Bolker v. C.I.R.

• Decision Date: 17 May 1985
• Docket Number: No. 84-7357,84-7357
• Parties: -5121, 53 USLW 2620, 85-1 USTC P 9400 Joseph R. BOLKER, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1039

760 F.2d 1039

56 A.F.T.R.2d 85-5121, 53 USLW 2620, 85-1

USTC P 9400

Joseph R. BOLKER, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 84-7357.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Feb. 7, 1985.

Decided May 17, 1985.

Gilbert Dreyfuss, Richards, Watson, Dreyfuss & Gershon, Los Angeles, Cal., for petitioner-appellee.

Raymond Hepper, Dept. of Justice, Washington, D.C., for respondent-appellant.

On appeal from the United States Tax Court.

Before BOOCHEVER and BEEZER, Circuit Judges, and HARDY, ^* District Judge.

BOOCHEVER, Circuit Judge:

Bolker was the sole shareholder of the Crosby Corporation (Crosby) which owned the Montebello property. For tax purposes associated with the anticipated development of the property, Bolker decided to liquidate Crosby and distribute Montebello to himself. Before Crosby carried out the liquidation, problems in financing convinced Bolker to dispose of the Montebello property rather than developing it himself. On the day the Crosby liquidation actually occurred, Bolker contracted to exchange Montebello with Southern California Savings & Loan (SCS) for other like-kind investment property to be designated. This exchange took place three months later. Bolker asserted, and the Tax Court agreed, that the exchange qualified for nonrecognition treatment under I.R.C. Sec. 1031(a). ¹ Bolker v. Commissioner, 81 T.C. 782 (1983). The Commissioner appeals. Because we believe that Bolker held the Montebello property for investment within the meaning of section 1031(a), we affirm.

The transaction was consummated as follows. In March 1972, Bolker commenced the liquidation of Crosby. On March 13, 1972, all of the following occurred:

(1) Crosby transferred all its assets and liabilities to Bolker in redemption of all Crosby stock outstanding;

(2) Bolker as president of Crosby executed the Internal Revenue Service liquidation forms;

(3) A deed conveying Montebello from Crosby to Bolker was recorded;

(4) Bolker and Parlex, a corporation formed by Bolker's attorneys to facilitate the exchange, executed a contract to exchange Montebello for properties to be designated by Bolker;

(5) Parlex contracted to convey Montebello to SCS in coordination with the exchange by Bolker and Parlex; and

(6) Bolker, Crosby, Parlex, and SCS entered into a settlement agreement dismissing a breach of contract suit pending by Crosby against SCS in the event that all the other transactions went as planned. ²

On June 30, 1972, all the transactions closed simultaneously, SCS receiving Montebello and Bolker receiving three parcels of real estate which he had previously designated.

Bolker reported no gain on the transaction, asserting that it qualified for nonrecognition under then-current I.R.C. Sec. 1031(a):

No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

The Commissioner sent Bolker statutory notices of deficiency on the ground that the transaction did not qualify under section 1031(a). In the Tax Court, the Commissioner argued two theories: that Crosby, not Bolker, exchanged Montebello with SCS, and in the alternative, that Bolker did not hold Montebello for productive use in trade or business or for investment. ³ The Tax Court rejected both arguments. The Commissioner does not appeal the decision that Bolker individually made the exchange. The Commissioner does not challenge any of the Tax Court's findings of fact; review of the Tax Court's decisions of law is de novo. California Federal Life Insurance Co. v. Commissioner, 680 F.2d 85, 87 (9th Cir.1982).

I. STOCK FOR PROPERTY

Section 1031(a) specifically excludes from eligibility for nonrecognition an exchange involving stock. The Commissioner argues that Bolker's transactions should properly be viewed as a whole, under the step transaction doctrine, see Commissioner v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981 (1945) (court may view transaction as a whole even if taxpayer accomplishes result by series of steps), and that so viewed, Bolker exchanged his Crosby stock for property. The Commissioner did not argue this theory in the Tax Court.

