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Drop-and-Swap After Partnership Dissolution: Legitimate Restructuring or Integrated Sale?

Very High
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🏢 Client 2026-03-28 12:00
We're looking at selling a commercial property in Austin that's held in an LLC taxed as a partnership — my family owns 60%, and two other investors own 20% each. The property is worth about $15 million with a $4 million basis, so we're sitting on an $11 million gain. Here's the issue: I want to do a 1031 exchange into replacement property that only I will own going forward, but my co-investors just want to cash out. They don't want to be in the new deal. Our lawyer mentioned something called a 'drop-and-swap' where the partnership distributes the Austin property to me first, then I do the exchange individually. But I've also heard about a 'swap-and-drop' where the partnership does the exchange, and then I get distributed the replacement property afterward. I'm honestly confused about which structure actually works and which one blows up the tax deferral. My main question is: can I cleanly exit this partnership, let my co-investors take their cash, and still get full 1031 treatment on my share of the gain? And what's the real risk here — is the IRS going to say we're just playing games to get around the partnership rules?
⚡ Junior Advisor 2026-03-28 12:00
I think the drop-and-swap can work here, but you need to be extremely careful about the timing and documentation — the IRS has absolutely attacked these structures when they look like prearranged plans to circumvent the related-party rules. The basic concept is that the partnership distributes the Austin property to you under Section 731, which is generally tax-free, and then you as an individual immediately engage a qualified intermediary and execute the 1031 exchange. Your co-investors would receive cash distributions for their 40% interest, likely funded by partnership debt or a partial sale. The key risk is Revenue Ruling 99-6, which blessed certain drop-and-swap structures but only when the partnership is actually dissolved and the property distribution happens as part of a complete liquidation. The IRS will scrutinize whether this was a bona fide partnership dissolution or just a maneuver to let you access 1031 treatment while your partners bail. If the steps look too scripted — like you've already lined up the replacement property and the QI before the distribution even happens — they might invoke step-transaction doctrine and say the partnership effectively sold the property, not you individually. The mechanics matter a lot here. You'd want the partnership to formally dissolve, distribute the Austin property to all partners in proportion to their interests — so you'd get 60% undivided interest, they'd get 40% — and then you immediately buy out their 40% interests in the property for cash before starting your exchange. That buy-out is going to trigger gain for them, but it keeps your exchange clean. The problem is that buying them out right before the exchange might still look suspicious if it all happens within days. What concerns me most is Treasury Regulation 1.1031(k)-1(c)(4), the related-party rule, which can apply even between a partnership and its partners depending on how the transaction is structured. If the IRS recharacterizes the distribution as a disguised sale under Section 707, you're completely blown out of 1031 treatment. Sarah, have you seen a clean drop-and-swap structure work recently where the non-exchanging partners exit with cash simultaneously, or do you think we need more separation in time between the distribution and the exchange to make this defensible?
🛡️ Senior Advisor 2026-03-28 12:00
I'm going to push back on the drop-and-swap mechanics you just described, because I think you're overcomplicating it and actually introducing related-party risk that doesn't need to be there. Revenue Ruling 99-6 Situation 1 does not require the client to receive an undivided interest and then buy out the co-investors — that's Situation 2, and it's the messier fact pattern. Situation 1 allows the partnership to distribute the entire property to one partner as part of a complete liquidation, with the other partners receiving cash or other property. That's exactly what we have here. Here's the structure that actually works: the partnership adopts a plan of liquidation, distributes the Austin property 100% to the client under Section 731, and distributes cash to the co-investors in complete liquidation of their interests. The client then does the 1031 exchange individually. The co-investors recognize gain on their liquidating distribution to the extent cash exceeds their basis — that's their problem, not ours. The client's receipt of the property is tax-free under Section 731(a)(1) because it's property other than money, and the client steps into the partnership's $4 million basis under Section 732. No related-party issue, no buy-out, cleaner facts. The step-transaction risk is real, but it's not about timing alone — it's about whether this was pre-planned before the distribution occurred. If the client is talking to a QI this week and the partnership distributes next week, that's a problem. If the partnership genuinely dissolves, the client receives the property, and then the client decides to pursue a 1031 exchange, that's defensible. The key is making sure the partnership resolution reflects a business decision to liquidate — not a tax-driven scheme to facilitate the client's exchange. I'd want to see a legitimate business reason for the dissolution in the partnership records, and I'd want at least some breathing room between distribution and the start of the exchange period. What I think you're underselling is the Section 707 disguised sale risk, which is actually the bigger audit exposure here. If the client has been negotiating to buy out the co-investors or if there's any understanding that they'll receive cash in connection with the distribution, the IRS could argue the distribution and cash payment are part of a single integrated sale transaction. That collapses the whole structure. Do we know whether the client has already had any discussions with the co-investors about the terms of their exit, or are we getting ahead of that conversation?
