March 3, 2004 - Phil Hodgen

Tax-deferred exchange perils: the unscrupulous intermediary

It is possible to sell out of one real estate investment and acquire another without incurring tax. This is called a tax-deferred exchange, or is sometimes referred to by the operative tax provision–Section 1031.

One frequent feature of such a transaction is that you will park the cash from selling your property with a third party, who then uses it to buy your desired new property and deed it to you. This person is called an intermediary. You do this because if you take the cash in your pocket you trigger tax liability. If you don’t touch the cash, you don’t pay tax on sale of your property.

There’s an obvious problem. What if the intermediary steals your money? It happens from time to time. Moral of the story: pick highly stable, reputable outfits. Look at the amount of money involved and ask yourself where you’d want to keep it safe from predators and creditors, in-laws and outlaws.

Here’s a press release from the U.S. Attorney’s Office about one such case. The intermediary used $9 million to trade options. Surprise, he lost the money. Now he’s looking at jail time. Here’s the text of the press release:


Boston, MA… A federal grand jury returned an Indictment late yesterday charging the former Chairman of Benistar Property Exchange Trust Company with mail and wire fraud in connection with a scheme that resulted in the misappropriation of approximately $9 million in client funds.

United States Attorney Michael J. Sullivan and Kenneth W. Kaiser, Special Agent in Charge of the Federal Bureau of Investigation in New England, announced that DANIEL E. CARPENTER, age 48, of Simsbury, Connecticut, was charged in a nineteen-count Indictment with mail and wire fraud.

According to the Indictment, CARPENTER served as Chairman of both Benistar Property, a now-defunct corporation formerly based in Newton, Massachusetts, and of its parent corporation, Benistar, Ltd., based in Simsbury, Connecticut. Benistar Property was engaged in the business of serving as an intermediary in property exchanges performed under Section 1031 of the Internal Revenue Code. Such exchanges permit property owners to defer capital gains tax that would otherwise be owed upon the sale of property by rolling over the proceeds of the sale into the purchase of replacement property. In its capacity as intermediary, Benistar Property pledged to hold the proceeds from the initial sale in escrow until its clients requested that the funds be disbursed to purchase replacement property.

The Indictment charges CARPENTER with fraudulently misappropriating approximately $9 million in client funds that had been entrusted to Benistar Property to hold in escrow. According to the Indictment, instead of holding the funds safely in escrow, CARPENTER used the money to engage in high risk, speculative trading in the options market. CARPENTER lost millions of dollars through his trading activity. By the time Benistar Property ceased operations, over $9 million in client money was gone.

If convicted, CARPENTER faces up to 5 years’ imprisonment on each of the fraud counts, together with a fine of up to $250,000 and restitution to the clients of Benistar Property.

The case was investigated by the Federal Bureau of Investigation and is being prosecuted by Assistant U.S. Attorney Michael J. Pineault in Sullivan’s Economic Crimes Unit.

Tax and Trusts