Bend 1031 exchange files for Chapter 11
Clients could recover some of their money but face tax liabilities
By Andrew Moore
December 23. 2008
Bend-based Summit Accommodators Inc., which does business as Summit 1031 Exchange, filed for Chapter 11 bankruptcy protection Friday and was placed in receivership, saying it’s short approximately $14.2 million out of a total of $27.8 million due its clients, according to a statement posted on the company’s Web site.
The company, which has operations in eight mostly Western states, closed its Bend office Dec. 15, citing a cash crunch. The status of other Summit offices listed online was unclear.
Mark Neuman, president of Summit, said Monday that he could not comment on the bankruptcy.
The company’s bankruptcy attorney, Susan Ford of Sussman Shank LLP in Portland, referred all questions to the online statement.
In the statement, the company acknowledges it loaned money from its clients to Inland Capital Corp., a company owned by the same owners as Summit, which in turn loaned the money to various entities and individuals involved in real estate investments, primarily in Central Oregon.
With the downturn of the real estate market, the entities and individuals who received loans from Inland were unable to repay Inland, which in turn was unable to repay Summit, according to the statement. Inland owes Summit $13.7 million.
The majority of the company’s 20 largest unsecured claims are from creditors based outside Central Oregon, according to the company’s bankruptcy petition. Chapter 11 protects a company from creditors while it reorganizes its finances.
“It’s absolutely ruined my life,” said Bert Manuel, of Yuba City, Calif., who is owed $512,232 by Summit, according to the bankruptcy petition filed by the company with the U.S. Bankruptcy Court, District of Oregon.
Manuel had hoped to use the money he entrusted to Summit to purchase a cabin near Lake Tahoe. Now the deal is likely off, and Christmas, too, he said.
“Every present we bought for our kids was around the cabin that we were going to purchase … and everything we have done for this Christmas, including making plans for the family to go up there and spend Christmas, is gone,” Manuel said. “My kids are just devastated.”
Summit facilitated real estate transactions called 1031 exchanges. A 1031 exchange refers to Section 1031 of the federal tax code, which allows the owner of a business or investment property to sell the business or property and defer any capital gains tax if the proceeds are used to purchase a business or investment property of equal or greater value.
Caveats are the purchase must be made 180 days after the sale, and the sale proceeds can’t pass through the owner’s hands, thus requiring a third party to take delivery of the proceeds, hold them until the seller finds another suitable investment and then send the money to the new seller in the buyer’s name.
According to the Internal Revenue Service, these third parties are called qualified intermediaries.
There is no federal oversight of qualified intermediaries, which the industry also calls accommodators. Most states, including Oregon, do not have any regulatory oversight of such companies, either.
Kevin Anselm, chief of enforcement and securities for the Oregon Division of Finance and Corporate Securities, said the department has begun an investigation into Summit.
“We have some questions about the (account) differences and want to know if investors knew that their money was being loaned out,” Anselm said Monday.
When asked if it’s common practice for accommodators to put clients’ exchange funds into real estate, Hugh Pollard, president of the Philadelphia-based Federation of Exchange Accommodators, said, “God, no. Certainly, I would say it’s not a good idea to put (exchange funds) in real estate. To be pretty conservative is the more prudent way to go.”
Because accommodators have roughly 180 days to deliver a client’s money, the funds should be in an investment, such as a money market fund, that can be easily converted into cash, Pollard said.
Summit was listed as a member of FEA until the FEA learned of the company’s issues last week and removed its name from the association’s Web site. The association sent its own letter of inquiry offering to help, but Pollard was not aware if Summit has responded. The help would not include financial aid, Pollard said.
According to Summit’s online statement, under the direction of the Bankruptcy Court and the company’s receiver, Tyrell Vance, of Portland, the real estate investments at issue will be made available to satisfy claims and that it’s the company’s hope “that its assets will be sufficient to satisfy all customers’ and creditors’ claims and is committed to doing so.”
In the statement, the company also said it “deeply regrets the distress and detriment that (its customers) are currently experiencing” and that the company is “committed to complete transparency” to ensure all of its actions are performed to the benefit of its customers.
Vance has taken control of the company and Summit’s previous management team has been replaced, according to the statement. Vance, who is a recognized business crisis manager and court receiver with more than 30 years of experience, will have the authority to investigate all transactions and will manage Summit and all of its assets for the exclusive benefit of Summit and its creditors until all debts are paid in full or all assets have been appropriately liquidated and paid to creditors, the statement said.
Manuel, who said he would not have used Summit as an accommodator if he knew about its real estate investments, has hired three attorneys to help him recover his money. Manuel does not expect much of his money to be returned, which he said is especially bittersweet as the lost funds stemmed from a $75,000 inheritance he received from his father that he built up through business investments.
“I feel sick,” Manuel said.
For Manuel and other Summit clients, the funds at stake are not the end of their concerns. Because the IRS requires funds gained through a 1031 exchange sale to be reinvested in 180 days, money not reinvested is subject to capital gains tax.
Despite the extraordinary circumstances of Summit’s clients, they are still responsible for paying the tax, even if they have lost the total value of their investment, IRS spokesman David Stell said.
“It’s incumbent on the taxpayer that any transaction entered into is reported properly for tax purposes,” said Stell. “It goes back to personal responsibility of the taxpayer.”
Pollard said his association has approached the IRS about extending the deadline for such circumstances, but he said the request fell on deaf ears.
The IRS’s Stell said there is an extension available in the advent of natural disasters.
Pollard said, “You could sort of draw a correlation between that and this and their response is the specific extension is for disasters and nothing covers this sort of thing.”
Andrew Moore can be reached at 541-617-7820 or firstname.lastname@example.org.