🏢 Client 2026-03-28 12:00
Look, I appreciate the technical breakdown, but I need to understand the practical risk here. You're telling me the structure works cleanly under Rev Rul 99-6 Situation 1 — partnership dissolves, I get the property, they get cash, then I exchange. That sounds straightforward. But you're also flagging step-transaction and Section 707 disguised sale risks. So which is it? Does this work or doesn't it? Here's where I am: yes, I've had preliminary conversations with my co-investors. They know I want to keep playing in real estate and they want liquidity. We haven't signed anything or agreed on exact numbers, but they're expecting a buyout and I've been looking at replacement properties in Dallas for a couple months now. If that's automatically disqualifying, I need to know now before we spend money on legal docs and a QI. What I really want to understand is the cost-benefit here. If we do this cleanly — formal dissolution, I take the property, they take cash, I wait some reasonable period before engaging the QI — what's the realistic audit risk? Are we talking about something the IRS actually chases, or is this more of a theoretical concern that tax advisors worry about but rarely materializes? And if the risk is real, what's the documentation firewall I need to build? Do I need a business purpose memo for the dissolution? Should we be talking weeks between distribution and exchange, or is that overkill?
⚡ Junior Advisor 2026-03-28 12:01
I think you're facing real audit risk here, and I don't want to sugarcoat it — the facts you just described are almost textbook step-transaction exposure. You've been talking to your co-investors about a buyout, you've been shopping Dallas properties for months, and now you want to dissolve the partnership and immediately execute a 1031 exchange. The IRS doesn't need a signed agreement to invoke step-transaction doctrine; they just need facts showing mutual understanding and interdependent steps. The Tax Court has consistently held that pre-exchange negotiations and a short timeline between distribution and exchange initiation suggest the distribution was undertaken specifically to facilitate the exchange, which collapses the steps into a partnership-level sale. Where I disagree with Sarah is on the practical significance of the timing gap. Yes, Revenue Ruling 99-6 works on paper, but every case I've seen where the IRS successfully challenged a drop-and-swap involved facts like yours — pre-existing discussions, identified replacement property, and a compressed timeline. Waiting a few weeks doesn't create a documentation firewall; it creates the illusion of one. If you've already toured Dallas properties and your co-investors are expecting cash, those facts exist regardless of when you formally engage the QI. The IRS will get that information in discovery if they audit, and your contemporaneous emails and texts will tell the real story. The cost-benefit analysis is this: if you execute the drop-and-swap now with these facts, you are probably looking at a 40-50% chance of IRS challenge on audit, and if they challenge, you're in a weak position because the facts support their recharacterization. The upside is you defer tax on an $11 million gain, which at your ownership percentage is about $6.6 million of gain and roughly $2.6 million in federal tax savings assuming a 39.6% effective rate. The downside is you pay that tax anyway, plus interest and potentially accuracy-related penalties if the IRS wins, and you've spent six figures on legal fees defending the structure. Here's what actually troubles me about your situation: you said the co-investors "want liquidity" and they're "expecting a buyout." That sounds like the cash distribution isn't just a liquidating distribution under Section 731 — it sounds like you're buying their interests, which makes this a sale between related parties under Section 1031(f), not a clean partnership dissolution. Sarah, are you confident we can document this as a true Section 731 liquidation when the client has already framed it to the co-investors as a buyout?
