(a) Section 1031(f): if: (i) a taxpayer exchanges property with a related person; (ii) the taxpayer recognizes no gain or loss on the exchange pursuant to section 1031(a); and (iii) within 2 years of the date of the last transfer which was part of the exchange, either of the related parties disposes of the property, then the earlier like-kind exchange no longer qualifies as a tax-free exchange.

(1) Facts: (i) Taxpayer transfers property to QI (the relinquished property), (ii) QI sells the property and uses the proceeds to purchase property from a person related to Taxpayer in a taxable transaction (the replacement property), and (iii) QI transfers the replacement property to Taxpayer, thus completing the exchange.

(2) Ruling: Taxpayer used QI (an unrelated person) in an attempt to circumvent the purposes of section 1031(f), and thus, the non-recognition provisions of section 1031(a) are inapplicable and Taxpayer must recognize gain on the disposition of its property.

(3) The Perceived Abuse: Related taxpayers can use a QI to circumvent the related party rules of section 1031, and thus, effect a basis shifting transaction and reduce the amount of gain recognized on the disposition of low basis, high value property.

(1) Facts: (i) Taxpayer A and Taxpayer B are related for purposes of section 1031, (ii) Taxpayer A agrees to transfer Property A to Buyer, but wants to defer gain on the transfer, (iii) Taxpayer A identifies Property B, owned by Taxpayer B, as a replacement property for a like-kind exchange, (iv) Taxpayer B plans on exchanging Property B for like-kind property, (v) Taxpayers A and B enter into exchange agreements with QI in order to facilitate exchanges qualifying under section 1031, and, as a result of the exchange agreement with the QI, (vi) the QI is treated as the seller of Property 1 to Buyer and the acquirer of Property 2, which is transferred to Taxpayer A – and – the QI is treated as acquiring property to replace Property 2 and transferring it to Taxpayer B in exchange for Property 2.

(2) Ruling: The above-described transaction does qualify for non-recognition for both Taxpayers A and B because neither Taxpayer “cashed out”.

(3) Note: In the Ruling, Taxpayer B represented that it would not dispose of its replacement property for 2 years from the date of its acquisition.

(1) Rev. Proc 2000-37 provides a safe-harbor for reverse like-kind exchanges (also known as parking transactions).

(A) In a reverse like-kind exchange: (i) the taxpayer often parks the replacement property with an accommodation party (“exchange-last” transaction), (ii) the taxpayer arranges for the sale of the relinquished property, and (iii) the replacement property is transferred by the accommodation party to the taxpayer, thus completing the like-kind exchange. Note: There are several variations on this structure.

(B) In a deferred forward like-kind exchange: (i) the taxpayer disposes of the relinquished property, (ii) the sales proceeds are paid to a qualified intermediary (“QI”), (iii) the QI acquires replacement property on behalf of the taxpayer, and (iv) the QI transfers the replacement property to the taxpayer, thus completing the exchange.

(2) Original Safe Harbor under Rev. Proc 2000-37: The Service will not challenge the qualification of property as either “replacement property” or “relinquished property” for purposes of section 1031 and the regulations thereunder, or the treatment of the exchange accommodation titleholder as the beneficial owner of such property for Federal income tax purposes, if the property is held in a Qualified Exchange Accommodation Arrangement (defined in (B) below). Note: As discussed below, this safe harbor has been modified by Rev. Proc. 2004-51.

(A) Exchange Accommodation Titleholder (“EAT”): An EAT is a person who (i) is not the taxpayer or a disqualified person (under Treas. Reg. § 1.1031(k)-1(k)) and, (ii) either (A) is subject to federal income tax, or (B) if treated as a partnership or S corporation for federal income tax purposes (i.e., not subject to Federal income tax), more than 90 percent of its interests or stock are owned by partners or shareholders who are subject to Federal income tax.

(B) Qualified Exchange Accommodation Arrangement (“QEAA”): An arrangement is a QEAA if all of the following conditions are satisfied:

(i). In an exchange-last transaction, EAT holds qualified indicia of ownership of the property at all times from the date of acquisition by the EAT until the property is transferred to the taxpayer in accordance with section 4.02(5) of the Rev. Proc.: · “Qualified indicia of ownership” means legal title to the property, other indicia of ownership of the property that are treated as beneficial ownership of the property under applicable principles of commercial law (e.g., a contract for deed), or interests in an entity that is disregarded as an entity separate from its owner for Federal income tax purposes (e.g., a single member limited liability company) and that holds either legal title to the property or such other indicia of ownership. · Thus, the EAT merely needs legal title to the property in order to have “qualified indicia of ownership” for purposes of the Rev. Proc.

