The Build-To-Suit Exchange

Section 263A(g)(1) of the Code states that the term “produce” includes construct, build, install, manufacture, develop or improve. In this regard we note that even before these regulations (§ 1.1031(k)-1(e)) were promulgated, courts permitted taxpayers great latitude in structuring exchange transactions under § 1031 in “build-to- suit” situations. Thus, a taxpayer can locate suitable property to be received in an exchange and can enter into negotiations for the acquisition of such property. Coastal Terminals, Inc. v. United States, 320 F.2d 333, 338 (4th Cir. 1963); Alderson v. Commissioner , 317 F.2d at 790 (9th Cir. 1963); Coupe v. Commissioner, 52 T.C. 394 (1969). A party can hold transitory ownership of exchange property solely for the purposes of effecting the exchange. Barker v. Commissioner, 74 T.C. 555 (1980). Moreover, the taxpayer can oversee improvements on the land to be acquired, J.H. Baird Publishing Co. v. Commissioner , 39 T.C. 608 (1962), and can even advance money toward the purchase of the property to be acquired by exchange. 124 Front Street Inc. v. Commissioner, 65 T.C. 6 (1975); Biggs v. Commissioner, 632 F.2d 1171 (5th Cir. 1980), aff'g. 69 T.C. 905 (1978). The Service has also approved certain exchange transactions in which the replacement property was built to suit the requirements of the exchanging taxpayer. For example, in Rev. Rul. 75-291, 1975-2 C.B. 332, a corporation (X) agreed to exchange its land and factory for land to be purchased by another (Y) and improvements to be constructed thereon. The ruling stated that Y “built the factory solely on its own behalf” and “not as an agent of the taxpayer.” X was allowed nonrecognition treatment.

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