T.C. Memo. 1996-150
UNITED STATES TAX COURT
RAYMOND ST. LAURENT, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 23048-93. Filed March 25, 1996.
Bryan M. Dench, for petitioner.
William T. Hayes and Louise R. Forbes, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
WELLS, Judge: Respondent determined a deficiency of
$125,887 in petitioner’s 1988 Federal income tax. After
concessions, the only issue remaining for decision is whether,
pursuant to section 1031(a), petitioner may defer recognition of
gain realized upon the sale of certain real property. Unless
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otherwise indicated, all section references are to the Internal
Revenue Code as in effect for the year in issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
FINDINGS OF FACT
At the time the petition in the instant case was filed,
petitioner resided in Lewiston, Maine.
During 1988, petitioner and his ex-wife, Phyllis St.
Laurent, owned, as tenants in common, an apartment complex known
as RPDS Estates (RPDS) located in Auburn, Maine. Petitioner
decided to sell RPDS and acquire other real property in which Ms.
St. Laurent would not have an interest. Petitioner intended to
dispose of his interest in RPDS by exchanging it for other
property in a manner that would entitle him to nonrecognition
treatment of the gain realized pursuant to section 1031(a).
On May 9, 1988, petitioner and Ms. St. Laurent agreed to
sell RPDS to Richard and Barbara Labbe for $1,900,000. The
purchase and sale agreement (sale agreement) signed by them
provided that “It is agreed between the parties that Purchasers
shall assist Seller in consummating a Section 1031 Tax Deferred
Exchange. Seller shall indemnify Purchaser of any legal or
accounting costs of said exchange.”
After the sale agreement was signed, petitioner began
looking for property to replace his interest in RPDS, but he had
not selected replacement property by the time the sale of RPDS
closed. The closing was delayed pending regulatory approval of
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the sale and performance of certain work on RPDS. The closing
took place November 4, 1988, and on that date petitioner and Ms.
St. Laurent transfered RPDS to the Labbes for $1,880,000. As
part of the closing, the sale agreement was amended (amendment)
to provide procedures by which an exchange of properties would be
effected. The amendment provided in pertinent part:
In lieu of the terms of sale described above in this
Agreement, the Sellers may, at their exclusive option,
designate one or more properties (the "Exchange
Property") to be acquired by Buyer and exchanged with
the Sellers for the Property to be transferred
hereunder in a manner intended to qualify as a tax free
exchange of properties under Section 1031 of the United
States Internal Revenue Code of 1986, as amended (the
"Exchange"). Buyer makes no representation that the
Exchange will qualify under Section 1031 of the U.S.
Internal Revenue Code of 1986, as amended. Buyer
agrees to cooperate with the Sellers in the purchase of
the Exchange Property designated by the Sellers,
including negotiation for the purchase of the Exchange
Property; to execute, but not otherwise prepare,
contracts, documents and instruments as requested in
writing by the Sellers; to purchase the Exchange
Property designated by the Sellers; and to execute all
other documents necessary to consummate the Exchange as
reasonably requested in writing by the * * * Sellers.