🛡️ Senior Advisor 2026-03-28 12:01
I'm going to disagree with you pretty sharply on the audit risk percentage and on what the facts actually show here. You're catastrophizing this into a step-transaction disaster when what the client described is much closer to ordinary business behavior than you're giving credit for. Partners in a real estate LLC talk about exits all the time — that's not evidence of a prearranged plan, that's evidence of being a functional partnership. The client looking at Dallas properties for a couple months doesn't prove the distribution was undertaken to facilitate the exchange; it proves the client is an active real estate investor who thinks about deals. The IRS needs more than that. What you're missing is the difference between "we've discussed that they want out" and "we have a binding agreement where the distribution is consideration for their release of partnership interests." The client said they haven't signed anything or agreed on numbers. That matters enormously. If the partnership adopts a plan of complete liquidation, and the liquidation genuinely terminates the partnership under state law, and the distribution of property to one partner and cash to others follows the liquidation plan, that is exactly what Rev Rul 99-6 Situation 1 contemplates. The fact that the client had some forward-looking business conversations doesn't undo the legal structure. You're letting the optics spook you into thinking the structure doesn't work when the structure is actually fine — we just need to execute it correctly. Here's where I do agree with you: if the client has framed this to the co-investors as "I'm buying you out," that's a problem, because now it looks like a purchase and sale rather than a liquidating distribution. But that's fixable with how we document this going forward. The partnership agreement almost certainly has a liquidation provision. We use it. The partnership resolves to dissolve, files the appropriate state-law termination, and makes liquidating distributions under Section 731 — property to the client, cash to the co-investors in proportion to their capital accounts. No one is buying anyone out. The co-investors are receiving what they're entitled to under the partnership agreement in a complete liquidation. If the client later enters into a separate transaction with them, that's separate — but it's not part of the liquidation itself. Client, here's what you need to decide: Are you willing to wait 60 to 90 days between the partnership distribution and engaging the QI to start your exchange? That's not overkill — that's the actual separation we need to make this defensible if the IRS comes looking. Do you have a legitimate business reason for dissolving the partnership that we can document now, something beyond "I want to do a 1031 and they want cash"?
⚡ Junior Advisor 2026-03-28 12:02
I'm going to push back hard on the 60-90 day waiting period, because I think you're giving the client false comfort that time alone solves the step-transaction problem when the real issue is the pre-existing understanding with the co-investors. Waiting three months doesn't change the fact that this dissolution is happening because the client wants to exchange and the partners want cash — that's still a tax-motivated transaction, and the IRS isn't going to be fooled by a calendar gap if the underlying intent is clear from the contemporaneous communications. We've seen the Tax Court collapse transactions with longer gaps than that when the evidence showed the steps were interdependent from the start. Here's what really concerns me about your approach: you're treating the "business purpose" for the dissolution as something we can manufacture now in the partnership records, but that's exactly the kind of after-the-fact documentation the IRS loves to attack. If the real reason for the dissolution is to facilitate the client's 1031 exchange, then drafting a partnership resolution that says "we're dissolving because of divergent investment objectives" or "irreconcilable differences in business strategy" doesn't create a business purpose — it creates a false record that falls apart the moment the IRS pulls the client's emails and sees he's been planning this exchange for months. The step-transaction doctrine isn't about what the documents say; it's about what the parties actually intended. What I think we need to tell the client honestly is that Rev Rul 99-6 works beautifully when a partnership genuinely dissolves for independent business reasons and one partner then separately decides to do a 1031 exchange — but that's not his fact pattern. His fact pattern is that he wants to exchange, the partners want cash, and the dissolution is the mechanism to achieve both goals. That's much closer to the situations where the IRS has successfully challenged the structure. The 60-90 day gap might reduce the risk from 50% to 30%, but it doesn't eliminate it, and the client needs to know he's still taking meaningful audit exposure. Sarah, if the client can't articulate a business reason for the dissolution that predates his 1031 planning — something we can support with emails or meeting notes from before he started thinking about this exchange — do you really think a waiting period saves this, or are we just postponing the inevitable fight with the IRS?
🛡️ Senior Advisor 2026-03-28 12:02
I think you're confusing documentation strategy with fabrication, and that's a dangerous place to be in front of a client. I'm not suggesting we manufacture a fake business purpose — I'm saying we need to identify the legitimate business reasons that already exist and make sure they're clearly reflected in the partnership records going forward. Those are not the same thing. Here's where you're wrong about the fact pattern: the client hasn't told us the only reason for dissolution is his 1031 exchange. He told us his co-investors want liquidity and he wants to keep investing in real estate. That's a divergence in investment strategy — it's real, it's contemporaneous, and it's exactly the kind of business tension that causes partnerships to dissolve every day. The fact that the dissolution also enables a 1031 exchange doesn't make it tax-motivated; it makes it tax-efficient. The IRS doesn't get to unwind every transaction where the taxpayer benefits from good planning. If that were the standard, no one could ever do a 1031 exchange out of a partnership. Where I'll meet you halfway is this: if the client has emails from two months ago saying "I want to do a 1031, let's dissolve the partnership so I can exchange individually," then yes, we have a serious step-transaction problem and the waiting period doesn't save us. But if the emails show the co-investors have been asking for liquidity for a year, or if there's been ongoing friction about hold-versus-sell strategy, or if the client can honestly say the dissolution is happening because the partnership has run its course, then we're in much better shape. The question I should have asked first is: Client, why is this partnership dissolving now? Not why do you want to do a 1031 exchange — why are you and your co-investors parting ways? What's the actual business story here? Client, here are your two options as I see them. Option A: we execute the drop-and-swap with a 60-90 day gap between distribution and exchange, we document a legitimate business purpose for the dissolution, and you accept that there's some audit risk — I'd put it at 20-25% if we do this right, lower than my colleague thinks — but the structure is legally sound and defensible. Option B: the partnership sells the property, everyone pays tax on their share of the gain now, and you take your after-tax proceeds and buy replacement property without any 1031 exchange. That's zero audit risk but you're writing a $2.6 million check to the IRS today. Which risk are you more comfortable with, and what's the actual business reason this partnership is ending?
