Rev. Proc. 2003-39

Part III. Administrative, Procedural, and Miscellaneous
Earned Income Credit and
Tribal Child Placements

Rev. Proc. 2003–39
SECTION 1. PURPOSE

Notice 2003–28
This notice clarifies the application of
the earned income credit for a taxpayer caring for a child placed with the taxpayer by
an Indian tribal government (ITG) or an organization an ITG has authorized to place
Indian children. Section 32(a)(1) provides
for an earned income credit in the case of
an eligible individual. Section 32(c)(1)(A)(i)
defines an eligible individual as an individual who has a qualifying child for the
taxable year. Section 32(c)(3) defines a
qualifying child as one who satisfies a relationship test, a residency test, and an age
test. Under § 32(c)(3)(B)(i)(III), an eligible foster child satisfies the relationship
test. Pursuant to § 32(c)(3)(B)(iii), for taxable years beginning after December 31,
1999, an eligible foster child includes a
child placed with the taxpayer by an authorized placement agency whom the taxpayer cares for as the taxpayer’s own child
(and, for taxable years beginning before
January 1, 2002, who has the same principal place of abode as the taxpayer for the
taxpayer’s entire taxable year). For purposes of § 32(c)(3)(B)(iii), an authorized
placement agency includes an ITG and also
includes an organization an ITG has authorized to place Indian children (Indian
tribal organization). Thus, for taxable years
beginning after December 31, 1999, a child
placed with a taxpayer by an ITG or an Indian tribal organization qualifies as an eligible foster child, provided the taxpayer
cares for the child as his or her own, and,
for taxable years beginning before January 1, 2002, the child has the same principal place of abode as the taxpayer for the
taxpayer’s entire taxable year.
The principal author of this notice is
Sylvia F. Hunt of the Office of the Division Counsel/Associate Chief Counsel (Tax
Exempt and Government Entities). For further information regarding this notice, contact Ms. Hunt at (202) 622–6080 (not a tollfree call).
26 CFR 1.1031(a)–1: Property held for productive
use in trade or business or for investment;
1.1031(k)–1: Treatment of deferred exchanges.

2003–22 I.R.B.

This revenue procedure provides safe
harbors with respect to programs involving ongoing exchanges of tangible personal property using a single intermediary,
as described in section 3.02 of this revenue procedure (an “LKE Program”).
SECTION 2. BACKGROUND
.01 Section 1031(a)(1) provides that no
gain or loss is recognized on the exchange
of property held for productive use in a
trade or business or for investment (“relinquished property”) if the property is exchanged solely for property of like kind that
is to be held either for productive use in a
trade or business or for investment (“replacement property”).
.02 Section 1031(a)(3) provides that replacement property received by the taxpayer is not treated as like-kind property if
it: (a) is not identified as property to be received in the exchange on or before the day
that is 45 days after the date on which the
taxpayer transfers the relinquished property (the “45-day identification period”); or
(b) is received after the earlier of the date
that is 180 days after the date on which the
taxpayer transfers the relinquished property, or the due date (determined with regard to extensions) for the transferor’s
federal income tax return for the year in
which the transfer of the relinquished property occurs.
.03 Section 1.1031(k)–1(a) defines a deferred exchange as an exchange in which,
pursuant to an agreement, the taxpayer
transfers relinquished property and subsequently receives replacement property. In
order to constitute a deferred exchange, the
transaction must be an exchange (i.e., a
transfer of property for property, as distinguished from a transfer of property for
money).
.04 Section 1.1031(k)–1(c)(1) provides
that any replacement property that is received by the taxpayer before the end of the
45-day identification period will be treated
in all events as identified before the end of
the 45-day identification period.
.05 Section 1.1031(k)–1(f)(1) provides
that if a taxpayer actually or constructively receives money or other property in