Buyer shall have no obligation to find or select the
Exchange Property; shall not be responsible for the
negotiation of the terms of such acquisition or the
preparation of the documents containing such terms;
shall not be responsible for the failure of such
purchase of the Exchange Property to be fully closed or
settled; shall not be required to advance any funds on
behalf of the Exchange prior to the settlement
hereunder; and shall not be required to advance any
funds above the purchase price of the Property and
other sums otherwise payable by Purchaser hereunder for
the Property, as a result of any such Exchange. The
Exchange shall be accomplished by any of the following
methods, at the sole option of the Sellers:
* * * * * * *
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(B) A delayed like kind exchange, whereby the
purchase price shall be paid by Buyer to
Coastal Savings Bank of Portland, Maine (the
“Escrow Agent”), as escrow holder, for a term
of one hundred eighty (180) days after
settlement (the “Exchange Period”) and the
deed conveyed to Buyer and the settlement
otherwise consummated as elsewhere herein
provided. The entire purchase price shall be
held by the Escrow Agent in an interest-
bearing account. Within forty-five (45) days
of the settlement (the “Designation Period”),
the Sellers may designate in writing the
Exchange Property to be acquired by Buyer
with the escrowed money, the costs of which
are to be paid from the escrowed money. If
the Sellers fail to designate an Exchange
Property within the Designation Period, then
upon the expiration of the Designation
Period, the Escrow Agent shall pay to the
Sellers the escrowed money and all interest
accrued thereon. If the Sellers designate
the Exchange Property during the Designation
Period, but the Exchange Property is not
transferred to the Sellers before the end of
the Exchange Period, then upon termination of
the Exchange Period, the Escrow Agent shall
pay to the Sellers the escrowed money and all
interest accrued thereon. The Sellers shall
have no right to receive the escrowed money
or interest accrued thereon prior to the
earlier of (i) settlement on the Exchange
Property, (ii) termination of the Designation
Period without the Sellers having designated
the Exchange Property, or (iii) termination
of the Exchange Period. All funds remaining
in the escrow upon termination of the
Exchange Period or after settlement on the
Exchange shall, after paying the Exchange
Price, be paid to the Sellers.
(C) Any other arrangement mutually satisfactory
to the Sellers and Buyer whereby the Exchange
Property is conveyed to the Sellers and the
Property is conveyed to Buyer.
Two checks in the amount of $390,500.30, made payable to the
order of Coastal Savings Bank-Escrow Agent (escrow agent), were
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received by petitioner and Ms. St. Laurent at the closing.
Petitioner delivered his check to the escrow agent on November 4,
1988, and it was deposited in an escrow account that was opened
for the benefit of petitioner on November 14, 1988. A bank
officer assisted petitioner in establishing the escrow account,
and thereafter, the officer’s function was as a signatory on the
account. The officer was not an agent of petitioner.
Petitioner continued to search for suitable exchange
properties subsequent to the closing on RPDS, viewing 40 to 50
properties. The Labbes did not search for the properties, and
petitioner did not discuss with them the properties he was
considering. Petitioner was advised to furnish a list of
replacement properties to the escrow agent because it was
required under the law governing like-kind exchanges. Pursuant
to that advice, petitioner sent a letter dated December 16, 1988,
to the escrow agent in which he listed 20 properties that were
identified pursuant to section 1031 as like-kind property to be
received in exchange for his interest in RPDS. The letter was
received by the escrow agent on or before December 19, 1988. The
properties designated included Hillview Estates (Hillview), a 40-
unit trailer park in Turner, Maine, and a lot on Sheffield Street
in Lewiston, Maine (Sheffield lot).
Petitioner subsequently negotiated for the purchase of
Hillview, and, on January 30, 1989, petitioner signed an
agreement to buy Hillview. The Labbes were not parties to the
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agreement. The agreed purchase price was $500,000, consisting of
$390,000 to be paid from the escrow account and a $110,000
seller-financed mortgage. By letter dated March 20, 1989,
petitioner requested the escrow agent to release the funds in the
escrow account to the law firm handling the closing for Hillview.
On March 22, 1989, petitioner closed on Hillview. The Labbes did
not participate in, nor were they present at, the closing.
Petitioner and Ms. St. Laurent timely filed a joint Federal
income tax return for 1988 on April 15, 1989. They did not
request an extension of time to file such return.
On May 17, 1989, petitioner closed on the Sheffield lot.
OPINION
Section 1001 generally requires recognition of the entire
amount of gain or loss on the sale or exchange of property.
Section 1031(a)(1), however, provides for the nonrecognition of
such gain or loss on “the exchange of property held for
productive use in a trade or business or for investment if such
property is exchanged solely for property of like kind which is
to be held either for productive use in a trade or business or
for investment.” For transfers after July 18, 1984, section
1031(a)(3), enacted as part of the Deficit Reduction Act of 1984
(DEFRA), Pub. L. 98-369, sec. 77(a), 98 Stat. 494, 595, governs
deferred like-kind exchanges. Section 1031(a)(3) provides:
(3) Requirement that property be identified and
that exchange be completed not more than 180 days after
transfer of exchanged property.--For purposes of this
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subsection, any property received by the taxpayer shall
be treated as property which is not like-kind property
if--
(A) such property is not identified as
property to be received in the exchange on or
before the day which is 45 days after the date on
which the taxpayer transfers the property
relinquished in the exchange, or
(B) such property is received after the
earlier of--
(i) the day which is 180 days after the
date on which the taxpayer transfers the
property relinquished in the exchange, or
(ii) the due date (determined with
regard to extension) for the transferor’s
return of the tax imposed by this chapter for
the taxable year in which the transfer of the
relinquished property occurs.