Planning Tip: Effecting a section 1031 exchange through a QEAA may result in two levels of state transfer and recordation tax – first, when property is transferred from the seller to the EAT, and second, when property is transferred from the EAT to the taxpayer. In Maryland, thus far, where there is no transfer and recordation tax owed on the sale of economic interests, it is advisable to (i) have the EAT form a single member limited liability company (LLC), which is disregarded for Federal tax purposes, (ii) have the LLC acquire the replacement property, and (iii) have the EAT transfer 100% of the LLC interests to the taxpayer. Note: agency argument has been accepted in NY to avoid duplicate tax burden.

(ii). At the time the qualified indicia of ownership of the property is transferred to the EAT, it is the taxpayer's bona fide intent that the property held by the EAT represent either replacement property or relinquished property in an exchange that is intended to qualify for nonrecognition of gain (in whole or in part) or loss under section 1031;

 

(iii). No later than five business days after the transfer of qualified indicia of ownership of the property to the EAT, the taxpayer and the EAT enter into a written agreement (the “qualified exchange accommodation agreement”), which (A) provides that the EAT is holding the property for the benefit of the taxpayer in order to facilitate an exchange under section 1031 and the Rev. Proc., (B) provides that the taxpayer and the EAT agree to report the acquisition, holding, and disposition of the property in accordance with the Rev. Proc., and (C) specifies that the EAT will be treated as the beneficial owner of the property for all Federal income tax purposes and that the parties must report the Federal income tax attributes of the property on their Federal income tax returns in a manner consistent with the qualified exchange accommodation agreement;

(iv). No later than 45 days after the transfer of qualified indicia of ownership of the replacement property to the EAT, the relinquished property is properly identified. Identification must be made in a manner consistent with Treas. Reg.
§ 1.1031(k)-1(c), and the taxpayer may properly identify alternative and multiple properties, as described in Treas. Reg. § 1.1031(k)-1(c)(4);

(v). No later than 180 days after the transfer of qualified indicia of ownership of the property to the EAT, (A) the property is transferred (either directly or indirectly through a qualified intermediary (as defined in Treas. Reg.
§ 1.1031(k)-1(g)(4))) to the taxpayer as replacement property; or (B) the property is transferred to a person who is not the taxpayer or a disqualified person as relinquished property; and

(vi). The combined time period that the relinquished property and the replacement property are held in a QEAA does not exceed 180 days.

(1) The Issue: Based on the language in section 4.01 of Rev. Proc. 2000-37 that the “Internal Revenue Service will not challenge the qualification of property held in a QEAA as either 'replacement property' or 'relinquished property' (as defined in § 1.1031(k)-1(a)) for purposes of section 1031 and the regulations thereunder,” some taxpayers have interpreted Rev. Proc. 2000-37 to permit a taxpayer to treat as a like-kind exchange a transaction in which the taxpayer transfers property to an EAT and receives back that same property, with improvements, as replacement property. However, the Service has taken the position that an exchange of real estate owned by a taxpayer for improvements on land owned by the same taxpayer does not meet the requirements of section 1031. See DeCleene v. Commissioner, 115 T.C. 457 (2000); Bloomington Coca-Cola Bottling, 189 F.2d 14 (7th Cir. 1951). In order to enforce the Service’s position and to curtail an undersigned interpretation of Rev. Proc. 2000-37, the Service modified Rev. Proc. 2000-37.

(2) The Modifications: Rev. Proc. 2004-51 modifies the terms of Rev, Proc. 2000-37 to clarify that property previously owned by the taxpayer generally will not qualify as replacement property for purposes of section 1031:

(A) Section 1 of Rev. Proc. 2000-37 is modified to read as follows: “This revenue procedure provides a safe harbor under which the Internal Revenue Service will treat an exchange accommodation titleholder as the beneficial owner of property for federal income tax purposes if the property is held in a ‘qualified exchange accommodation arrangement’ (QEAA), as defined in section 4.02 of this revenue procedure.”