As a general rule, we will not consider an issue raised for the first time on appeal, United States v. Greger, 716 F.2d 1275, 1277 (9th Cir.1983) (taxpayer argued for first time on appeal that statute prohibiting assistance in preparation of false return cannot apply if preparer is innocent), cert. denied, --- U.S. ----, 104 S.Ct. 1002, 79 L.Ed.2d 234 (1984), although we have the power to do so, see Hormel v. Helvering, 312 U.S. 552, 557-59, 61 S.Ct. 719, 721-22, 85 L.Ed. 1037 (1941). This circuit has recognized three exceptions to this rule: in the "exceptional" case in which review is necessary to prevent a miscarriage of justice or to preserve the integrity of the judicial process, see Greger, 716 F.2d at 1277, when a new issue arises while appeal is pending because of a change in the law, see United States v. Whitten, 706 F.2d 1000, 1012 (9th Cir.1983) (objection to plain view search first raised on appeal), cert. denied, --- U.S. ----, 104 S.Ct. 1593, 80 L.Ed.2d 125 (1984), or when the issue presented is purely one of law and either does not depend on the factual record developed below, or the pertinent record has been fully developed, see United States v. Patrin, 575 F.2d 708, 712 (9th Cir.1978) (on appeal of conviction for assaulting federal officers in performance of their duties, government could not rely on a different statute defining federal officers than at trial because defendants might have tried their case differently in response). If one of the exceptions is applicable, we have discretion to address the issue.

The Commissioner contends that the third exception applies in this case. Although a determination based on the step transaction doctrine would require reliance on the factual record, the Commissioner argues that the record is fully developed and that we could decide the issue on appeal without prejudice to Bolker's right at trial to present relevant facts. See id. at 712-13. Application of the step transaction doctrine requires a detailed factual inquiry, however, and there may be facts relevant to the issue which were not developed in the record. Moreover, Bolker's tactics, presentation of the facts, and legal arguments at trial might have been different if the Commissioner had argued the step transaction issue below. ⁴ We therefore decline to address the issue on appeal.

II. THE HOLDING REQUIREMENT

The Commissioner argued unsuccessfully in the Tax Court that because Bolker acquired the property with the intent, and almost immediate contractual obligation, to exchange it, Bolker never held the property for productive use in trade or business or for investment as required by section 1031(a). Essentially, the Commissioner's position is that the holding requirement has two elements: that the taxpayer own the property to make money rather than for personal reasons, and that at some point before the taxpayer decides to exchange the property, he have intended to keep that property as an investment.

Bolker argues that the intent to exchange investment property for other investment property satisfies the holding requirement. Bolker's position also in essence posits two elements to the holding requirement: that the taxpayer own the property to make money, and that the taxpayer not intend to liquidate his investment.

Authority on this issue is scarce. This is not surprising, because in almost all fact situations in which property is acquired for immediate exchange, there is no gain or loss to the acquiring taxpayer on the exchange, as the property has not had time to change in value. Therefore, it is irrelevant to that taxpayer whether section 1031(a) applies. See, e.g., D. Posin, Federal Income Taxation 180 & n. 46 (1983); Rev.Rul. 77-297, 1977-2 C.B. 304, 305. The cases generally address the taxpayer's intent regarding the property acquired in an exchange, rather than the property given up. The rule of those cases, e.g., Regals Realty Co. v. Commissioner, 127 F.2d 931, 933-34 (2d Cir.1942), is that at the time of the exchange the taxpayer must intend to keep the property acquired, and intend to do so with an investment purpose. That rule would be nonsense as applied to the property given up, because at the time of the exchange the taxpayer's intent in every case is to give up the property. No exchange could qualify.

The Commissioner cites two revenue rulings to support his position, Rev.Rul. 77-337, 1977-2 C.B. 305, and Rev.Rul. 77-297. Revenue rulings, however, are not controlling. Ricards v. United States, 683 F.2d 1219, 1224 & n. 12 (9th Cir.1981) (revenue rulings not binding although entitled to consideration as "body of experience and informed judgment"). Moreover, neither ruling is precisely on point here. In Revenue Ruling 77-337, A owned X corporation, which owned a shopping center. Pursuant to a prearranged plan, A liquidated X to acquire the shopping center so that he could immediately exchange it with B for like-kind property. A never held the shopping center, and therefore section 1031(a) did not apply. This case differs from 77-337 in two ways. First, the liquidation was planned before any intention to exchange the properties arose, not to facilitate an exchange. Second, Bolker did actually hold Montebello for three months.

In Revenue Ruling 77-297, B wanted to buy A's ranch, but A wanted to exchange rather than sell. A located a desirable ranch owned by C. Pursuant to a...