The taxpayer, a calendar-year corporation, wants to change its company's headquarters currently consisting of a ten-story building. The company owns the building outright. The taxpayer has identified some potentially more suitable properties. One of the possible properties is a single-story building on a large, attractive lot. The
other property consists of a two-building complex, with retail shops on the ground floor of one building and residential rental property in a portion of the other building.
After further discussions with the client and a review of relevant documents, you discover the following additional facts: Each of the new properties has a fair market value that slightly exceeds that of the current ten-story building. The taxpayer would demolish the single-story building if the company purchases that property. It would then build a specially designed building on the lot. The sellers of both properties appear to be interested in entering an exchange transaction whereby the company's property would be exchanged for one of the other properties.
After many discussions with the taxpayer, the company decided to exchange its existing property for the retail and residential building complex. You assisted the company in structuring the exchange. Both parties used a middleman corporation, to whom the properties were to be initially conveyed. The agreement with the middleman included the requirement that the taxpayer sell its property to the middleman and then, within 45 days of the initial closing, formally identify which of the two new properties it intended to acquire. The identified property was also to be sold to the middleman corporation. The corporation would then transfer title to the taxpayer within 180 days after the date of the initial closing.