Although the transactions in issue are deferred like-kind
exchanges the tax consequences of which are governed by section
1031(a)(3), we precede our consideration of the statute by
looking to certain pre-DEFRA case law that continues to be
generally applicable to like-kind exchanges. In structuring
their transactions as tax-deferred like-kind exchanges, taxpayers
have been allowed great latitude. Biggs v. Commissioner, 69 T.C.
905, 913 (1978), affd. 632 F.2d 1171 (5th Cir. 1980). For
instance, an agreement to sell property for cash may be converted
into a like-kind exchange before substantial implementation of
the transaction occurs. Coupe v. Commissioner, 52 T.C. 394, 405
(1969). Multiple parties may be involved in an exchange where
the potential buyer of the taxpayer’s property does not own any
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property at the time that the agreement to exchange is signed.
Biggs v. Commissioner, supra at 913-914. Exchange property need
not be identified at the time an agreement to effect an exchange
is made. Alderson v. Commissioner, 317 F.2d 790 (9th Cir. 1963),
revg. 38 T.C. 215 (1962). Proceeds of the sale of property to be
exchanged may be placed in escrow and, provided the taxpayer does
not constructively receive the proceeds, an exchange involving
property acquired with the proceeds will qualify for the benefits
of section 1031(a). Garcia v. Commissioner, 80 T.C. 491, 499-500
(1983). The taxpayer may locate and negotiate for the property
to be exchanged. Biggs v. Commissioner, supra at 915. The buyer
need not hold title to the exchange property received by the
taxpayer. Biggs v. Commissioner, 632 F.2d at 1177. Where a
preference for exchange is manifest, and an exchange actually
occurs, courts generally ignore the possibility that a sale of
the taxpayer’s property may occur if the exchange does not
actually take place. Mercantile Trust Co. v. Commissioner, 32
B.T.A. 82, 87 (1935).
Although considerable latitude has been allowed by the
courts with respect to the structure of like-kind exchanges, that
latitude is not open ended. Estate of Bowers v. Commissioner, 94
T.C. 582, 590 (1990). A taxpayer’s intent to effect a section
1031(a) transaction is not determinative of the transaction’s tax
treatment, although intent is given deference where the parties
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to the transaction have acted consistently therewith. Garcia v.
Commissioner, supra at 498.
In the instant case, respondent makes two principal
arguments that the RPDS/Hillview exchange transaction fails to
qualify for tax-deferred treatment pursuant to section 1031(a).
Respondent’s first objection is that, in acquiring Hillview
himself, petitioner failed to observe the terms of the amendment
to the sale agreement that provided that the Labbes would
purchase the property to be exchanged for his interest in RPDS.
Secondly, respondent contends that petitioner’s identification of
20 replacement properties exceeds the limitation on the number of
replacement properties that may be designated pursuant to section
1031(a)(3), and that the particular replacement property received
in the exchange was not subject to determination by contingencies
beyond the control of the parties to the exchange.
As to respondent’s first contention, the amendment to the
sale agreement makes clear that the manner in which the exchange
transaction was to be effected was almost exclusively within
petitioner’s control. We view the Labbes’ undertakings in the
amendment with respect to the acquisition of property to be
exchanged for petitioner’s interest in RPDS as merely
accommodations to petitioner to ensure that the Labbes would
perform whatever acts that might be deemed necessary to cause an
exchange to qualify for like-kind exchange treatment pursuant to
section 1031(a). Moreover, the amendment provides that, in
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addition to the methods set forth therein, the exchange of
petitioner’s interest in RPDS for like-kind property may be
effected in any other manner mutually satisfactory to the parties
thereto.
