Opinion ID: 153022
Heading Depth: 3
Heading Rank: 1

Heading: Purpose for the transaction structure

Text: Although Ocmulgee Fields has let loose a barrage of explanations for why it structured its exchange as it did, the record adequately supports the tax court’s 19 finding that Ocmulgee Fields structured its transactions to avoid the purposes of § 1031(f). As a starting point, we can look to the actual consequences of Ocmulgee Fields’ transactions to ascertain its intent. See Teruya Bros., 580 F.3d at 1045-46 (looking to the actual consequences to discern a taxpayer’s intent). Here, Ocmulgee Fields and Treaty Fields cashed-in on their low-basis property, Wesleyan Station. Although Ocmulgee Fields continued to hold investment property after the exchange, once the dust settled, Treaty Fields held only the cash proceeds from the sale of the Barnes & Noble Corner property. As discussed, Congress accorded nonrecognition treatment to like-kind exchanges in the first instance because after a like-kind exchange both parties still had a continuing investment after the exchange, albeit in a different property; here, Treaty Fields no longer had a continuing investment. Moreover, Congress enacted § 1031(f) because of its disapproval of taxpayers’ use of § 1031 to cash-in on a low-basis investment property, but to pay taxes as if it were cashing in on the high basis property; here, Ocmulgee Fields and Treaty Fields cashed in on the low-basis property, Wesleyan Station, but paid taxes only on the gains from Treaty Fields’ sale of the high-basis property, the Barnes & Noble Corner.14 Thus, the substantive 14 The means of achieving this result are slightly different in the context of a direct exchange between a related party and a taxpayer and the context of an exchange, such as here, 20 result of Ocmulgee Fields’ series of transactions supports an inference that Ocmulgee Fields structured its transactions to avoid the purposes of § 1031(f): it was the economic equivalent of a direct related-party exchange for which § 1031(f)(1) would disallow nonrecognition treatment. Moreover, although it is not necessarily a dispositive factor by itself, we can look to the unneeded complexity in the series of transactions to help us in inferring Ocmulgee Fields’ intent. See Teruya Bros., 580 F.3d at 1046 (drawing an adverse inference from the taxpayer’s decision to use a qualified intermediary when it could have achieved the same result through a direct exchange but the direct exchange would not have received nonrecognition treatment). Ocmulgee Fields could have achieved the same result by simply engaging in a direct exchange of property with Treaty Fields, and Treaty Fields could have then sold Wesleyan Station to the McEachern Family Trust. If Ocmulgee Fields had taken this approach, however, § 1031(f)(1) would have automatically disallowed nonrecognition treatment for the exchange because Treaty Fields disposed of where a taxpayer has interposed a qualified intermediary between himself and the related party. Our Alpha Co. hypothetical illustrates how the taxpayer and the related party achieve this result in a direct exchange: the taxpayer, Alpha Co., directly exchanges its low-basis property, Blackacre, for a related party’s high-basis property, Charlie Co’s Whiteacre, in anticipation of the related party subsequently selling Blackacre because, after the exchange, Blackacre will have taken on Whiteacre’s higher basis. Although the means are different, the result is the same: the taxpayer and the related party cash in on the low-basis property but pay taxes on it as if that property had always had a high-basis, thereby reducing their overall tax burden through nonrecognition treatment despite cashing in on their low-basis investment property. 21 Wesleyan Station within two years of the exchange. And it is unlikely that § 1031(f)(2) would have resurrected nonrecognition treatment for the exchange because it would have involved the exchange of a high-basis property for a lowbasis property in anticipation of the sale of the low-basis property. Cf. H.R. Rep. No. 101-386, at 614 (1989) (Cont. Rep.) (explaining that a taxpayer is more likely to establish that tax-avoidance was not a principal purpose where the exchange does not involve this type of basis-shifting and a subsequent disposition of the lowbasis property). Therefore, unless Ocmulgee Fields offered a persuasive justification for the complexity of its transactions, we can infer that Ocmulgee Fields added layers of complexity to avoid the purposes of § 1031(f). Here, Ocmulgee Fields has offered no persuasive justifications that would support a conclusion that the tax court committed clear error. Ocmulgee Fields asserts that the Barnes & Noble Corner property was merely a fall-back position, and it had engaged in a complex series of transactions with the genuine desire to find a replacement property held by an unrelated third party. But, despite purportedly beginning its search for a replacement property even before contracting with the McEachern Family Trust, Ocmulgee Fields had examined only a small number of potential replacement properties; it also entered into a sales contract for the Barnes & Noble Corner property just six days after it engaged 22 Security Bank as a qualified intermediary. Moreover, Ocmulgee Fields offers no explanation, aside from tax-avoidance, for why it maintained its four-party transaction structure once it settled on the Barnes & Noble Corner property. The contract with the McEachern Family Trust for the sale of the Wesleyan Station contract had been fulfilled; it did not require Ocmulgee Fields to structure the transaction as a like-kind exchange. The combination of these factors undermines the persuasiveness of Ocmulgee Fields’ justification for the complexity of the transaction.