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. 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.
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 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.” Here, the statute intends that only like-kind properties that are exchanged receive favorable treatment under § 1031. 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. 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.” Again, the facts of this case are in accord with that holding.
Read more about this topic: Alderson V. Commissioner
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