1031 Scam or Fraud?

[Marc Thompson]

I have a question about 1031 fraud.

If a seller signs a form 1031 for a million dollars, but the money was never transferred to the seller from the escrow company, and the buyer never planned to allow that to happen (in fact the money might not have even been in escrow), does that sound like fraud?

My brother was involved in a business deal that went sour. I have reason to believe that the buyer planned to rip my brother off from the beginning.

My brother offered a kettle corn business for sale to an individual who previously owned a chain of Subway stores (he sold the stores and was looking to re-invest). The sale consisted of a transferable contract for several vending locations, a recipe, and of course the vending equipment (including trailers, poppers, etc.). Total value of the real property (equipment) was far less than $100k while everything else was intangible property, but the buyer offered close to $900k.

The buyer's lawyer wrote up a purchase contract (that had several convenient loopholes by the way) and apparently my brother did not have a lawyer look it over before he signed the contract.

Prior to the transfer of money, the buyer asked my brother to sign two 1031 forms for almost a million dollars. In exchange, the buyer was supposed to receive real property from my brother (based on what I am reading in the 1031 form). But most of his "property" (or business value) consisted of intangible assets (verbal contracts for locations, a kettle corn recipe, etc.).

Unfortunately my brother didn't understand what he was signing and he obliged.

The buyer claimed that because he sold his chain of Subway stores that he needed the 1031 to "gain access to the funds". Again, my brother didn't understand what he was signing, and in fact he never heard of a 1031 before.

In the end, and almost immediately after my brother signed the documents, the buyer backed out over what we considered to be almost frivolous reasons to escape the contract. The buyer even extorted my brother by threatening criminal prosecution for things that didn't even apply to my brother.

The buyer scared my brother into signing a release document that ended the purchase contract. But the 1031 still exists and we don't see how he can void it.

That was a long story but to get to the point, my brother wants to know how he can reverse those 1031's so that the other party doesn't benefit by them, and also if this sounds like fraud, my brother wants to know where he can report this. Would it be the FBI, Attorney General, or the IRS? Or has no fraud actually been committed? It seems to me that the buyer conspired to commit fraud at least if he could somehow benefit from the 1031. I honestly don't understand how 1031 works well enough even after reading up on it.

There's more to this story and I'm just keeping it brief, but there are mysterious bankruptcies and other facts in this failed transaction, all of which helped the buyer escape or at least scare my brother into signing a release.