Thus, the statement that the “Service will not challenge the qualification of property as either replacement property or relinquished property” has been removed.

(B) Section 4.01 of Rev. Proc. 2000-37 is modified to read as follows: “The Service will treat an [EAT] as the beneficial owner of property for federal income tax purposes if the property is held in a QEAA. Property held in a QEAA may, therefore, qualify as either ‘replacement property’ or ‘relinquished property’ (as defined in
§ 1.1031(k)-1(a)) in a tax-deferred like-kind exchange if the exchange otherwise meets the requirements for deferral of gain or loss under § 1031 and the regulations thereunder.

Thus, the statement that the “Service will not challenge (a) the qualification of property as either replacement property or relinquished property” has been removed. Instead, the qualification of property as either replacement or relinquished property is determined under the general rules and regulations of section 1031.

(C) Section 4.05 is added to Rev. Proc. 2000-37, which reads: “This revenue procedure does not apply to replacement property held in a QEAA if the property is owned by the taxpayer within the 180-day period ending on the date of transfer of qualified indicia of ownership of the property to an exchange accommodation titleholder.”

Thus, by tying the exclusion to 180 days, Rev. Proc 2004-51 effectively insures that relinquished property cannot also serve as replacement property with respect to the same taxpayer.

(3) Rev. Proc. 2004-51 is effective (and thus modifies Rev. Proc. 2000-37) for transfers on or after July 20, 2004.

(1) In general: Section 121(a) excludes from income gain ($250,000 per individual; $500,000 per married couple filing jointly) realized from the sale or exchange of a residence if the taxpayer owned and used the residence as his principal residence for 2 of the past 5 years (calculated from the date of sale).

(2) Fact Pattern: Taxpayer owns Whiteacre. On January 1, 2000, Taxpayer trades Whiteacre for Blackacre in a tax-free exchange qualifying under section 1031. Starting March 1, 2002, Taxpayer uses Blackacre as his principal residence. On March 2, 2004, Taxpayer sells Blackacre and realizes a $200,000 gain. Because Blackacre was Taxpayer’s principal residence for the 2-year period immediately preceding the sale, the $200,000 gain is excluded from income under section 121(a). Note that under the old rules the fact that Taxpayer acquired Blackacre in a Section 1031 transaction is of no consequence.

(1) Rule: New section 121(d)(10) provides that gain realized on the sale of a principal residence that was previously acquired by the selling-taxpayer in a section 1031 exchange is not excluded from income under section 121(a) if the sale occurs within five years from the date the residence was acquired by the taxpayer (in the section 1031 exchange). New section 121(d)(10) is effective for sales or exchanges occurring after October 22, 2004.

(2) Result: In the fact pattern above, Taxpayer must recognize $200,000 of gain because Taxpayer acquired Blackacre in a Section 1031 exchange within 5 years of the date of sale.

(1) Scope: Rev. Proc. 2005-14 applies to taxpayers who exchange property that satisfies the requirements for both the exclusion of gain from the exchange of a principal residence under section 121 and the nonrecognition of gain on the exchange of like-kind property under section 1031. Thus, Rev. Proc. 2005-14 applies only to taxpayers who satisfy (i) the 2-year principal residence test of section 121, and (ii) the held for productive use in a trade or business or for investment requirement of section 1031(a)(1) with respect to the relinquished business property and the replacement business property.

(2) Rule: Rev. Proc. 2005-14 may apply to exclude gain realized on the exchange of a principal residence under section 121 and to defer gain on the exchange of like-kind properties under section 1031. In applying the Rev. Proc., taxpayers must follow the procedures set forth immediately below:

(A) Computation of gain:

(i). Section 121 must be applied to gain realized before applying section 1031;

(ii). Under section 121(d)(6), the section 121 exclusion does not apply to gain attributable to depreciation deductions for periods after May 6, 1997 claimed with respect to the business or investment portion of a residence. However, section 1031 may apply to such gain;

(iii). In applying section 1031, cash or other non-like kind property (boot) received in exchange for property used in the taxpayer's trade or business or held for investment (the relinquished business property) is taken into account only to the extent the boot exceeds the gain excluded under section 121 with respect to the relinquished business property.