Respondent concedes that it was not necessary for the Labbes
to take title to Hillview in order for the exchange of
petitioner’s interest in RPDS for such property to meet the
requirements of section 1031(a). See Biggs v. Commissioner, 632
F.2d at 1177. Consequently, we do not consider it significant,
for purposes of section 1031(a), that the parties to the
amendment did not follow the procedure for acquiring the
replacement property (i.e., Hillview). Moreover, by their
conduct, we treat petitioner and the Labbes as having adopted,
pursuant to the provisions of the amendment, a mutually
satisfactory alternative method for accomplishing the exchange of
petitioner’s interest in RPDS for Hillview.
We next consider respondent’s argument concerning the
provisions of section 1031(a)(3). As noted above, respondent
argues that petitioner’s identification of replacement properties
did not satisfy section 1031(a)(3)(A) because (1) petitioner
identified 20 properties as replacement properties, and (2) the
particular replacement properties to be received were not to be
determined by contingencies beyond the control of the parties to
the exchange. Respondent relies on the following passage in the
conference report on DEFRA:
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The conferees note that the designation requirement in
the conference agreement may be met by designating the
property to be received in the contract between the
parties. It is anticipated that the designation
requirement will be satisfied if the contract between
the parties specifies a limited number of properties
that may be transferred and the particular property to
be transferred will be determined by contingencies
beyond the control of both parties. For example, if A
transferred real estate in exchange for a promise by B
to transfer property 1 to A if zoning changes are
approved and property 2 if they are not, the exchange
would qualify for like-kind treatment. * * * [H. Conf.
Rept. 98-861, at 866 (1984), 1984-3 C.B. (Vol. 2) 1,
120; emphasis supplied.]
After the year in issue, the Commissioner issued regulations
providing that, in general, a taxpayer may identify either (1) a
maximum of three properties as replacement properties, or (2) any
number of properties provided the fair market value of the
designated properties does not exceed 200 percent of the fair
market value of all properties relinquished by the taxpayer in
the exchange. Sec. 1.1031(k)-1(c)(4), Income Tax Regs., T.D.
8346, 1991-1 C.B. 150, 157. The regulations, however, are
prospective only, as they apply to transfers of property made on
or after June 10, 1991, or in certain cases, to transfers made on
or after May 16, 1990.1 Sec. 1.1031(k)-1(o), Income Tax Regs.,
1
Because the Commissioner’s regulations are not applicable to
the transactions in issue, we express no opinion concerning the
regulations’ validity. We note, however, where a statute is
silent or ambiguous with respect to an issue that is the subject
of a regulation, a reviewing court need only decide whether the
regulation is based on a permissible construction of the statute.
Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837, 843 (1984).
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T.D. 8346, 1991-1 C.B. at 165. The Commissioner included no
requirement in the regulations that the particular replacement
property to be received by a taxpayer be determined by
contingencies beyond the control of the parties to the exchange.
Sec. 1.1031(k)-1(c), Income Tax Regs., T.D. 8346, 1991-1 C.B. at
156.
Petitioner argues that section 1031(a)(3)(A) does not
expressly limit to less than 20 the number of replacement
properties that may be designated and that the exchange of
petitioner’s interest in RPDS for Hillview complied with the
literal language of section 1031(a)(3). We agree.
As the regulations are not before us, the issue presented in
the instant case is one of statutory interpretation. In
construing section 1031(a)(3)(A), our task is to give effect to
the intent of Congress, and we must begin with the statutory
language, which is the most persuasive evidence of the statutory
purpose. United States v. American Trucking Associations, Inc.
310 U.S. 534, 542-543 (1940). Ordinarily, the plain meaning of
the statutory language is conclusive. United States v. Ron Pair
Enters., Inc., 489 U.S. 235, 241-242 (1989). Where a statute is
silent or ambiguous, we may look to legislative history in an
effort to ascertain congressional intent.2 Burlington No. R. Co.
2
Of course, even where the statutory language appears to be
clear, we are not precluded from consulting legislative history.
(continued...)
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v. Oklahoma Tax Commn., 481 U.S. 454, 461 (1987); Griswold v.
