California OTA Rules Prepayment Fee, Legal Costs as Taxable Boot

The California Office of Tax Appeals (OTA) partially granted the taxpayer’s consolidated appeals. In 2016, the taxpayer exchanged real property in Pasadena, California, for replacement property in Renton, Washington, obtaining loans totaling $54 million from American National Insurance Company (ANIC) to finance the acquisition. The key issues were whether certain payments made by the taxpayer to ANIC, including a 1 percent prepayment fee for ANIC’s legal fees, constituted a taxable “boot” in the like-kind exchange, and whether interest could be abated. The Office of Tax Appeals found that the prepayment fee and legal fees paid were costs of obtaining financing ...