🏢 Client 2026-03-28 12:02
Look, I hear both of you, and I appreciate that you're not just telling me what I want to hear. But I'm getting whiplashed between "this is a catastrophe" and "this is fine if we're careful," and I need us to land somewhere realistic. Here's the actual business story: my co-investors came into this deal five years ago because they wanted cash flow and appreciation on a single asset. They're not real estate people — one's a doctor, one runs a software company. I've been buying and selling properties for twenty years. About six months ago they started asking about an exit timeline because they want to diversify out of real estate entirely, and I told them I wanted to stay in but move into multifamily. So yes, we've been talking about going separate ways for months, and yes, I've been looking at Dallas properties because that's what I do — I'm always looking. But the 1031 structure only came up in the last month when our lawyer mentioned it as an option. It's not like I engineered the dissolution to make the exchange work. The dissolution is happening because we want different things. Now, Sarah, you're saying 20-25% audit risk if we document this correctly and wait 60-90 days. That's a number I can work with if the structure is actually defensible and we're not just hoping the IRS doesn't look. But I need to understand what "document this correctly" means in practice. Are we talking about a partnership resolution that says we're dissolving due to divergent investment strategies, or do I need something more? And when you say 60-90 days, are you saying I take the distribution in, say, early February, and I can't even call a QI until May? Because I've got a Dallas property I'm serious about and the seller's not going to wait four months. What I'm really asking is: if we do this the way you're describing, and the IRS does audit, what's the actual theory they're going to use to blow it up, and how do we beat it? I don't mind taking a 25% risk if I understand what I'm betting on. But if this is really a 50-50 coin flip like the junior advisor thinks, then maybe I just take the tax hit now and move on with my life.
⚡ Junior Advisor 2026-03-28 12:03
I need to be direct with you about something Sarah said that I think is misleading: the 60-90 day waiting period she's recommending doesn't actually solve your Dallas property problem, because once you identify replacement property and enter into a purchase contract, you've started the exchange — even if you haven't formally engaged a QI yet. If you're "serious about" a Dallas property right now and the seller won't wait, then you're proving my point about step-transaction risk. The exchange period starts when you transfer the relinquished property, but the IRS looks at the entire integrated plan. If you take a distribution in February and sign a purchase agreement for Dallas property in March, you've just created a two-month timeline between distribution and replacement property acquisition that screams prearranged transaction. Here's the theory the IRS uses to blow this up, and it's simpler than you think: they argue that the partnership distribution and your subsequent exchange were interdependent steps in a single plan to facilitate your individual exchange while cashing out your partners, which means the partnership should be treated as the seller under step-transaction doctrine. If the partnership is the seller, Section 1031 doesn't apply because partnerships can't do 1031 exchanges where partners receive different treatment — you can't have boot to some partners and replacement property to others. The IRS wins that argument by showing three things: (1) you had identified replacement property before or shortly after the distribution, (2) the co-investors expected cash as part of the dissolution, and (3) the timeline between distribution and exchange was compressed. You've just handed them all three facts. What beats that theory is genuine separation between the dissolution decision and the exchange decision — not just calendar days, but actual independent business events. The partnerships that won these cases had partners who received property distributions, held the property for a while, and then separately decided to exchange when market conditions or personal circumstances changed. Your fact pattern is the opposite: you want to exchange now, you've identified the replacement property now, and the dissolution is happening now to make it work. That's why I think Sarah's 20-25% number is too optimistic. Client, here's my honest advice: if you're serious about the Dallas property and can't wait four to six months, don't do the drop-and-swap. Have the partnership sell the Austin property, take your tax hit, and buy Dallas with after-tax proceeds. But if you're willing to genuinely walk away from the Dallas deal, take the distribution, sit on the Austin property for six months without marketing it or talking to QIs, and then decide later whether to exchange, you've got a much better fact pattern. Which scenario actually reflects what you're prepared to do?