971

the full amount of the consideration for the
relinquished property before the taxpayer
actually receives the replacement property, the transaction will constitute a sale
and not a deferred exchange, even though
the taxpayer may ultimately receive replacement property.
.06 Section 1.1031(k)–1(g) sets forth safe
harbors involving a qualified escrow account, a qualified trust, or a qualified intermediary, the use of which will result in
a determination that the taxpayer is not in
actual or constructive receipt of money or
other property for purposes of § 1031 and
the regulations.
.07 Section 1.1031(k)–1(g)(4)(iii) requires that, for an intermediary to be a
qualified intermediary, the intermediary must
enter into a written “exchange” agreement
with the taxpayer and, as required by the
exchange agreement, acquire the relinquished property from the taxpayer, transfer the relinquished property, acquire the
replacement property, and transfer the replacement property to the taxpayer.
.08 Section 1.1031(k)–1(g)(4)(iv) provides that the intermediary will be treated
as acquiring or transferring property, as the
case may be, if the intermediary (either on
its own behalf or as the agent of any party
to the transaction) enters into an agreement for the acquisition or transfer of property and, pursuant to that agreement, the
property is transferred.
.09 Section 1.1031(k)–1(g)(4)(v) provides that an intermediary will be treated
as entering into an agreement for the acquisition or transfer of property if the taxpayer’s rights in the agreement are assigned
to the intermediary, and the other parties to
the acquisition or transfer agreement are notified in writing of the assignment on or before the date of the relevant transfer of
property (the “Assignment Safe Harbor”).
Under the Assignment Safe Harbor, there
is no requirement that the taxpayer also assign or delegate its obligations arising under the agreement.
.10 Section 1.1031(k)–1(g)(6) provides
that an agreement with an escrow holder,
trustee or qualified intermediary must expressly limit the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain
the benefits of money or other property held
in the qualified escrow or trust or by the
qualified intermediary.

June 2, 2003

.11 Sections 1.1031(k)–1(g)(3) and (4)
provide that the application of the safe harbor requires that in the case of a qualified escrow account, a qualified trust, or a
qualified intermediary, the escrow holder,
trustee, or intermediary must not be a “disqualified person.”
.12 Section 1.1031(k)–1(k)(2) provides
that a person that is the agent of the taxpayer at the time of the transaction is a disqualified person. For this purpose, a person
who has acted as the taxpayer’s employee,
attorney, accountant, investment banker or
broker, or real estate agent or broker within
the two-year period ending on the date of
the transfer of the first of the relinquished
properties is treated as an agent of the taxpayer at the time of the transaction. Solely
for purposes of §1.1031–1(k)(2), performance of the following services will not be
taken into account: (a) services for the taxpayer with respect to exchanges of property intended to qualify for nonrecognition
of gain or loss under § 1031; and (b) routine financial, title insurance, escrow, or trust
services for the taxpayer by a financial institution, title insurance company, or escrow company.
.13 The Service and Treasury Department have determined that it is in the best
interest of sound tax administration to provide taxpayers with guidance regarding the
qualification of LKE Programs under
§ 1031. Accordingly, this revenue procedure provides safe harbors that clarify the
application of § 1031 and the regulations
thereunder to LKE Programs.
SECTION 3. SCOPE AND
DEFINITIONS
.01 Exclusivity. This revenue procedure provides safe harbors for certain aspects of the qualification under § 1031 of
certain exchanges of property pursuant to
LKE Programs. The principles set forth in
sections 4 through 6 of this revenue procedure have no application to any federal
income tax determinations other than determinations that involve LKE Programs
qualifying for one or more of the safe harbors. For a transaction to qualify under
§ 1031, it must also satisfy the requirements of § 1031 for which safe harbors are
not provided in this revenue procedure (e.g.,
whether property involved in an exchange
is considered like-kind property within the
meaning of § 1031).

