taxpayer sellers relinquished property to unrelated party using a qualified intermediary.  Taxpayer then purchases replacement property from related party who does not perform a 1031 exchange.  Taxpayer give related party seller an unsecured unrecorded promissory note and makes no payments.

Qualified intermediary (now acting as tax attorney for taxpayer) convinces related party to cancel promissory note and place property into a newly formed partnership 3 months after transaction.

Needless to say....I have hired an attorney (I am the "related" party) but would love your opinion on this "transaction"

beachgrits:

taxpayer sellers relinquished property to unrelated party using a qualified intermediary.  Taxpayer then purchases replacement property from related party who does not perform a 1031 exchange.  Taxpayer give related party seller an unsecured unrecorded promissory note and makes no payments.

The taxpayer's 1031 exchange will be more than likely disallowed by the IRS because of the related party 1031 exchange.  The first thing that people focus on is that their is a two (2) year holding requirement when their is a related party 1031 exchange.  However, they usually are not aware of Revenue Procedure 2002-83 that essentially prevents the taxpayer from acquiring their like-kind replacement property from a related party unless (1) the related party completes their own 1031 exchange; or (2) the related party ends up paying more tax than what the taxpayer paid; or (3) there is no "basis swapping" involved.  The majority of the transactions that we review do involve basis swapping where the related party "cashes out" but pays relatively little tax otherwise they would generally not do the transaction. 

Qualified intermediary (now acting as tax attorney for taxpayer) convinces related party to cancel promissory note and place property into a newly formed partnership 3 months after transaction.

A qualified intermediary can not be the taxpayer's agent, and a person acting as the taxpayer's tax attorney two years prior to or two years after the 1031 exchange would be considered the taxpayer's agent and therefore a disqualified party.  The taxpayer's 1031 exchange would also be disqualified under this scenario as well.  Why/How did he cancel the note?  A promissory note can not just be cancelled. 

Needless to say....I have hired an attorney (I am the "related" party) but would love your opinion on this "transaction"

I'm glad to see that you have hired an attorney.  That is a very important and necessary step in resolving these issues.