Click v. Comm'r of Internal Revenue

• Decision Date: 16 February 1982
• Docket Number: Docket No. 12138-78.
• Citation: 78 T.C. 225
• Parties: DOLLIE H. CLICK, PETITIONER v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

78 T.C. 225

DOLLIE H. CLICK, PETITIONER

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 12138-78.

United States Tax Court

Filed February 16, 1982.

On July 9, 1974, petitioner exchanged her farm for two residential properties, cash, and a note. On the same day, her two children and their families each moved into the residences. Approximately 7 months later, petitioner transferred the residences by gift to her children. Held, the July 9, 1974, exchange does not qualify for nonrecognition treatment under sec. 1031(a), I.R.C. 1954, because petitioner did not intend to hold the property received for productive use in a trade or business or for investment. Jonathan J. Broome, Jr., and Joel M. Birken, for the petitioner.

Barry A. Furman, for the respondent.

STERRETT , Judge:

By statutory notice dated August 4, 1978, respondent determined a deficiency in petitioner's Federal income tax for the taxable year 1974 in the amount of $45,921.05. Petitioner paid the amount of the asserted deficiency on August 17, 1978, which was subsequent to her receipt of the statutory notice but before filing her petition with this Court on October 26, 1978. On January 13, 1981, respondent filed an amended answer in which he asserted that the deficiency against petitioner should be increased by $9,406.80 (for a total of $55,327.85). Petitioner then amended her petition on January 13, 1981, to request that the Court find that there was no deficiency for 1974 and to direct that the overpayment of $45,921.05 plus interest be refunded to her. No objection was made either to the amendment to the petition or the amendment to the answer.

The issues for our decision are (1) whether the nonrecognition provisions of section 1031, I.R.C. 1954, apply to petitioner's acquisition of two residential properties; and (2) if section 1031 applies, whether petitioner's receipt of cash, a promissory note, and two properties constitutes two separate transactions for purposes of reporting on the installment method under section 453.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

Petitioner Dollie H. Click resided in Fairfax, Va., at the time of filing her petition herein. Using a single filing status, she filed a Federal income tax return, Form 1040, for the calendar year 1974 with the Internal Revenue Service Center at Memphis, Tenn.

On December 30, 1964, petitioner and her husband purchased approximately 161.250 acres of farmland (hereinafter the farm) in Prince William County, for $110,000. The property was to be held for investment purposes. On September 19, 1967, petitioner and her husband conveyed approximately 4.085 acres of the farm (hereinafter parcel B) to their daughter and son-in-law, Mary and Carlton Highsmith. On June 27, 1967, petitioner and her husband conveyed approximately 2.080 acres of the farm (hereinafter parcel C) to their son and daughter-in-law, John and Sharon Click. Petitioner's remaining parcel consisted of approximately 155.085 acres (hereinafter parcel A).

Petitioner's husband died on September 21, 1972. During the last months of 1972, petitioner received a number of offers to purchase the farm. All of these offers were made by Manassas Realty, on behalf of Williams Properties, Inc., and an undisclosed principal. The undisclosed principal was later identified as the Marriott Corp. (hereinafter Marriott).

On January 9, 1973, petitioner entered into an agreement of lease and purchase option with Williams Properties, Inc., on behalf of its still undisclosed principal, Marriott. Although the agreement provided for the purchase of the entire farm, petitioner's children and their spouses, who owned parcels B and C, neither executed the agreement nor were named as parties to it.

Marriott hoped to acquire the entire farm and certain land adjacent to the farm in order to build a 515-acre amusement park that would contain, inter alia, shops, theaters, and carnival rides. As of June 9, 1973, Marriott had obtained options to purchase an additional 353.46 acres of land surrounding the farm. The farm was the largest single component of the proposed park site, and Marriott considered its acquisition to be a critical and inseparable part of its plans.

In June 1973, Marriott indicated its desire to renegotiate the terms of its January 9, 1973, purchase option because it was not binding on petitioner's children, it contained no subordination provision to allow Marriott to finance improvements, it contained no prepayment provisions, and it was difficult to administer. On June 9, 1973, petitioner and Mr. and Mrs. Highsmith executed with Marriott a 1-year lease and a revised purchase option agreement for parcels A and B. The option agreement gave Marriott until June 9, 1974, to inform the petitioner and Mr. and Mrs. Highsmith of its intention to purchase the property, and until July 9, 1974, to reach settlement on the purchase. In addition, the agreement contained a provision that permitted the sellers, petitioner and her daughter and son-in-law, to opt for partial or full payment through the receipt of “exchange” or “swap” property or properties which the sellers would have the right to designate. Also on June 9, 1973, Mr. and Mrs. John Click entered into a separate agreement with Marriott for the sale of parcel C with settlement to take place on or before July 9, 1974.

