Ocmulgee Fields, Inc. v. Comm'r of Internal Revenue

• Decision Date: 31 March 2009
• Docket Number: No. 967–07.,967–07.
• Citation: 132 T.C. No. 6,132 T.C. 105
• Parties: OCMULGEE FIELDS, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

132 T.C. 105

132 T.C. No. 6

OCMULGEE FIELDS, INC., Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 967–07.

United States Tax Court.

March 31, 2009.

P transferred appreciated real property to a qualified intermediary, which sold the property and used the proceeds to purchase from a person related to P like-kind property, which it transferred to P.

Held: P has failed to prove the absence of a principal purpose of Federal income tax avoidance; P's exchange with the qualified intermediary is part of a transaction structured to avoid the purposes of sec. 1031(f), I.R.C., governing like-kind exchanges between related persons, and, under sec. 1031(f)(4), I.R.C., the nonrecognition provisions of sec. 1031, I.R.C., do not apply to the exchange.

David D. Aughtry and David W. Siegel, for petitioner.

Vicki J. Hyche and Clinton M. Fried, for respondent.

HALPERN, Judge.

By notice of deficiency (the notice), respondent determined a deficiency of $2,015,862 in petitioner's Federal income tax for its taxable year ended May 31, 2004 (taxable year 2004), and an accuracy-related penalty of $403,172.

Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended and in effect for taxable year 2004, and all Rule references are to the Tax Court Rules of Practice and Procedure.

The deficiency determination is the result of respondent's adjustment requiring that petitioner recognize the gain it realized on the following transaction: (1) Petitioner transferred appreciated real property to a “qualified intermediary” (qualified intermediary), (2) an unrelated third party purchased the property from the qualified intermediary for cash, (3) a person related to petitioner sold like-kind property to the qualified intermediary for cash, (4) the qualified intermediary transferred the like-kind property to petitioner, and (5) petitioner realized a gain on the exchange. Petitioner claims that its exchange is a nontaxable exchange under the so-called like-kind exchange rules found in section 1031. Respondent claims that section 1031(f)(4) requires recognition because petitioner “structured” the transaction “to avoid the purposes” of the rules for exchanges between related persons. Respondent concedes that, but for the application of section 1031(f)(4), petitioner's exchange with the qualified intermediary qualifies for nonrecognition treatment under section 1031. Because we agree with respondent, we deny petitioner nonrecognition under section 1031(a)(1). We do not sustain respondent's determination of an accuracy-related penalty.

FINDINGS OF FACT

Some facts have been stipulated and are so found. The stipulation of facts, with attached exhibits, is incorporated herein by this reference. Petitioner is a corporation organized in the State of Georgia. At the time it filed the petition, its principal place of business was in Macon, Georgia (Macon).

Petitioner

Petitioner was organized in 1973 by Charles H. Jones (Charles Jones). Petitioner develops, owns, and manages real estate located primarily in middle Georgia, an area including Macon. During taxable year 2004, petitioner's principal shareholders were Charles Jones, his sons Dwight C. and C. Jefferson (Dwight Jones and Jeff Jones, respectively), and Jones Family Partnership, which was owned one-third each by Charles Jones, Dwight Jones, and Jeff Jones. During taxable year 2004, Dwight Jones was president of petitioner.

During taxable year 2004, Charles Jones, his sons, and their related entities were among the largest owners of commercial property, including shopping centers and office buildings, in middle Georgia. At the beginning of taxable year 2004, petitioner's real properties included the Wesleyan Station Shopping Center (Wesleyan Station) and part of the Rivergate Shopping Center (Rivergate), both in Macon.

The term “Barnes & Noble Corner” is the term petitioner uses (which we shall adopt) to describe three parcels of real property in Rivergate. Petitioner had owned the Barnes & Noble Corner before selling it in 1996 to Treaty Fields, L.L.C. (Treaty Fields). At the time of that sale, the Barnes & Noble Corner was undeveloped real property. Petitioner sold it so that the benefit of developing it would accrue to Treaty Fields.

Treaty Fields

Treaty Fields is a Georgia limited liability company that Dwight Jones organized in 1996. At all times here pertinent, it was owned by Dwight Jones and Charles Jones.