June 2, 2003

.02 LKE Program. For purposes of this
revenue procedure, an “LKE Program” is
an ongoing program involving multiple exchanges of 100 or more properties. Although LKE Programs may differ in various
ways, an LKE Program must have all of the
following characteristics:
(1) The taxpayer regularly and routinely
enters into agreements to sell tangible personal property as well as agreements to buy
tangible personal property;
(2) The taxpayer uses a single, unrelated intermediary to accomplish the exchanges in the LKE Program;
(3) The taxpayer and the intermediary
enter into a written agreement (“master exchange agreement”);
(4) The master exchange agreement expressly limits the taxpayer’s rights to receive, pledge, borrow, or otherwise obtain
the benefits of money or other property held
by the intermediary as provided in
§ 1.1031(k)–1(g)(6);
(5) In the master exchange agreement,
the taxpayer assigns to the intermediary the
taxpayer’s rights (but not necessarily its obligations) in some or all of its existing and
future agreements to sell relinquished property and/or to purchase replacement property;
(6) The taxpayer provides written notice of the assignment to the other party to
each existing and future agreement to sell
relinquished property and/or to purchase replacement property;
(7) The taxpayer
(a) implements a process that identifies potential replacement property or properties before the end of the identification
period for the relinquished property or group
of relinquished properties of which it is disposing in each exchange,
(b) complies with the identification requirement by receiving replacement property or properties before the end of the 45day identification period, or
(c) satisfies the identification requirements by a combination of the approaches
in (a) and (b);
(8) The taxpayer implements a process
for collecting, holding, and disbursing funds
(which may include the use of joint taxpayer and intermediary bank accounts, or
accounts in the name of a third party for
the benefit of both the taxpayer and the intermediary) that ensures that the intermediary controls the receipt, holding, and
disbursement of all funds to which the in-

972

termediary is entitled (i.e., proceeds from
the sale of relinquished properties);
(9) Relinquished property or properties that are transferred are matched with
replacement property or properties that are
received in order to determine the gain, if
any, recognized on the disposition of the relinquished property and to determine the basis of the replacement property; and
(10) The taxpayer recognizes gain or loss
on the disposition of relinquished properties that are not matched with replacement properties, and the taxpayer takes a
cost basis in replacement properties that are
received but not matched with relinquished
properties.
A taxpayer may conduct more than one
LKE Program simultaneously. In such a
case, each LKE Program is evaluated separately for purposes of determining whether
that LKE Program qualifies for the safe harbors of this revenue procedure.
.03 No Inference. The Service recognizes that exchanges of property pursuant
to LKE Programs may qualify for nonrecognition treatment under § 1031 although
they fall outside the safe harbors provided
in this revenue procedure. No inference is
intended with respect to the federal income tax treatment of transfers of relinquished property and acquisitions of
replacement property that do not satisfy the
terms of the safe harbors provided in this
revenue procedure.
.04 Scope of Safe Harbors. Each of the
paragraphs under sections 4, 5, and 6 of this
revenue procedure is considered a separate and distinct safe harbor. Therefore, a
taxpayer who fails to qualify for the benefits of one safe harbor may nevertheless
qualify for the benefits of another safe harbor.
SECTION 4. EXCHANGES OF
RELINQUISHED PROPERTY AND
REPLACEMENT PROPERTY
.01 Separate and Distinct Exchanges. In
the case of an LKE Program, the taxpayer’s transfer of each relinquished property or group of relinquished properties and
the taxpayer’s corresponding receipt of each
replacement property or group of replacement properties with which the relinquished
property or group of relinquished properties has been matched by the taxpayer is
treated as a separate and distinct exchange
for purposes of § 1031. The determination of whether a particular exchange quali-

2003–22 I.R.B.

