Taxes and Business Decisions 339the two parcels of real estate? It would seem that a taxable sale of the one fol-
lowed by a purchase of the other will be necessary in almost every case.
Practitioners have, however, devised a technique to overcome this prob-
lem, known as the three-corner exchange. In a nutshell, the transaction is
structured by having the proposed buyer of Morris’s old facility use his pur-
chase money (plus some additional money contributed by Morris) to acquire
the facility Morris wants to buy, instead of giving that money to Morris. Having
thus acquired the new facility, he then trades it to Morris for Morris’s old facil-
ity. When the dust settles, everyone is in the same position he would have oc-
cupied in the absence of an exchange. The former owner of the new facility
has his cash; the proposed buyer of Morris’s old facility now owns that facility
and has spent only the amount he proposed to spend; and Morris has traded the
old facility plus some cash for the new one. The only party adversely affected is
the IRS, which now must wait to tax the gain in Morris’s old facility until he
sells the new one.
This technique appears so attractive that when practitioners first began
to use it, they attempted to employ the technique even when the seller of the
old facility had not yet found a new facility to buy. They merely had the buyer
of the old facility place the purchase price in escrow and promise to use it to
buy a new facility for the old owner as soon as she picked one out. Congress has
since limited the use of these so-called delayed like-kind exchanges by requir-
ing the seller of the old facility to identify the new facility to be purchased
within 45 days of the transfer of the old one and by further requiring that the
exchange be completed within six months of the first transfer.
DIVIDENDS
Some time after Morris engineered the acquisition of the molding facility, the
hiring of Brad to run it, and the consolidation of his company’s operations
through the like-kind exchange, Plant Supply was running smoothly and prof-
itably enough for Morris’s thoughts to turn to retirement. Morris intended to
have a comfortable retirement funded by the fruits of his lifelong efforts on
behalf of the company, so it was not unreasonable for him to consider funding
his retirement through dividends on what would still be his considerable hold-
ings of the company’s stock. Although Brad already held some stock and Morris
expected that Lisa and Victor would hold some at that time, he still expected to
have a majority position and thus sufficient control of the board of directors to
ensure such distributions.
Morris also knew enough about tax law, however, to understand that such
distributions would cause considerable havoc from a tax viewpoint. We have al-
ready discussed how characterizing such distributions as salary or bonus would
avoid double taxation, but with Morris no longer working for the company such
characterization would be unreasonable. These payments would be deemed
dividends on his stock. They would be nondeductible to the corporation (if it