Brooklyn Law School, Legal Studies Paper No. 808 22 UC Law SF Bus. L. J. 81 (2025) 99 Pages Posted: 13 Jan 2026 Last revised: 13 Jan 2026 Brooklyn Law School Date Written: January 12, 2026 Taxpayers have six wins and zero losses in cases that grant nonrecognition to exchanges that occur in proximity to tax-free business transactions (contributions to and distributions from entities) of the exchanged property. Those six cases (the proximate-exchange cases) were decided between 1983 and 1989. From those cases emerged the proximate exchange principle: “a trade of Property A for Property B, both of like kind, may be preceded by the tax-free acquisition of Property A at the front end, or succeeded by a tax-free transfer of Property B at the back end.” Despite the explicit declaration of the proximate-exchange principle and the almost four decades since the last proximate-exchange case was decided, lawyers and other tax advisors continue to caution property owners against doing the transactions that have explicitly been sanctioned by the courts and lead them to alternative structures. One reason advisors may caution against doing proximate exchanges is that proximate-exchange cases and their resulting transactions have been heavily scrutinized over the years. Such analyses appear to disregard the proximate-exchange principle. An equally problematic result of advising against court-sanctioned structures is the advice to engage in one of several pre-packaged alternative structures. Despite their popularity, these alternative structures appear to have escaped scrutiny over years. This Article fills that gap by recounting the overwhelming authority supporting proximate exchanges and turns a critical eye to the alternative structures. Not surprisingly, those alternative structures do not hold up under such scrutiny. The foundation supporting proximate exchanges is the overlapping purposes for granting nonrecognition of gain provided under section 1031 and the partnership tax contribution and distribution rules. When considering structured exchanges, courts and the Internal Revenue Service deviate from traditional tax principles that elevate substance over form and apply a form-driven analysis that is a unique part of section 1031 jurisprudence. No authority applies the form-driven analysis to alternative structures. Alternative structures, which are beyond the form-driven analysis of section 1031 jurisprudence, do not stand up under judicial and other principles. This Article applies substance-over-form principles to the alternative structures and shows that such structures add complexity, transaction costs, and non-tax risks but do not reduce tax risks. Keywords: section 1031, drop-and-swap, swap-and-drop, proximate exchange, temporary resulting entity, section 1031/section 721 transactions, DST to REIT Suggested Citation: Suggested Citation 250 Joralemon Street Brooklyn, NY 11201 United States HOME PAGE: http://www.brooklaw.edu Brooklyn Law School Legal Studies Research Paper Series Subscribe to this free journal for more curated articles on this topic Tax eJournal Subscribe to this fee journal for more curated articles on this topic Tax Law & Policy eJournal Subscribe to this fee journal for more curated articles on this topic Real Estate eJournal Subscribe to this fee journal for more curated articles on this topic Political Economy: Taxation, Subsidies, & Revenue eJournal Subscribe to this fee journal for more curated articles on this topic Entrepreneurship & Law eJournal Subscribe to this fee journal for more curated articles on this topic Tax Law: Practitioner Series eJournal Subscribe to this fee journal for more curated articles on this topic Property, Land Use & Real Estate Law eJournal Subscribe to this fee journal for more curated articles on this topic Corporate Law: LLCs, Close Corporations, Partnerships, & Other Private Enterprises eJournal Subscribe to this fee journal for more curated articles on this topic Randomized Social Experiments eJournal Subscribe to this fee journal for more curated articles on this topic Comparative Political Economy: Fiscal Policy eJournal Subscribe to this fee journal for more curated articles on this topic
Bradley T. Borden (Thu,) studied this question.