The McEachern Agreement

During the spring of 2003, Dwight Jones met Scott Wilson (Mr. Wilson), a licensed real estate broker. Mr. Wilson told Dwight Jones that he was looking for income-producing commercial real estate. He asked him whether petitioner had any for sale. They discussed Wesleyan Station. Although petitioner had not listed Wesleyan Station for sale or otherwise marketed it, petitioner agreed to sell it. On July 17, 2003, petitioner entered into an agreement (the McEachern agreement) for the sale of Wesleyan Station to two testamentary trusts under the will of John McEachern and to Mr. Wilson (the son-in-law of John McEachern). Among other things, the McEachern agreement provides: (1) The purchase price would be $7,250,000, (2) the closing would take place on or before October 10, 2003, (3) petitioner intended to conduct the transaction as part of an exchange of property qualifying for nonrecognition to petitioner under section 1031, and (4) in light of (3), petitioner could assign its interest in the agreement to a qualified intermediary.

Petitioner's Search for Replacement Property

Raymond Pippin (Mr. Pippin) is a certified public accountant (C.P .A.) and a member of the Macon accounting firm McNair, McLemore, Middlebrooks & Co., L.L.P. (McNair). McNair is the largest accounting firm in the Macon area, and it has as clients more real estate developers than any other accounting firm in Macon. Mr. Pippin services more of those clients (including petitioner) than anyone else at McNair. Even before petitioner entered into the McEachern agreement, Dwight Jones had asked Mr. Pippin whether he was aware of any income-producing commercial real property in the Macon area that could be acquired to replace Wesleyan Station. Petitioner's requirements for replacement property were that it be income-producing commercial real property in middle Georgia worth more than $7 million. Mr. Pippin indicated that he was not aware of any such property, and Dwight Jones asked him to keep his eyes open. Dwight Jones also asked petitioner's real estate lawyer and two commercial real estate brokers to help him find suitable replacement property. In addition, Mr. Wilson (also a broker) offered to help petitioner find replacement property.

As stated, the deadline for closing the McEachern agreement was October 10, 2003. Before that date, petitioner had considered and rejected for various reasons at least six possible replacement properties presented by brokers. As the date approached, Dwight Jones considered the possibility of petitioner's reacquiring the Barnes & Noble Corner as replacement property.

On October 9, 2003, petitioner engaged Security Bank of Bibb County, Macon, Georgia (Security Bank), as a qualified intermediary. On that date, it assigned its rights to sell Wesleyan Station to Security Bank. On October 10, 2003, Security Bank, as a qualified intermediary for petitioner, sold Wesleyan Station as called for in the McEachern agreement.

Petitioner's Receipt of the Barnes & Noble Corner

Petitioner settled on the Barnes & Noble Corner as appropriate replacement property. On October 15, 2003, petitioner and Treaty Fields entered into a contract of purchase with respect to that property. Petitioner subsequently transferred its rights under that contract to Security Bank, and petitioner received the Barnes & Noble Corner on November 4, 2003. Treaty Fields filed a Form 1065, U .S. Return of Partnership Income, for 2003, reporting the disposition of the Barnes & Noble Corner as a taxable sale. It reported that the amount realized on the sale was $6,740,900,¹ its adjusted basis in the property sold was $2,554,901, and it realized a gain of $4,185,999.

Petitioner's Taxable Year 2004 Federal Income Tax Return

For taxable year 2004, petitioner filed Form 1120, U.S. Corporation Income Tax Return (petitioner's 2004 Form 1120). Petitioner reported the disposition of Wesleyan Station as a like-kind exchange on an attached Form 8824, Like–Kind Exchanges. It reported that the amount realized on the exchange was $6,838,900, its adjusted basis in the property exchanged and its expenses related to the exchange were $716,164, and it realized a gain of $6,122,736. It reported that its basis in the property received (the Barnes & Noble Corner) was $716,164, and, under the heading of part II, “Related Party Exchange Information”, it identified Treaty Fields as the related party. It also reported on another form installment sale income of $475,396, resulting from the acceleration of payments due petitioner from Treaty Fields on account of petitioner's previous 1996 sale of the Barnes & Noble Corner to Treaty Fields.

Mr. Pippin prepared petitioner's 2004 Form 1120, including Form 8824. Charles Jones and Dwight Jones had great confidence in Mr. Pippin. They had relied on him and his firm for tax advice for many years. They relied on him to prepare properly petitioner's 2004 Form 1120.

Respondent's Determination

Respondent's determination of a deficiency is principally based on his adjustment increasing petitioner's gross income by $6,122,736 on account of its exchange with Security Bank of Wesleyan Station for the Barnes & Noble Corner. Respondent explained his adjustment in an attachment to the notice as follows: “[Y]ou have not established that you have met all of the requirements of Section 1031(f) for nonrecognition of that gain.”

OPINION

I. Introduction

We shall first address the deficiency in tax and then address the accuracy-related penalty.

II...