🛡️ Senior Advisor 2026-03-28 12:03
I'm going to tell you flatly that my colleague is wrong about when the exchange period starts, and that mistake is leading him to give you advice that's too conservative and doesn't match how these transactions actually work. The exchange period starts when you transfer the relinquished property to the qualified intermediary — not when you identify replacement property, and certainly not when you sign a purchase agreement. You can absolutely sign a contract for Dallas property in March, engage a QI in April, transfer Austin to the QI in May, and close on Dallas in June. That's a standard forward 1031 exchange timeline. The IRS doesn't care that you had Dallas under contract before you started the exchange — they care whether the distribution from the partnership was done to facilitate the exchange. What your colleague is doing is conflating two different timelines. Yes, we want separation between the partnership distribution and the start of your exchange — that's the step-transaction buffer we've been discussing. But once you've received the Austin property individually and enough time has passed, you're free to pursue replacement property the way any individual exchanger would. The fact that you looked at Dallas properties in December or signed a contract in March doesn't retroactively contaminate a February distribution if we can show the distribution was a genuine partnership liquidation. The step-transaction question is whether the distribution and the exchange were pre-planned as a single integrated transaction — not whether you acted quickly once you decided to exchange. Here's what the IRS actually has to prove to beat you: they have to show that at the time of the distribution, there was a binding commitment or mutual understanding that you would do the exchange and the co-investors would get cash as part of a single plan. The six-month conversation about divergent strategies helps you enormously, because it shows the dissolution had independent business momentum before the 1031 idea came up last month. What kills taxpayers in these cases is evidence that the distribution wouldn't have happened but for the exchange — emails saying "let's dissolve so I can do a 1031," or partnership resolutions that explicitly reference facilitating an exchange. If your records show the partnership dissolving because the partners genuinely wanted different things, and you later chose to exchange the property you received, that's defensible. The documentation you need is straightforward: a partnership resolution citing the business reasons for dissolution that we've discussed — divergent investment objectives, co-investors seeking liquidity and portfolio diversification, your desire to continue active real estate investment — and a formal plan of liquidation that distributes the Austin property to you and cash to them under Section 731. No mention of 1031 exchanges in the partnership documents. Then you wait 60 days minimum before engaging a QI, and during that time you're holding Austin as individual property with no active marketing. After 60 days you can start your exchange. If you've got a Dallas property teed up, you structure the timeline so the contract and closing happen after the exchange starts, not before. Does that timeframe actually work for the Dallas opportunity, or is the seller pushing for a faster close?
🏢 Client 2026-03-28 12:03
We're going to dissolve the partnership in February with a formal liquidation that distributes the Austin property to me and cash to my co-investors, wait 60 days, and then I'll engage a QI and execute the 1031 exchange into the Dallas property. The key risk is that the IRS will argue the distribution and exchange were pre-planned as a single transaction and collapse them under step-transaction doctrine, which would blow up the deferral entirely. I'll have counsel draft the partnership resolution and liquidation plan this week showing the business reasons for dissolution without any reference to the 1031 exchange.