(B) Computation of basis: In determining the basis of the property received in the exchange to be used in the taxpayer's trade or business or held for investment (the replacement business property), any gain excluded under section 121 is treated as gain recognized by the taxpayer for purposes of determining basis. Thus, under section 1031(d), the basis of the replacement business property is increased by any gain attributable to the relinquished business property that is excluded under section 121.

(C) Note: Check applicability of section 121(d)(10) (discussed above). That is, section 121 will not apply to exclude gain if the relinquished property was acquired by the taxpayer in a section 1031 exchange within the 5-year period immediately preceding latter section 1031 exchange.

(3) Example

Taxpayer A, an unmarried individual, buys a house for $210,000 that A uses as A's principal residence from 2000 to 2004. From 2004 until 2006, A rents the house to tenants and claims depreciation deductions of $20,000. In 2006, A exchanges the house for $10,000 of cash and a townhouse with a fair market value of $460,000 that A intends to rent to tenants. A realizes gain of $280,000 on the exchange.

A's exchange of a principal residence that A rents for less than 3 years for a townhouse intended for rental and cash satisfies the requirements of both sections 121 and 1031. Section 121 does not require the property to be the taxpayer's principal residence on the sale or exchange date. Because A owns and uses the house as A's principal residence for at least 2 years during the 5-year period prior to the exchange, A may exclude gain under section 121. Because the house is investment property at the time of the exchange, A may defer gain under section 1031.

Under Rev. Proc. 2005-14, A applies section 121 to exclude $250,000 of the $280,000 gain before applying the nonrecognition rules of section 1031. A may defer the remaining gain of $30,000, including the $20,000 gain attributable to depreciation, under section 1031. Although A receives $10,000 of cash (boot) in the exchange, A is not required to recognize gain because the boot is taken into account for purposes of section 1031(b) only to the extent the boot exceeds the amount of excluded gain.

These results are illustrated as follows:

Amount realized                                   $ 470,000

Less: Adjusted basis                            $ 190,000 
          Realized gain                              $ 280,000

Less: Gain excluded under§ 121          $ 250,000 
         Gain to be deferred                       $ 30,000

A's basis in the replacement property is $430,000, which is equal to the basis of the relinquished property at the time of the exchange ($190,000) increased by the gain excluded under section 121 ($250,000), and reduced by the cash A receives ($10,000)).

(4) Conclusion: Rev. Proc. 2005-14 is very taxpayer-friendly. Not only does it sanction the piggy-backing of gain deferral and gain exclusion provisions, but it also reinforces that taxpayers will get a stepped-up basis equal to the amount of gain excluded under section 121. Note, however, that attention must be paid to the potential application of section 121(d)(10) if the relinquished property was acquired in a section 1031 exchange.

(a) Background: Tenancy-in-common arrangements (“TICs” or TIC arrangements”) are used as a means to acquire replacement property within the 180-day period, when the acquisition of more desirable replacement property cannot occur in a timely fashion.

(1) For example, A wants to buy B’s property (and B wants to sell), but B does not want to recognize gain on the sale. B sells to A (sales proceeds to QI), but B cannot find desirable replacement property in a timely fashion. Solution – QI acquires a TIC interest in real property and transfers the interest to B as replacement property. Then, when B eventually finds desirable property, the TIC interest is used as relinquished property in a section 1031 exchange that yields the desired property (as replacement property).

(2) In broad-brush terms, Rev. Rul. 2004-86 addresses the issues of whether a Delaware Statutory Trust qualifies as a TIC arrangement for purposes of effecting section 1031 exchanges.

(b) Issue: Rev. Rul. 2004-86 addresses the specific issue of whether a taxpayer’s exchange of real property for an interest in a Delaware statutory trust, which itself owns real property, qualifies for nonrecognition of gain or loss under section 1031. More broadly, however, the Rev. Proc. provides guidance regarding the use of business entities as tenancy-in-common arrangements for section 1031 exchanges. See also I.R.C. § 1031(a02)(E) (certificates of trust or beneficial interests are disqualified property for purposes of section 1031).

(c) Facts: On January 1, 2005, A, an individual, borrows money from BK, a bank, and signs a 10-year note bearing adequate stated interest, within the meaning of section 483. On January 1, 2005, A uses the proceeds of the loan to purchase Blackacre, rental real property. The note is secured by Blackacre and is nonrecourse to A.