fies under § 1031 is made without regard
to any other exchange. Thus, if a particular exchange of a relinquished property or
group of relinquished properties for a replacement property or group of replacement properties pursuant to an LKE
Program fails to qualify under § 1031, such
failure will not affect the application of
§ 1031 to any other exchange pursuant to
the LKE Program.
.02 45-day Identification Period. Replacement property that is received within
the 45-day identification period or that is
otherwise properly identified as provided in
§ 1.1031(k)–1(c) is treated as satisfying the
requirement of § 1031(a)(3) that replacement property be identified, notwithstanding that it may not be matched with
relinquished property until after the end of
the 45-day identification period. The replacement property must, however, be
matched no later than the due date (determined with regard to extensions) of the taxpayer’s return.
SECTION 5. ACTUAL OR
CONSTRUCTIVE RECEIPT OF
MONEY OR OTHER PROPERTY
For purposes of this section, any requirement that the taxpayer transfer money
or other property to the qualified intermediary will be deemed to be satisfied if the
amount of money held by the qualified intermediary and the amount of money in any
joint account (as described in § 5.02 of this
revenue procedure) equals or exceeds the
amount of proceeds from the sale of relinquished property (including the amount that
is required to be transferred by the taxpayer) that has not yet been used to acquire replacement property.
.01 Receipt of Checks and Other Negotiable Instruments. A taxpayer engaged in
an LKE Program will not be considered to
be in actual or constructive receipt of money
or other property as a result of processing a check or other negotiable instrument made payable to a person other than
the taxpayer if:
(1) The check or other negotiable instrument has not been endorsed by the person to whom the check or other negotiable
instrument is made payable;
(2) The person to whom the check or
other negotiable instrument is made payable is not a disqualified person as defined in § 1.1031(k)–1(k); and

2003–22 I.R.B.

(3) The check or other negotiable instrument is forwarded to or for the benefit of a qualified intermediary or deposited
into an account in the name of the qualified intermediary, a joint account, or an account in the name of a third party (other
than a disqualified person as defined in
§ 1.1031(k)–1(k)) for the benefit of both the
taxpayer and the qualified intermediary.
.02 Joint Accounts. A taxpayer engaged
in an LKE Program will not be considered to be in actual or constructive receipt of proceeds from the sale of
relinquished property deposited into or held
in a joint bank, trust, escrow, or similar account in the name of the taxpayer and the
qualified intermediary, or in an account in
the name of a third party (other than a disqualified person as defined in § 1.1031(k)–
1(k)) for the benefit of both the taxpayer
and the qualified intermediary, if:
(1) The account is used to collect, hold,
and/or disburse proceeds arising from the
sale of relinquished property for the benefit of the qualified intermediary;
(2) The agreement setting forth the terms
and conditions with respect to the account
requires authorization from the qualified intermediary to transfer proceeds from the sale
of relinquished properties out of the account; and
(3) The agreement setting forth the terms
of the taxpayer’s and qualified intermediary’s rights with respect to, or beneficial interest in, the account expressly limits the
taxpayer’s rights to receive, pledge, borrow, or otherwise obtain the benefits of proceeds from the sale of relinquished property
held in the joint account as provided in
§ 1.1031(k)–1(g)(6).
The account may also be used by the
parties for other purposes provided that such
use does not undermine the qualified intermediary’s right to control the proceeds
from the sale of relinquished property.
.03 Funds Netting. A taxpayer engaged
in an LKE Program will not be considered to be in actual or constructive receipt of money or other property as a result
of transferring relinquished property solely
because an amount owed by the taxpayer
to the buyer (other than a lease security deposit) is netted against the sales price of the
relinquished property, provided that, as required by the master exchange agreement,
funds equal to the full amount of sales proceeds from the relinquished property are
transferred to or for the benefit of the quali-

