Opinion ID: 2783177
Heading Depth: 2
Heading Rank: 2

Heading: Purpose of the Transactions

Text: After a bench trial, this court reviews the district court's findings of fact for clear error, and its legal conclusions de novo. Lisdahl v. Mayo Found., 633 F.3d 712, 717 (8th Cir. 2011). The core issue in this appeal is whether the district court erred in determining that North Central structured the exchange transactions to avoid the purposes of § 1031(f). This is a factual issue subject to clear error review. See Lisdahl, 633 F.3d at 717. We begin by noting the comparative complexity of the transactions at issue. See Ocmulgee Fields, 613 F.3d at 1369 (affirming a determination that an exchange was structured to avoid the purposes of § 1031(f) in part because of the unnecessary complexity and unnecessary parties involved in the transaction); Teruya Bros., 580 F.3d at 1046 (same). As discussed above, the transactions each involved an intricate interplay between at least five parties: North Central, Accruit, Butler Machinery, Caterpillar, and the third party who buys North Central's used equipment. Of course, North Central, Caterpillar, and the third-party customer were indisputably necessary for the sales and purchase transactions to occur. Butler Machinery and Accruit, however, were not. -7- As North Central acknowledges in its briefing, Butler Machinery functioned as a passthrough of both the cash and the property. This begs the question of why Butler Machinery was involved at all in the transactions. Elsewhere in its briefing North Central proffers several alternative reasons for Butler Machinery's involvement, including that it made the transactions administratively easier and more efficient. None of these arguments, however, convince us that the district court clearly erred in reaching a different conclusion. After all, North Central already had its own dealer code, and it could have placed the exact same equipment orders directly to Caterpillar. Injecting Butler Machinery into the transactions added unnecessary inefficiencies and complexities to the transactions, including, among other things, additional transfers of payment and property. An equally (if not more) plausible explanation for Butler Machinery's involvement is that Butler Machinery financially benefitted from what amounted to six-month, interest-free loans under the DRIS financing terms. See Ocmulgee Fields, 613 F.3d at 1369 (analyzing the actual consequences of the transactions to ascertain the taxpayer's intent); Teruya Bros., 580 F.3d at 1045 ([T]he taxpayer and the related party should be treated as an economic unit in this inquiry.). As discussed above, the DRIS financing gave Butler Machinery up to six months to pay its invoices to Caterpillar. In the meantime, the sales proceeds from the relinquished equipment were deposited into Butler Machinery's main bank account, and Butler Machinery was able to use the proceeds as it pleased. The value of Butler Machinery's interest-free access to such money should not be underestimated.4 4 For instance, purely by way of illustration, assume that Butler Machinery could have obtained DRIS financing terms for merely 350 of the exchanges at issue in this case, and that the average sales proceeds received from the property relinquished in the transactions was $600,000 (which is less than the sales proceeds received in each of the stipulated transactions). In this scenario, Butler Machinery would have received a total of $210,000,000 in de facto interest-free loans. -8- Butler Machinery attempts to downplay the benefit it derived from these de facto interest-free loans by asserting that North Central would have received the same financing terms if it had ordered directly from Caterpillar. The President and CEO of Accruit, however, testified at trial that Accruit would have paid the sales proceeds from the relinquished property directly to Caterpillar if the new equipment were not purchased via Butler Machinery. In other words, if Butler Machinery was not involved in these transactions, neither Butler Machinery nor North Central would have received the de facto interest-free loans. In sum, Butler Machinery was not necessary to the transactions at issue yet possessed significant, unearmarked cash proceeds as a result of the transactions. Both the Eleventh Circuit and the Ninth Circuit have affirmed determinations that transactions were structured to avoid the purposes of § 1031(f) when unnecessary parties participated in the transactions and when a related party ended up receiving cash proceeds. See Ocmulgee Fields, 613 F.3d at 1369; Teruya Bros., 580 F.3d at 1046. North Central argues that this case is unique because Butler Machinery did not have indefinite access to the sales proceeds from each transaction. Even so, that fact does not change our analysis, and we simply cannot ignore the significant and continuous financial benefits Butler Machinery derived from these hundreds of de facto interest-free loans. Indeed, as the Ninth Circuit noted in Starker v. United States, if . . . taxpayers sell their property for cash and reinvest that cash in like-kind property, they cannot enjoy [§ 1031's] benefits, even if the reinvestment takes place just a few days after the sale. 602 F.2d at 1352. This court reached a similar conclusion in Coleman v. Commissioner of Revenue, in which we affirmed a determination that $14,000 a taxpayer received as part of an exchange should be recognized as taxable gain—even though the money was allegedly intended to apply to a mortgage the taxpayer assumed in the exchange. 180 F.2d 758, 760 (8th Cir. 1950). Critically for purposes of our analysis, the taxpayer in Coleman was at liberty to use [the cash] as he pleased, id., just like Butler Machinery was in this case. -9- Accruit was also an unnecessary party to these transactions. Butler Machinery and North Central could have exchanged property directly with each other without Accruit's involvement. This unnecessary layer of complexity lends support to a finding that the exchanges were structured to sidestep § 1031(f). Indeed, the Eleventh Circuit in Ocmulgee Fields affirmed a determination that exchanges were structured to avoid the purposes of § 1031(f), in part, because the parties could have completed the transactions without the involvement of a qualified intermediary. See 613 F.3d at 1370, 1373. Moreover, the Ninth Circuit reached the same conclusion in Teruya Brothers and further held that a qualified intermediary's involvement in [the underlying] transactions thus served no purpose besides rendering simple—but tax disadvantageous—transactions more complex in order to avoid § 1031(f)'s restrictions. 580 F.3d at 1046 (footnote omitted). Notably, if Butler Machinery and North Central exchanged the property directly with each other, they, as related parties, would have to hold the exchanged-for property for two years before the exchanges could qualify for nonrecognition treatment. See 26 U.S.C. § 1031.5 Hence, their need for Accruit. North Central argues that Accruit was nevertheless necessary for its LKE program to qualify for certain safe harbors established under 26 C.F.R. §§ 1.1031(k)–1 et seq. and Revenue Procedure 2003-39. North Central's safe harbor argument is unavailing. It simply has not shown that the district court committed clear error in finding the intent behind the transactions' structure. See F.D.I.C. v. Lee, 988 F.2d 838, 841–42 (8th Cir. 1993) ([I]f a district court's factual determination 'falls within a broad range of permissible conclusions,' then it must be upheld under clear error review) (quoting Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 400 (1990)). Furthermore, the safe harbor rationale does not explain why Butler Machinery was involved at all in these 398 exchange transactions. In short, because North Central 5 North Central does not dispute that it and Butler Machinery are related parties under the statute. -10- could have achieved the same property dispositions via a much simpler means, it appears these transactions took their peculiar structure for no purpose except to avoid § 1031(f). Teruya Bros., 580 F.3d at 1046. The district court did not commit clear error by finding that the LKE transactions were structured to avoid the purposes of § 1031(f).