Carlton v. United States
| Citation | 385 F.2d 238 |
| Decision Date | 28 August 1967 |
| Docket Number | No. 23955.,23955. |
| Parties | June Pinson CARLTON and Charles T. Carlton, as Administrators of the Estate of Thad H. Carlton, and June Carlton, Appellants, v. UNITED STATES of America, Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (5th Circuit) |
Robert O. Rogers, West Palm Beach, Fla., for appellants.
Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Melva M. Graney, Donald W. Williamson, Jr., Meyer Rothwacks, Attys., Dept. of Justice, Washington, D. C., William A. Meadows, Jr., U. S. Atty., Alfred E. Sapp, Asst. U. S. Atty., Miami, Fla., for appellee.
Before GEWIN and AINSWORTH, Circuit Judges, and LYNNE, District Judge.
This is an appeal from a judgment of the United States District Court for the Southern District of Florida denying the claim of the appellants for a refund of income taxes and interest paid after a deficiency was assessed by the Internal Revenue Service for the tax year 1959. In their joint return for 1959, the appellants1 did not recognize the gain realized on the transfer of several parcels of real property but treated the transfers as an exchange of property under § 1031 of the I.R.C. of 1954. The I.R.S. asserted that the transfers constituted a sale and not an exchange and assessed a deficiency of $34,337.63 together with interest. The appellants paid the deficiency assessed, and filed a timely claim for refund. The claim was disallowed by the District Director of Internal Revenue and this suit followed. The district court concluded that the transfers constituted a sale and repurchase and rendered judgment for the Government. We affirm.
The facts of the case are fully stipulated. During the year 1959 and for several years prior thereto the appellants had been engaged in the ranching business. In connection with that business they owned a tract of land in Saint Lucie County, Florida, (ranch property) having a basis of $8,918.91. On October 18, 1958, they executed a contract with General Development Corporation (General) which gave General an option to acquire the ranch property for $250.00 an acre. General paid the appellants $50,000 deposit which was to be credited to the total purchase price should General exercise its option. The contract also provided that the appellant could require General, by notifying it in writing, to acquire such other land as designated by the appellants for the purpose of exchange in lieu of a cash payment or mortgage. General's obligation to supply funds for any down payment which might be needed to bind any contracts to purchase other land for exchange was not to exceed the $50,000 advanced at the time the option was executed. In the event such an exchange could not be effected, General was to pay for the ranch property by cash and a mortgage securing the balance of the purchase price. From the outset of negotiations with General, the appellants desired to continue ranching operations and intended to exchange the ranch property for other property suitable for ranching. They also desired an exchange as opposed to a sale in order to obtain the tax benefits incident to an exchange under § 1031. At all times General desired simply to purchase the ranch property.
Following the execution of the option contract with General, Thad Carlton (Carlton) found two suitable parcels of land, one in Gladen County, Florida (Lyons), and one in Hendry County, Florida (Fernandez). He conducted all the negotiations for the acquisition of these lands and paid the deposit for each by a cashiers check issued by his bank. The total deposit on both pieces of property did not exceed the fifty thousand dollars paid by General. When the negotiations to acquire the Lyons and Fernandez properties were complete, Carlton notified General in writing that he would require it to purchase these lands for the purpose of exchanging them for his ranch property, and the actual agreements of sale were executed by General.2 On May 11, 1959 General exercised its option to acquire the ranch property and arrangements were made to close the entire transaction around August 1, 1959. The closing of the several transactions actually occurred on August 3rd and 4th and in closing the appellants deviated from the original plan which resulted in the tax problem here in issue.
In order to avoid unnecessary duplication in title transfer, a procedure was adopted whereby title to the Lyons and Fernandez properties would be conveyed directly to the appellants instead of to General and then to the appellants. To accomplish this result, General, on August 3rd, assigned to the appellants its contracts to purchase the two pieces of property and paid the appellants, by check, the total amount it would have been required to pay if it had actually first purchased the Lyons and Fernandez property in its own name and then conveyed the land to the appellants. Later that same day Carlton took the assignment of the contracts to purchase and purchased the Lyons property, using his personal check to close the sale. On August 4 he purchased the Fernandez property in a similar manner. At the time Carlton issued these checks, the balance in his checking account was too small to cover them, but he deposited the check received from General when the transaction with it was closed to meet these outstanding checks. This check was the balance of the cash purchase price and was in addition to the $50,000.00 paid when the option was executed.
The district court held that on the basis of these facts the transfers constituted a sale and repurchase. The court concluded that because General never acquired the legal title to the Lyons and Fernandez property, it could not have exchanged those properties for the ranch property. Rather, the court found that the appellants sold the ranch property to General and applied the cash thereby acquired to the purchase of the Lyons and Fernandez properties. The court also noted that Carlton was the active party in arranging the acquisition of the Lyons and Fernandez tracts and that he was personally liable on the notes and mortgages involved in such acquisitions. The appellants contend on this appeal that the district court erred in focusing on one aspect of a continuing transaction. They assert that the procedure adopted must be viewed as a single unitary transaction through which they intended to exchange properties, and which resulted in their acquiring property suitable for ranching and relinquishing their rights to like property. They insist that intent is the essential element which distinguishes a sale from an exchange. Since the Government has stipulated that an exchange was intended, and since the net result of the transaction was an exchange of ranching properties, they conclude, the transfers must be considered an exchange.