973

fied intermediary by the opening of the next
day’s business. Likewise, a taxpayer acquiring replacement property in a likekind exchange will not be considered to be
in actual or constructive receipt of money
or other property solely because an amount
owed by the seller to the taxpayer is netted against the purchase price of the property and the qualified intermediary transfers
to the taxpayer funds in an amount equal
to the amount owed by the seller to the taxpayer so that the qualified intermediary expends the full amount of the purchase price
obligation for the replacement property.
.04 Taxpayer As Lender to Purchaser. If
a taxpayer that is engaged in an LKE Program lends money to the buyer for the purchase of the taxpayer’s relinquished
property, the taxpayer’s receipt of the buyer’s promissory note or other evidence of
indebtedness will not be considered actual or constructive receipt of money or
other property if:
(1) The taxpayer makes similar loans in
the ordinary course of its business operations;
(2) The buyer is not obligated to obtain financing from the taxpayer for the purchase of the relinquished property, but rather
is free to borrow the funds from another
lender;
(3) The taxpayer’s loan to the buyer is
an arm’s-length transaction at the prevailing market terms; and
(4) As required by the master exchange
agreement, the taxpayer promptly transfers funds equal to the loan proceeds (plus
a market rate of interest on such amount for
the period between the date of the sale of
the relinquished property and the date of the
transfer of the loan proceeds to the qualified intermediary) to or for the benefit of
the qualified intermediary.
05. Application of Lease Security Deposit To Purchase Price. In the case of a
taxpayer that engages in an LKE Program
and is the lessor of the property being purchased by the buyer-lessee, the buyerlessee’s application of its lease security
deposit to the purchase price of the relinquished property will not be considered actual or constructive receipt of money or
other property provided that, as required by
the master exchange agreement, the taxpayer promptly transfers funds equal to the
lease security deposit (plus a market rate
of interest on such amount for the period
between the date of the sale of the relin-

June 2, 2003

quished property and the date of the transfer of the security deposit to the qualified
intermediary) to or for the benefit of the
qualified intermediary.
SECTION 6. DEFINITION OF
QUALIFIED INTERMEDIARY
.01 In General. For purposes of determining whether an intermediary is a disqualified person in the context of an LKE
Program, the intermediary will not fail to
be a qualified intermediary merely because the intermediary:
(1) is assigned the taxpayer’s rights in
its agreements to sell relinquished properties that ultimately are not matched with replacement properties under the taxpayer’s
LKE Program;
(2) is assigned the taxpayer’s rights in
its agreements to buy replacement properties that ultimately are not matched with relinquished properties under the taxpayer’s
LKE Program;
(3) receives funds with respect to the
transfer of relinquished property that ultimately is not matched with replacement
property under the taxpayer’s LKE Program; or
(4) pays funds with respect to the acquisition of replacement property that ultimately is not matched with relinquished
property under the taxpayer’s LKE Program.

June 2, 2003

.02 Assignment Safe Harbor. The taxpayer’s assignment in the master exchange
agreement to the intermediary of the taxpayer’s rights (but not necessarily its obligations) in some or all of its existing and
future agreements to sell relinquished property and/or to purchase replacement property, and the taxpayer’s written notice of the
assignment to the other party to each agreement to sell relinquished property and/or to
purchase replacement property on or before the date of the relevant transfer of property, will be effective to satisfy the
Assignment Safe Harbor and notice requirement under § 1.1031(k)–1(g)(4)(v).
SECTION 7. PAPERWORK
REDUCTION ACT
The collections of information contained
in this revenue procedure have been reviewed and approved by the Office of Management and Budget in accordance with the
Paperwork Reduction Act (44 U.S.C. 3507)
under control number 1545–1834.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless
the collection of information displays a valid
control number.
The collections of information in this
revenue procedure are in sections 5 and 6.
This information is required by the Service to provide safe harbors under § 1031
to taxpayers participating in LKE Pro-

974

grams for federal income tax purposes. The
likely respondents are finance companies;
subsidiaries of manufacturers; or banks that
purchases retail leases and retail installment sale contracts from dealers of automobiles or other types of equipment.
The estimated total annual reporting and
recordkeeping burden is 8,600 hours.
The estimated annual burden per
respondent/recordkeeper varies from 45
minutes to 75 minutes, depending on individual circumstances, with an estimated
average of 60 minutes. The estimated number of respondents and recordkeepers is
8,600.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required by
26 U.S.C. 6103.
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue procedure is Elizabeth Kaye of the Office of
Associate Chief Counsel (Income Tax and
Accounting). For further information regarding this revenue procedure, contact
Ms. Kaye at (202) 622–4920 (not a tollfree call).

2003–22 I.R.B.