Swaim v. U.S.
| Decision Date | 27 July 1981 |
| Docket Number | No. 79-3244,79-3244 |
| Citation | 651 F.2d 1066 |
| Parties | 81-2 USTC P 9575 Emsy H. SWAIM and Annie Swaim, Plaintiffs-Appellees Cross Appellants, v. UNITED STATES of America, Defendant-Appellant Cross Appellee. . Unit A |
| Court | U.S. Court of Appeals — Fifth Circuit |
Robert A. Bernstein, Aaron P. Rosenfeld, Ernest J. Brown, M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Chief, Appellate Section, Dept. of Justice, Tax Div., Washington, D.C., for defendant-appellant cross appellee.
Thompson, Knight, Simmons & Bullion, Eugene W. Brees, II, Joe A. Rudberg, James Y. Robb, III, Dallas, Tex., for plaintiffs-appellees cross appellants.
Appeals from the United States District Court for the Northern District of Texas.
Before WISDOM, POLITZ and SAM D. JOHNSON, Circuit Judges.
In 1965, taxpayers Emsy H. and Annie J. Swaim, in unrelated transactions, conveyed two pieces of real property, one located in Hale County, Texas, and the other situated in Concho County, Texas. This appeal involves the federal income tax consequences of those conveyances. The Internal Revenue Service assessed a tax deficiency of $26,430.28 plus interest for the year 1965 based on (1) a taxable gain of $41,771.42 1 in the Hale County property transaction (on the ground that it did not qualify as a nontaxable exchange under Section 1031 2 of the Internal Revenue Code), and (2) under the doctrine of constructive receipt a taxable gain of $25,839.29 3 in the Concho County property transaction during 1965 instead of 1966 as contended by the taxpayers. In their action for a refund of taxes paid, the Swaims prevailed on the Concho County property issue but were unsuccessful in their § 1031 claim on the Hale County property. Both parties appeal. Finding both transactions taxable, and taxable in 1965, we affirm in part and reverse in part.
On January 8, 1965, the Swaims executed a contract with Mr. and Mrs. E. D. Zimmerman and Mr. and Mrs. M. E. Gary (hereinafter Zimmerman and Gary) involving 238 acres of land owned by the Swaims in Hale County, Texas, and approximately 2,600 acres of land owned by Zimmerman and Gary in Maverick County, Texas. 4 The contract valued the Hale County property at $101,150 and obligated Zimmerman and Gary to pay the Swaims $30,000 in cash, to give them a promissory note in the amount of $29,750, and to take the Hale County tract subject to a $41,400 promissory note previously executed by the Swaims and secured by a deed of trust on the property. In return for the Maverick County property, which was valued at $297,632, the Swaims were to pay Zimmerman and Gary $50,000 in cash, give them promissory notes totalling $102,632, and assume a $120,000 promissory note previously executed by Zimmerman and Gary and secured by a deed of trust on the property and assume a $25,000 improvement loan to be obtained by Zimmerman and Gary which also would be secured by a deed of trust. The $25,000 improvement loan was earmarked for the cultivation of approximately 450 acres of farmland on the Maverick County tract.
Although the contract called for the simultaneous exchange of deeds by April 1, 1965, that plan was changed when it became apparent Zimmerman and Gary could not timely meet the conditions of the contract and, inter alia, ready for cultivation the 450 acres of farmland. Instead, on February 5 and 6, 1965, Zimmerman and Gary executed and delivered to Swaim general warranty surface and mineral deeds granting to the Swaims 5 the Maverick County property. Swaim decided not to record these deeds because the additional acreage was not yet in cultivation, the additional loan had not been secured and an updated abstract had not been furnished as required. Swaim placed the deeds in escrow pending compliance with all of the terms of the January contract. Some three months later Zimmerman and Gary completed the requirements of their agreement and, on May 14 and 15, 1965, new general warranty surface and mineral deeds were executed and delivered to the Swaims in substitution for the February 5 and 6 deeds that had been placed in escrow. Notwithstanding the then obvious inability of Zimmerman and Gary to complete timely their obligations under the January 8 contract, on February 2, 1965, the Swaims executed and delivered to Zimmerman and Gary the deed to the Hale County property; this deed was recorded and the transaction was completed.