United States, 59 F.3d 1571, 1575-1576 (11th Cir. 1995);
Mississippi Poultry Association, Inc. v. Madigan, 992 F.2d 1359,
1364 n.28 (5th Cir. 1989). Legislative history that is
inconclusive, however, should not be relied upon to supply a
provision not enacted by Congress. United States v. American
College of Physicians, 475 U.S. 834, 846-847 (1986).
The statute is silent and does not contain either a
restriction on the number of replacement properties that may be
identified or a requirement that the replacement property be
determined by contingencies beyond the control of the parties to
the exchange. Consequently, we may look to the legislative
history in order to decide whether Congress intended that an
identification of replacement properties conform to the
requirements urged by respondent in order to be effective. We,
however, do not find the conference report to be conclusive as to
the number of replacement properties that a taxpayer may
identify. The conference report merely states: “It is
anticipated that the designation requirement will be satisfied if
the contract between the parties specifies a limited number of
properties that may be transferred”. H. Conf. Rept. 98-861,
supra at 866, 1984-3 C.B. (Vol 2) at 120 (emphasis supplied). It
2
(...continued)
United States v. American Trucking Associations, Inc., 310 U.S.
534, 543-544 (1940).
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does not specify the number. The foregoing sentence from the
conference report is also vague in that it is a statement of what
will pass muster under the statute; it does not purport to define
what will not satisfy the statute. Although the example given in
the conference report mentions only two properties, as we read
the example, it merely illustrates a contingent exchange
arrangement that would qualify for like-kind treatment. It does
not purport to restrict to two the maximum number of properties
that may be identified. Id. Moreover, it should be noted that
the primary concern addressed by Congress in amending section
1031(a) was to prevent long periods of delay between the exchange
of properties, as was present in the case of Starker v. United
States, 602 F.2d 1341 (9th Cir. 1979) (where the exchange could
have occurred up to 5 years after the initial transaction). See
H. Conf. Rept. 98-861, supra at 866, 1984-3 C.B. (Vol 2) at 120.
Nonetheless, we do believe that Congress intended that
taxpayers identify only a finite number of replacement
properties.3 To construe the statute otherwise, i.e., as
3
We note the following dictionary definitions of the word
“limited”: “Confined within limits, restricted in extent,
number, or duration”, Webster’s Third New International
Dictionary (1993); “Restricted; bounded; prescribed. Confined
within positive bounds; restricted in duration, extent, or
scope”, Black’s Law Dictionary (6th ed. 1990); “confined or
restricted within certain limits”, Webster’s II New Riverside
University Dictionary (1984). Petitioner’s identification of
replacement properties was “limited” within the everyday,
ordinary meaning of the term. Cf. Malat v. Riddell, 383 U.S.
(continued...)
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allowing an unlimited number of replacement properties to be
identified, would make the identification requirement
meaningless. The fact that Congress included an identification
requirement suggests that an identification of an unlimited
number of properties could result in none being identified.
In the instant case, however, we need not, and do not,
decide the outer limit of how many replacement properties the
statute permits taxpayers to identify. Petitioner’s effort to
comply with the statute by identifying 20 specific properties to
be received in the exchange appears to have been made in good
faith and does not cause an absurd result, given the fact that
the statute is silent as to the permissible number and the
legislative history is an unreliable indicator of the proper
limitation.4 Petitioner sought advice and, because the
regulations were not published, even in proposed form, at the
3
(...continued)
569, 571 (1966).
4
This is not to say, however, that the requirements of sec.
1.1031(k)-1(c)(4), Income Tax Regs., T.D. 8346, 1991-1 C.B. 150,
157, generally limiting to three the number of properties that
taxpayers are entitled to identify, or any number of properties
where their total value does not exceed 200 percent of the fair
market value of the properties relinquished, is not a valid
exercise of the Commissioner’s authority to interpret a statute
which is silent on the matter. As stated above, that regulation
is not before us because it is not effective for the year in
issue.