Immediately following A's purchase of Blackacre, A enters into a net lease with Z for a term of 10 years. Under the terms of the lease, Z is to pay all taxes, assessments, fees, or other charges imposed on Blackacre by federal, state, or local authorities. In addition, Z is to pay all insurance, maintenance, ordinary repairs, and utilities relating to Blackacre. Z may sublease Blackacre. Z's rent is a fixed amount that may be adjusted by a formula described in the lease agreement that is based upon a fixed rate or an objective index, such as an escalator clause based upon the Consumer Price Index, but adjustments to the rate or index are not within the control of any of the parties to the lease. Z's rent is not contingent on Z's ability to lease the property or on Z's gross sales or net profits derived from the property.

Also on January 1, 2005, A forms DST, a Delaware statutory trust described in the Delaware Statutory Trust Act, Del. Code Ann. title 12, §§ 3801 - 3824, to hold property for investment. A contributes Blackacre to DST. Upon contribution, DST assumes A's rights and obligations under the note with BK and the lease with Z. In accordance with the terms of the note, neither DST nor any of its beneficial owners are personally liable to BK on the note, which continues to be secured by Blackacre. The trust agreement provides that interests in DST are freely transferable. However, DST interests are not publicly traded on an established securities market. DST will terminate on the earlier of 10 years from the date of its creation or the disposition of Blackacre, but will not terminate on the bankruptcy, death, or incapacity of any owner or on the transfer of any right, title, or interest of the owners. The trust agreement further provides that interests in DST will be of a single class, representing undivided beneficial interests in the assets of DST.

Under the trust agreement, the trustee is authorized to establish a reasonable reserve for expenses associated with holding Blackacre that may be payable out of trust funds. The trustee is required to distribute all available cash less reserves quarterly to each beneficial owner in proportion to their respective interests in DST. The trustee is required to invest cash received from Blackacre between each quarterly distribution and all cash held in reserve in short-term obligations of (or guaranteed by) the United States, or any agency or instrumentality thereof, and in certificates of deposit of any bank or trust company having a minimum stated surplus and capital. The trustee is permitted to invest only in obligations maturing prior to the next distribution date and is required to hold such obligations until maturity. In addition to the right to a quarterly distribution of cash, each beneficial owner has the right to an in-kind distribution of its proportionate share of trust property. The trust agreement provides that the trustee's activities are limited to the collection and distribution of income. The trustee may not exchange Blackacre for other property, purchase assets other than the short-term investments described above, or accept additional contributions of assets (including money) to DST. The trustee may not renegotiate the terms of the debt used to acquire Blackacre and may not renegotiate the lease with Z or enter into leases with tenants other than Z, except in the case of Z's bankruptcy or insolvency. In addition, the trustee may make only minor non-structural modifications to Blackacre, unless otherwise required by law. The trust agreement further provides that the trustee may engage in ministerial activities to the extent required to maintain and operate DST under local law.

On January 3, 2005, B and C exchange Whiteacre and Greenacre, respectively, for all of A's interests in DST through a qualified intermediary, within the meaning of Treas. Reg. § 1.1031(k)-1(g). A does not engage in a § 1031 exchange. Whiteacre and Greenacre were held for investment and are of like kind to Blackacre, within the meaning of section 1031.Neither DST nor its trustee enters into a written agreement with A, B, or C, creating an agency relationship. In dealings with third parties, neither DST nor its trustee is represented as an agent of A, B, or C.BK is not related to A, B, C, DST's trustee or Z within the meaning of section 267(b) or section 707(b). Z is not related to B, C, or DST's trustee within the meaning of section 267(b) or section 707(b).

(d) Holdings:

(1) The Delaware statutory trust described above is an investment trust, under Treas. Reg. § 301.7701-4(c), which is classified as a trust -- rather than a business entity -- for federal tax purposes.

(2) A taxpayer may exchange real property for an interest in the Delaware statutory trust described above without recognition of gain or loss under section 1031, if the other requirements of section 1031 are satisfied.

(e) Analysis:

(1) Don’t Judge a Book by Its Cover: At first blush, Rev. Rul. 2004-86 appears to provide a blue print for achieving an IRS-approved TIC arrangement. However, in reality the Ruling is of little practical use because:

(A). The Ruling is expressly limited to its facts, which are unrealistic;

(B). As discussed in (B) below, the Service expressly states that any deviation from the facts of the Ruling results in the trust being treated as a business entity for Federal tax purposes, which means the TIC arrangement will not qualify for purposes of section 1031;

(C). It is unclear how, if at all, the Ruling will impact or affect the viability of TIC arrangements as a means of parking replacement property until a more desirable replacement property is located.