In their tax return for the year 1965, the Swaims treated the Hale County property transaction as a nontaxable exchange under § 1031. From their perspective, each aspect of the agreement was a mutually interdependent part of an integrated plan, i. e., each transaction was contingent upon the successful completion of the entire transaction. The Swaims contend that an "exchange" is evidenced by the following transfer of assets and liabilities:
Swaims to Zimmerman and
Zimmerman and Gary Gary to Swaims
------------------ --------------
Cash $ 50,000 $ 30,000
Notes 102,632 29,750
Mortgage 145,000 * 41,400
Hale County property (FMV) 101,150 --
Maverick County property (FMV) -- 297,632
------- -------
Total Transfer $398,782 $398,782
------- -------
* Includes $25,000 improvement mortgage.
The government, on the other hand, insists that there was no "exchange" within the meaning of § 1031, but rather that there were two separate and distinct transactions:
Transaction No. 1: Sale by Swaims of Hale County property
Zimmerman and Swaims to
Gary to Swaims Zimmerman and Gary
-------------- ------------------
Cash $ 30,000 --
Notes 29,750 --
Assumption of mortgage 41,400 --
Hale County property (FMV) -- $101,150
------- -------
Total Transfer $101,150 $101,150
------- -------
Transaction No. 2: Purchase by Swaims of Maverick County property.
Zimmerman and Swaims to
Gary to Swaims Zimmerman and Gary
-------------- ------------------
Cash -- $ 50,000
Notes -- 102,632
Assumption of mortgage -- 145,000
Maverick County property (FMV) $297,632 --
------- -------
Total Transfer $297,632 $297,632
------- -------
The foundation for the government's position is the three month delay in the delivery and recording of the Maverick County property deeds. On February 2, 1965, when the Swaims conveyed their Hale County land and received consideration in full, the completion of the conveyance of the Maverick County land was still conditional and uncertain, a status which continued until mid-May.
In enacting § 1031, which provides that no gain or loss shall be recognized if property held for productive use in a trade or business or for investment is "exchanged" solely for property of a like kind, Congress sought to defer taxation of a gain or loss "when in theory the taxpayer may have realized gain or loss, but in substance his economic interest in the property has remained virtually unchanged by the transaction." Redwing Carriers, Inc. v. Tomlinson, 399 F.2d 652, 656 (5th Cir.1968). Taxpayers have been allowed wide latitude in structuring qualifying transactions, 6 adhering to the "well established principle that the substance of a transaction, rather than the form in which it is cast, ordinarily determines its tax consequences." Biggs v. Commissioner, 69 T.C. 905, 914 (1978), aff'd, 632 F.2d 1171 (5th Cir.1980). As noted by the Tax Court in Earlene T. Barker v. Commissioner, 74 T.C. 555, No. 42 (June 10, 1980), however, application of the principle within a logical framework is often a troublesome task:
The "exchange" requirement poses an analytical problem because it runs headlong into the familiar tax law maxim that the substance of a transaction controls over form. In a sense, the substance of a transaction in which the taxpayer sells property and immediately reinvests the proceeds in like-kind property is not much different from the substance of a transaction in which two parcels are exchanged without cash. Bell Lines, Inc. v. Unites States, 480 F.2d 710, 711 (4th Cir.1973). Yet, if the exchange requirement is to have any significance at all, the perhaps formalistic difference between the two types of transactions must, at least on occasion, engender different results. Accord, Starker v. United States, 602 F.2d 1341, 1352 (9th Cir.1979).
At the outset, we accept as true the Swaims' contention that both parties to the contract intended and agreed that there would be an exchange of properties which would fall within the ambit of § 1031. In support of this contention, the Swaims insist that from the beginning of their negotiations with Zimmerman and Gary they insisted that as a part of the consideration for the transfer of their Hale County property, they receive like kind property in exchange. However, "(w)hile it is true that the incidence of taxation is to be determined by viewing the entire transaction as a whole, Kanawaha Gas & Util. Co. v. C.I.R., 214 F.2d 685 (5th Cir.1954), that rule does not...
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