During this time, Mr. and Mrs. Highsmith owned and resided in a house on North Ninth Street in Arlington, Va. However, they wanted to move to a new house and so advised petitioner. On petitioner's suggestion, they began looking for a new home to use as “swap” property. Their condition for such property was that it contain a house larger than their house on North Ninth Street. They selected a home, also in Arlington, Va., that was owned by William C. and Bernice Gierisch (hereinafter the Gierisches).

Mr. and Mrs. John Click owned and resided in a house in Fairfax, Va., but they were interested in obtaining a house and more acreage. At petitioner's suggestion, they also began looking for “swap” property. Their condition for such property was that it contain a three-bedroom house with acreage sufficient to maintain a horse. They selected residential property in Clifton, Va., owned by Oscar W. and Margaret Ann Tinney (hereinafter the Tinneys).

The Tinney residence had previously been listed for sale in 1973. Mrs. Sharon Click saw the Tinneys' “for sale” sign and inspected the house several times in 1973. She liked the Tinney residence and wanted to purchase it at that time. However, the Tinneys decided not to sell their house and consequently took it off the market. Subsequently, the Tinneys once again listed their house for sale. Mrs. Click again visited the Tinney residence on several occasions in 1974 prior to the time of Marriott's offer to purchase the house.

On February 22, 1974, Marriott and the Gierisches entered into a purchase agreement for the Gierisch residence. On April 18, 1974, Marriott and the Tinneys entered into a purchase agreement for the Tinney residence. On June 5, 1974, Marriott notified petitioner and Mr. and Mrs. Highsmith of its intent to purchase parcels A and B.

Petitioner did not inspect the Tinney residence until after Marriott had made its offer to purchase and after the house was taken off the market.

On July 9, 1974, the Gierisches and the Tinneys conveyed their houses to Marriott. On the same day, Marriott exercised its option to purchase parcels A and B. Accordingly, petitioner and Mr. and Mrs. Highsmith received from Marriott a promissory note in the amount of $630,925.53, the Gierisch residence valued at $96,152.20, and the Tinney residence valued at $135,816.96 in exchange for parcels A and B. At closing, the three also received the first installment on the promissory note in the amount of $23,647.

Petitioner held all equity rights in the two residences which were received by her in partial satisfaction of the amount due her from the sale of parcel A to Marriott. Petitioner and Mr. and Mrs. Highsmith did not intend that the Highsmiths' legal interests in either the Gierisch residence or the Tinney residence would be in full or partial satisfaction of their conveyance of parcel B to Marriott. Instead, petitioner and the Highsmiths intended that 2.56 percent of the cash paid at closing on July 9, 1974, and a similar percentage of the principal and interest due under the note, would be in satisfaction of their conveyance of parcel B to Marriott.

On July 9, 1974, Mr. and Mrs. Highsmith together received a total of $619 as their pro rata share of Marriott's initial payment ($23,647) on its purchase of parcels A and B.

On or about July 9, 1974, Mr. and Mrs. Highsmith moved into the Gierisch residence, and Mr. and Mrs. John Click moved into the Tinney residence. The Highsmiths sold their North Ninth Street, Arlington, Va., home on or about July 12, 1974. Sometime in August or September 1974, Mr. and Mrs. John Click secured a purchaser for their Fairfax, Va., home. The closing, however, did not occur until December 27, 1974.

During the period from July 9, 1974, through February 8, 1975, Mr. and Mrs. Highsmith took out property damage insurance and paid property taxes on the Gierisch residence. During the same period, Mr. and Mrs. John Click made substantial improvements to the Tinney residence totaling over $5,000. The improvements included a fence for $593.75 to keep their horse enclosed on the property, an automatic garage door opener for $283.36, a well pump and other expenses related to the well for $239.48, a light fixture for $49.69, wall-to-wall carpeting for $1,440, custom draperies for $1,368.02, and wrought iron railings to replace wooden rails for $392. They also paid $781 to prune a tree, $129.71 for gravel for the driveway, and $30 for repair of a canvas awning. Mr. and Mrs. John...