Section 1031 of the I.R.C. of 1954, 26 U.S.C. § 1031 (1964) provides, in pertinent part, that the gain realized on the exchange of property of like kind held for productive use or investment shall not be recognized except to the extent that "boot" or cash is actually received.3 There is little doubt that the ranch property and the Lyons and Fernandez properties are of like kind, and that the properties were held by the appellants for productive use. The only question presented here is whether the transfer of the properties constituted a sale or an exchange.
Both parties agree that had the appellants followed the original plan, whereby General would have acquired the legal title to the Lyons and Fernandez properties and then transferred the title to such properties to the appellants for their ranch property, the appellants would have been entitled to postpone the recognition of the gain pursuant to § 1031. However, instead of receiving the title to the Lyons and Fernandez properties from General for their ranch property, the appellants received cash and an assignment of General's contract rights to those properties. Thus, the ultimate question becomes whether the receipt of cash by the appellants upon transferring their ranch property to General transformed the intended exchange into a sale. The Government asserts that it does, and, under the facts and in the circumstances of this case, we agree.
Section 1031 was designed to postpone the recognition of gain or loss where property used in a business is exchanged for other property in the course of the continuing operation of a business. In those circumstances, the taxpayer has not received any gain or suffered any loss in a general and economic sense. Nor has the exchange of property resulted in the termination of one venture and assumption of another. The business venture operated before the exchange continues after the exchange without any real economic change or alteration, and without realization of any cash or readily liquefiable asset. Jordan Marsh Co. v. C. I. R., 269 F.2d 453 (2 Cir. 1959); cf. Portland Oil Co. v. C. I. R., 109 F.2d 479 (1 Cir.) cert. den., 310 U.S. 650, 60 S.Ct. 1100, 84 L. Ed. 1416 (1940). The statute specifically limits the nonrecognition of gain or loss to exchanges of property, and it is well settled that a sale and repurchase do not qualify for nonrecognition treatment under the section. Coleman v. C. I. R., 180 F.2d 758 (8 Cir. 1950); Rogers v. C. I. R., 44 T.C. 126 (1965) aff'd 377 F.2d 534 (9 Cir. 1965); Cowden v. C. I. R., 65,278 P-H Memo TC (1965); see generally 3 Mertens, Federal Income Taxation §§ 20.16 — 20.31 (1967). Thus, even though the appellants continued their ranching business after the transaction here in question, that does not control the tax consequences of the transfers. Rather, it is essential that the transfers constituted an exchange and not a sale and repurchase if the tax benefits of § 1031 are to be applicable.
The appellants contend that the entire transaction must be viewed as a whole in determining whether a sale or an exchange has occurred. They argue that the transfer of the ranch property to General for the cash...
To continue reading
Request your trial
-
First Federal Sav. & Loan Ass'n of Temple v. US, Civ. A. No. W-86-CA-117.
...is the transfer of property between owners, while the mark of a sale is the receipt of cash for the property." Carlton v. United States, 385 F.2d 238, 242 (5th Cir.1967); see also Treas.Reg. § 1.1002(d) ("Ordinarily, to constitute an exchange, the transaction must be a reciprocal transfer o......
-
Forward Communications Corp. v. United States
...148 F.2d 208 (6th Cir. 1945). "The very essence of an exchange is a transfer of property between owners * * *." Carlton v. United States, 385 F.2d 238, 242 (5th Cir. 1967). "The purpose of Section 1031(a), as shown by the legislative history, is to defer recognition of gain or loss when a d......
-
S.F. Residence Club, Inc. v. Baswell-Guthrie
...applies even if the exchanger holds the cash or non-like-kind property for a very short period of time. See, e.g., Carlton v. United States, 385 F.2d 238 (5th Cir.1967). See also, e.g., Halpern v. United States, 286 F.Supp. 255 (N.D.Ga.1968) (holding that a transaction in which the exchange......
-
Redwing Carriers, Inc. v. Tomlinson
...1952, 11 CCH Tax Ct.Mem. 854. The appellant attempts to bolster its defenses, however, with a decision from our Court, Carlton v. United States, 5 Cir. 1967, 385 F.2d 238. In that case the taxpayer had sold ranch property to a purchasing corporation for cash. As part of this sale, the purch......
-
Real Estate Exchanges in the 1990s: Lessons from the Front
...inventory or personal use property. 12. Treas.Reg. § 1.1031(a)-1(a). 13. Treas.Reg. § 1.1031(a)-1(b). 14. See, e.g., Carlton v. Comm'r, 385 F.2d 238 (5th Cir. 1967). 15. A familiar tax law maxim is that the substance of the transaction, not the form, controls the tax consequences. The U.S. ......