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time the identification was made,5 neither petitioner nor his
adviser was on notice that the Commissioner would take the
position that the number of replacement properties that could be
identified pursuant to the statute generally would be limited to
three. Consequently, a trap for unwary taxpayers was set.6
We also do not accept respondent’s contention that
petitioner’s identification of replacement properties did not
satisfy section 1031(a)(3)(A) because the determination of the
particular replacement property or properties to be received was
not based on contingencies beyond the control of the parties to
the exchange. As noted above, the legislative history relied on
by respondent states: “It is anticipated that the designation
requirement will be satisfied if * * * the particular property to
be transferred will be determined by contingencies beyond the
control of both parties.” H. Conf. Rept. 98-861, supra at 866,
1984-3 C.B. (Vol. 2) at 120. As we stated above, we believe that
Congress was merely illustrating that a contingent identification
5
We note that the proposed regulations setting forth the
Commissioner’s construction of the statute and legislative
history were not published until May 16, 1990, after the
transactions in issue occurred. Sec. 1.1031(a)-3, Proposed
Income Tax Regs., 55 Fed. Reg. 20282.
6
The difficulty taxpayers faced in interpreting the
legislative history has been noted by at least one commentator.
Wasserman, “Mr. Mogul’s Perpetual Search for Tax Deferral:
Techniques and Questions Involving Section 1031 Like-Kind
Exchanges In a World of Changing Tax Alternatives”, 65 Taxes 975,
1000 n.211 (1987).
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would satisfy the statutory requirement. It does not appear to
mean, even by implication, that an identification of multiple
properties without a contingency would not satisfy the
identification requirement. As with the number of replacement
properties that may be identified, we similarly consider the
conference report inconclusive as to any contingency requirement.
As noted above, the Commissioner did not see fit to adopt such a
requirement in the regulations. We do not believe that our
construction of the statute as not imposing a contingency
requirement would make the identification requirement
meaningless. Accordingly, we are not persuaded that Congress
intended that an identification of replacement properties would
satisfy the identification requirement only if the particular
property to be received were to be determined by contingencies
beyond the control of the parties to an exchange.
Consequently, we conclude that petitioner made a valid
identification of replacement properties within the statutorily
prescribed period and that Hillview constitutes property of a
like kind received in exchange for petitioner’s interest in RPDS
pursuant to section 1031(a)(3).
Petitioner’s exchange of his interest in RPDS for the
Sheffield lot, however, does not qualify as a like-kind exchange
pursuant to the provisions of section 1031(a)(3). As noted
above, section 1031(a)(3)(B) provides that, in order to be
considered like-kind property, replacement property may not be
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received after the earlier of (1) 180 days after the transfer of
property relinquished in such exchange, or (2) the due date of
the return, including extensions, for the year in which the
relinquished property is transferred. Petitioner’s return for
1988, the year in which the transfer of his interest in RPDS
occurred, was due on April 15, 1989. That due date was less than
180 days after the transfer of his interest in RPDS, and so it
marks the end of the time allowed for completing the exchange of
such interest for like-kind property. Petitioner did not receive
the Sheffield lot until May 17, 1989. Consequently, petitioner
failed to complete the exchange of his interest in RPDS for the
Sheffield lot within the statutorily prescribed time limit. Sec.
1031(a)(3)(B)(ii). Furthermore, respondent contends, and
petitioner does not dispute, that the transfer of the Sheffield
lot to petitioner occurred 194 days after petitioner transferred
his interest in RPDS.7 Consequently, the exchange of
petitioner’s interest in RPDS for the Sheffield lot was not
completed within the 180-day period prescribed by section
1031(a)(3)(B)(i). Accordingly, the Sheffield lot is not property
of a like kind received in exchange for petitioner’s interest in
7
Indeed, other than objecting to respondent’s proposed
ultimate finding of fact that the transaction involving the
Sheffield lot was not a qualified exchange under sec. 1031(a),
petitioner makes no argument on brief with respect to the
Sheffield lot transaction.
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RPDS for purposes of the statutory provisions governing deferred
like-kind exchanges. Sec. 1031(a)(3).
In sum, we hold that petitioner must recognize gain realized
upon the disposition of his interest in RPDS only with respect to
the exchange of his interest in RPDS for the Sheffield lot.
To reflect concessions and the foregoing,
Decision will be entered
under Rule 155.