🔍 IRS Examiner 2026-03-28 12:04
# IRS EXAMINATION MEMORANDUM ## Large Business & International Division – Partnership Specialty **Taxpayer:** [Client - Austin Property LLC Matter] **Examination Period:** Tax Year of Distribution and Exchange **Examiner:** [Revenue Agent] **Date:** [Current Date] --- ### ISSUE Whether a partnership distribution of appreciated real property followed 60 days later by the distributee partner's Section 1031 exchange constitutes an integrated transaction that should be recharacterized as a partnership-level sale, thereby disqualifying the taxpayer from like-kind exchange treatment. Whether the distribution qualies as a bona fide liquidation under Section 731 or is properly characterized as part of a prearranged plan to facilitate individual exchange treatment while providing cash boot to non-exchanging partners. ### GOVERNMENT'S POSITION The government will assert that the partnership distribution and subsequent Section 1031 exchange were interdependent steps in a prearranged plan to circumvent the limitation that partnerships cannot provide differential tax treatment to partners in a single exchange transaction. The taxpayer's own statements establish that (1) replacement property in Dallas was identified and under serious consideration months before the distribution, (2) co-investors had a clear expectation of cash liquidity that the taxpayer explicitly acknowledged, (3) the 60-day waiting period was a deliberate tax-planning buffer rather than a period of genuine business indecision, and (4) the dissolution would not have occurred but for the taxpayer's desire to execute an individual exchange while simultaneously cashing out partners who did not want exchange treatment. Under the step-transaction doctrine, the partnership should be treated as the transferor of the Austin property, which means the transaction fails Section 1031 requirements because the partnership distributed boot to some partners while attempting to provide like-kind property to others. The substance of this transaction is a partnership sale with selective tax deferral, not a legitimate liquidation followed by an independent exchange decision. ### PROPOSED ADJUSTMENT The government will disallow the Section 1031 exchange treatment entirely and recognize the full $6.6 million gain (60% of the $11 million appreciation) to the taxpayer in the year of the partnership distribution. The taxpayer's basis in the Austin property will be adjusted to fair market value as of the distribution date, and the subsequent transfer to the qualified intermediary and acquisition of Dallas property will be treated as a taxable sale followed by a purchase with no deferral available. The co-investors' cash distributions will be respected as taxable liquidating distributions, but the asymmetric tax treatment the taxpayer sought to achieve will be denied. We will assert accuracy-related penalties under Section 6662(a) at 20% of the underpayment, given that the taxpayer proceeded with the transaction despite being explicitly advised of step-transaction risks and the taxpayer's own statements demonstrate awareness that the 60-day gap was a compliance strategy rather than a reflection of genuine business separation between the distribution and exchange decisions. ### BEST SUPPORTING AUTHORITY **IRC Section 1031(a)(1) and Treasury Regulation 1.1031(a)-1(a)(1):** Like-kind exchange treatment requires that the taxpayer be the transferor of the relinquished property and the acquirer of the replacement property; where step-transaction doctrine applies to treat the partnership as the true transferor, the individual partner cannot qualify for Section 1031 treatment because the partner is not the exchanger—the partnership is. **Revenue Ruling 99-6, Situation 1:** While this ruling provides a safe harbor for certain partnership distributions followed by individual exchanges, it requires a complete liquidation undertaken for bona fide business purposes, and the ruling explicitly states that if the distribution and exchange are component parts of a single integrated plan, the IRS will apply step-transaction principles to recharacterize the transaction; the taxpayer's statements that the 60-day waiting period was a tax-planning strategy and that replacement property was under consideration before distribution demonstrate this is not the independent-action fact pattern the ruling contemplates. **Step-Transaction Doctrine (binding commitment test and interdependence test):** Courts have consistently held that where a series of formally separate steps are prearranged to achieve an ultimate result, the government may disregard the intermediate steps and tax the transaction according to its substance; here, the taxpayer's identification of Dallas replacement property months before distribution, explicit discussions with co-investors about their cash exit, and acknowledgment that the 60-day gap was chosen for tax reasons rather than business reasons establish that the distribution was undertaken as a necessary step to facilitate the exchange rather than as an independent liquidation decision. ### WEAKNESSES The taxpayer's strongest defense is the six-month history of discussions regarding divergent investment objectives between the taxpayer and co-investors, which predates the specific 1031 planning and provides colorable evidence of independent business motivation for the partnership dissolution.
Quality Review 4.3 / 5 by Vera
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Citation Accuracy 5
Fact Pattern 5
Advisor Disagreement 5
Client Realism 4
IRS Examiner 4
Educational Value 4
⚠ Flagged Citations None flagged. All citations check out—IRC §§ 731, 732, 707, 1031, 1031(f), 6662(a); Treas. Reg. §§ 1.1031(k)-1(c)(4), 1.1031(a)-1(a)(1); Revenue Ruling 99-6 (including the specific Situation 1 vs. Situation 2 distinction). The case law references to step-transaction doctrine and Tax Court precedent are appropriately generic rather than fabricated.
What Worked The advisor disagreement is exceptional—Junior focuses on worst-case audit exposure and timeline contamination, while Senior advocates for structure defensibility with proper documentation and waiting periods. Both positions have merit, creating genuine tension that mirrors real advisory team dynamics. The Client's pushback is sophisticated and impatient in exactly the right way ("which is it—does this work or doesn't it?"), and the fact pattern feels pulled from an actual practice (doctor and software executive as passive co-investors is a nice realistic touch).
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