(2) Facts to Avoid: The Service noted that if the trustee had any of the following powers, the Delaware statutory trust would have been treated as a partnership for Federal tax purposes (unless it elected to be taxed as an association), rather than a trust; in which case, the exchange real property for an interest in the Delaware statutory trust would not qualify under section 1031: The power to:

(A) Dispose of Trust assets and to acquire other assets;

(B) Renegotiate the current lease or enter into new leases;

(C) Renegotiate or refinance the obligation used to purchase Trust assets;

(D) Invest cash received to profit from market fluctuations; or

(E) Make more than minor non-structural modifications to Blackacre not required by law.

(f) Conclusion: Rev. Rul. 2004-86 provides a favorable ruling with respect to impractical/improbable facts and indicates that unfavorable tax consequences will result upon any other facts. Based on the Ruling, Delaware Statutory Trusts likely are not viable alternatives to more traditional TIC arrangements.

(a) Background:

(1) The Jobs Creation Act of 2004 enacted, among other things, new section 470, which is intended to curtail the use of ”abusive” sale-leaseback structures with tax-exempt entities (i.e., “SILO transactions”), deemed a tax shelter by the Service; however, its impact is much broader than what is needed merely to curtail SILO transactions.

(2) In general, and subject to certain limited exceptions contained in section 470(d), section 470 limits the use of deductions generated from “tax-exempt use property.”

(A) “Tax-exempt use property” has the same meaning as in section 168(h), without regard to paragraphs (1)(C) and (3) thereof. Accordingly, in the case of non-residential real property, “tax-exempt use property” means that portion of the property leased to a tax-exempt entity in a disqualified lease, but only if the portion of such property leased to tax-exempt entities in disqualified leases is more than 35 percent of the property.

(B) The term “disqualified lease” means any lease of the property to a tax-exempt entity, but only if:

· part or all of the property was financed (directly or indirectly) by an obligation the interest on which is exempt from tax under section 103(a) and the tax-exempt entity (or a related entity) participated in such financing; 

· under the lease there is a fixed or determinable price purchase or sale option which involves a tax-exempt entity (or a related entity) or there is the equivalent of such an option; 

· the lease has a lease term in excess of 20 years; or 

· the lease occurs after a sale (or other transfer) of the property by, or lease of the property from, the tax-exempt entity (or a related entity) and the leased property has been used by a tax-exempt entity (or a related entity) before such sale (or other transfer) or lease.

(C) Special Rules Applicable to Pass-Through Entities:

(i). In the case of any property leased to a pass-through entity, the determination of whether any portion of such property is tax-exempt use property shall be made by treating each tax-exempt entity partner’s (or member’s or S Corp. shareholder’s) proportionate share (determined under section 168(h)(1)(6)(C)) of such property as being leased to such partner, member or shareholder, as applicable.

(ii). In general, if any property that is not tax-exempt use property is owned by a pass-through entity, which has both a tax-exempt entity and a person who is not a tax-exempt entity as partners (or members or shareholders), and any allocation to the tax-exempt entity of tax items is not in accordance with the rules of section 704(b), an amount equal to such tax-exempt entity’s proportionate share of such property is treated as tax-exempt use property. Accordingly, under certain circumstances involving entities with taxable and tax-exempt principals, non-tax-exempt use property may be deemed tax-exempt use property for purposes of section 168(h), and thus, for purposes of section 470.

(b) New Section 460(e)(4): Provides that section 1031(a) does not apply to an exchange where:

(1) The exchanged property is tax-exempt use property subject to a lease which was entered into before March 13, 2004, and which would not have met the requirements of section 470(d) (i.e., exclusions) had such requirements been in effect when the lease was entered into, or

(2) The replacement property is tax-exempt use property subject to a lease, which is not excluded from the application of section 470 by section 470(d).

(3) Results:

(A) Tax-exempt use property is no longer eligible to qualify as either relinquished property or replacement property for purposes of section 1031.

(B) Pass-through entities with tax-exempt principals must be aware of new section 470(e)(4), as property may be deemed tax-exempt use property, which could result in adverse tax consequences.