee by LandAmerica that the 1031 exchange funds would be available. I would like to see a copy of this guarantee. The majority of guarantees that I have reviewed are really worthless and more or less just a marketing ploy. They are written with sufficient "loop holes" so that the parent company can get out of the guarantee under many circumstances. However, if the guarantee holds up then the parent company has some liability, which I think they realize and explains why their parent company filed bankruptcy.

However, the bankruptcy court has to approve the sale of the operating title insurance companies to Fidelity before the transaction can be completed. There may be some value here, but we will have to wait and see. I hope the bankruptcy trustee will be able to apply the sale proceeds toward the client's claims in order to recover all of the 1031 exchange funds.

The other issue is whether the Auction Rate Securities market will regain its liquidity so that the ARS's full market value can be realized. I have my doubts about this. There will be too many investors that will not be willing to take that risk on for fear that the market will freeze and become illiquid again. They will most likely be sold at a steep discount at some point in the future. Time will tell.

It is too soon to know exactly what path would be best, but I would immediately retain legal counsel to review your specific circumstance and determine what can be done. You may want to see if you know others who are also involved in this failure and pool your resources. What ever action is taken will most likely and probably should be certified as a class action on behalf of all LandAmerica 1031 Exchange investors.

There may be ways to complete your 1031 exchange if you have other resources (cash) that you can contribute into a new 1031 exchange. We have already opened a few for some of the LandAmerica 1031 Exchange clients. Unfortunately, most of those harmed will not have sufficient resources in order to add cash and complete their 1031 exchange.

I would be happy to brainstorm more if you like. Feel free to call me.

I've been asked numerous times over the past couple of days if any other 1031 exchange companies have also invested in Auction Rate Securities. The answer is yes, and this is an important question that you should be asking any potential or current 1031 exchange company. You need to be very direct and specifically ask if they have ANY Auction Rate Securities in their investment portfolio.

Hi Burned in AZ,

Sorry to hear that it has affected you. I doubt the bank would release the funds to you since you are technical not their client. I'm assuming that the only signers on the account is LandAmerica 1031 Exchange Services. Also, since they have filed bankruptcy the accounts are more than likely frozen until a bankruptcy trustee gets the affairs in order. The bank would most likely violate a court bankruptcy order if they did release the funds.

I have not heard of anyone filing any suit yet or meeting to discuss options, etc. You might want to contact/email those that have posted on this discussion board/forum or those that have posted on the forums located on http://www.exeterboard.com to see if you can get together and discuss your options.

The 1031 exchange clients will most likely be the largest creditor class of the LandAmerica 1031 Exchange Services bankruptcy filing, so the 1031 exchange clients should be represented by counsel in order to protect their interest throughout the Landam 1031 exchange bankruptcy procedures.

I stand corrected. See post on discussion board at http://exeterboard.com/forums/t/379.aspx that presents a nice summary of where things are at today.

HERE IS A COPY OF A LETTER REQUEST SENT TO THE IRS:


December 4, 2008

The Honorable Eric Solomon
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220

Re: Participants in Like Kind Exchanges Affected by the Bankruptcy of Land America 1031 Exchange Services. Inc.
Dear Mr. Solomon:

We are writing in regards to the plight of the large number of taxpayers that may be adversely affected by the recent bankruptcy filing of LandAmerica 1031 Exchange Services, Inc. ("LandAmerica").

LandAmerica served as a "qualified intermediary" under the safe harbor reflected in Treasury Regulation Section 1.1031(k)-1(g)(4), which permits qualified intermediaries to hold sale proceeds in connection with deferred like kind exchanges without causing selling taxpayers to be considered to be in actual or constructive receipt of the sale proceeds. We understand that when LandAmerica filed its Chapter 11 petition, it was acting as a qualified intermediary pursuant to approximately 450 exchange agreements.1 Unfortunately, the current economic crisis creates considerable risk that other qualified intermediaries will fail, and hundreds, if not thousands, of additional taxpayers may find themselves in the same position as LandAmerica's current customers.

Taxpayers who are able to recover funds held by LandAmerica (or other failed qualified intermediaries) will generally wish to complete their like kind exchanges. However, LandAmerica has indicated that it will cease operations and may not honor exchange agreements. In such event, the most straightforward solution would be for LandAmerica customers to have replacement qualified intermediaries assume LandAmerica's duties under their exchange agreements (and take possession of sale proceeds currently held by LandAmerica). There is, however, no clear authority on the tax consequences of the bankruptcy of a qualified intermediary that is holding taxpayer funds. We are therefore concerned that the IRS will take the position that the use of a replacement qualified intermediary is not authorized under the qualified intermediary safe harbor and that an attempt to replace a bankrupt qualified intermediary would cause a deferred like kind exchange to be fully taxable.2

It would, of course, be unfair if customers of failed qualified intermediaries were not permitted to complete their like kind exchanges. We therefore respectfully request that the IRS issue a notice confirming that the assumption by a replacement qualified intermediary of the duties of a failed qualified intermediary under an exchange agreement will not cause a deferred like kind exchange to fall outside the qualified intermediary safe harbor at Treasury Regulation Section 1.1031(k)-1(g)(4).

Any guidance regarding failed qualified intermediaries should be issued as soon as possible. A taxpayer participating in a deferred like kind exchange must complete its exchange no later than the day which is 180 days after the date on which it transferred the relinquished property (and often sooner). Without immediate guidance, customers of failed qualified intermediaries may find it necessary to abandon their contemplated exchanges, in order to set aside funds needed to satisfy unanticipated tax liabilities.

We should emphasize that the relief that we are requesting is very limited in scope. We are not, for example, requesting that the Treasury Department extend the period within which taxpayers are required to complete their exchanges. That period is fixed by statute, and the Treasury Department may not unilaterally extend it.

We would be happy to provide you with further input on this issue at your convenience. Thank you for taking the time to consider our views.

Sincerely,

Jack J. Miles

Andrew H. Lee

cc:
Karen Gilbreath Sowell, Esq.
Deputy Assistant Secretary (Tax Policy)

Eric A. San Juan, Esq.
Acting Tax Legislative Counsel

The Honorable Douglas H. Shulman
Commissioner, Internal Revenue Service

The Honorable Donald L. Korb
Chief Counsel, Internal Revenue Service

FOOTNOTES


1 Clients of this Firm are among those taxpayers whose funds are still being held by LandAmerica pursuant to exchange agreements.
2 We understand that the IRS might permit customers of failed qualified intermediaries to complete their like kind exchanges with funds obtained from other sources, but such a solution would appear to be impractical for most customers.

END OF FOOTNOTES