Alderson v. Commissioner

Alderson v. Commissioner

317 F.2d 790 (9th Cir. 1963)

Facts

Petitioners owned a property entitled the “Buena Park” property. Petitioners formed a deal with Alloy Die Casting Company (“Alloy”) by which petitioners were going to sell the Buena Park property. Shortly thereafter, petitioners discovered a different property (“Salinas”) which they wanted to obtain in exchange for Buena Park. Petitioners arranged a deal with Alloy whereby Alloy would purchase Salinas and then exchange it with Salinas. Petitioners would give Alloy any discrepancy in the form of cash. If Alloy could not acquire the property by September 11, 1957, petitioners would sell Buena Park to them and then purchase Salinas. Alloy did purchase Salinas and the properties were exchanged.

Tax Court Ruling

The tax court held that the disposal of Buena Park and acquisition of Salinas did not constitute an exchange under § 1031(a). The court reasoned that petitioners intended from the outset to exchange their property for another of a like kind and that Alloy acquired title to the Salinas property solely to exchange it for Buena Park. [ Alderson v. Commissioner, 317 F.2d 790, 792 (9th Cir. 1963)] The court concluded that Buena Park was sold to Alloy and that petitioners purchased the Salinas property due to their escrow arrangement. [ Id. at 793.] Thus, the motives of petitioners indicated a sale and not an exchange.

Issue

Was the transaction a sale of the Buena Park property and then a subsequent purchase of Salinas, or was it a like-kind exchange under I.R.C. § 1031?

Appellate Court Holding

This was a like-kind exchange subject to § 1031 treatment. The Tax Court’s holding is reversed.

Reasoning

(Note: The court did not discuss whether the properties were in fact like-kind because the point was never refuted by the Tax Court).

The court held that because the properties were indeed exchanged, they are subject to nonrecognition of gain under § 1031. First, the court used the case of Commissioner v. Court Holding Co. [ 324 U.S. 331 (1945).] There, it was determined that for tax purposes:

The incidence of taxation depends upon the substance of a transaction. The tax consequences which arise from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step, from the commencement of negotiations to the consummation of the sale, is relevant. [ Id. at 794 (citing Commissioner, at 331).]

That is, what was the substantive transaction? Here, it was an exchange of like-kind properties. The deeds were exchanged September 3 or 4, 1957, prior to when petitioners would have sold Buena Park. The sale arrangement never came to fruition.

The Commissioner argued that Gregory v. Helvering [ 293 U.S. 465 (1935).] supported their position. There, the court held that “the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended.” [ Id. at 469.] Here, the statute intends that only like-kind properties that are exchanged receive favorable treatment under § 1031. [ I.R.C. § 1031 (2004).] This is exactly what the parties intended so their motives are in accord with the statute.

Finally, the court used the holding from Mercantile Trust Company of Baltimore v. Commissioner. [ 32. B.T.A. 82 (1935).] There, a similar transaction occurred. The petitioner wanted to exchange a property for one that had yet to be purchased by the other party. The deal provided that if the other party could not acquire the desired property by a certain date, petitioner would sell his property. The other property was acquired and there was an exchange. The court held: “ The above-mentioned agreement … evidenced an intention to exchange the … property, if certain conditions were met, and to sell it, if those conditions were not met. The property was … exchanged. That fact is controlling here.” [ Id. at 87.] Again, the facts of this case are in accord with that holding.

Significance

So long as an exchange of properties meets all the like-kind requirements, it does not matter whether one of the properties was purchased solely for exchange purposes.

Notes