Court Opinion

ID: 4485081
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:10.285409+00
Date Added: 2024-06-11T08:49:15.000151
License: Public Domain

Tannenwald, Judge, dissenting: I disagree with the holding of the majority that the requirements of section 1031 were satisfied because the contribution of the Plaza Property by petitioner to U.S. Trust (the partnership) was simply "a continuation of the old investment unliquidated in modified form” (see pp. 770-771). The rationale of continuity of investment rests on the false premise that "joint ownership of the property and partnership ownership of the property are merely formal differences and not substantial differences”1 (see p. 773), and that, therefore, the "like-kind” requirement of the section has been met. I use the phrase "false premise” advisedly because the majority fails to analyze the differences between an interest of a fee owner or of a tenant in common and that of a general partner and, in particular, the impact of California law. Such an analysis would have required the conclusion that such interests were not of like kind. Preliminarily, to determine whether properties are of like kind— [we must] ascertain whether the nature and character of the transferred rights in and to the respective properties are substantially alike. In making this comparison, consideration must be given to the respective interests in the physical properties, the nature of the title conveyed, the rights of the parties, the duration of the interests, and any other factor bearing on the nature or character of the properties as distinguished from their grade or quality. [Koch v. Commissioner, 71 T.C. 54, 65 (1978).] See also sec. 1.1031(a)-l(b), Income Tax Regs. Therefore, section 1031 requires that the rights of the taxpayer in, or his legal relationship to, the property held,2 as well as the nature of the property itself, must be of like kind.3 Consequently, respondent’s concession that the underlying assets were of like kind is not determinative of the question whether petitioners’ rights in those properties are of like kind as well. Petitioners’ first contention is that the exchange qualifies under section 1031 because, after the exchange, they held an interest in the Plaza Property as tenants in partnership, which is, they contend, a form of co-ownership under California law. Respondent contends that partnerships, rather than individual partners, hold the underlying assets of California partnerships. I assume, for purposes of this opinion, that under California law general partners have some ownership interest in the underlying assets of their partnerships. See Cal. Corp. Code sec. 15025(1) (West 1977), which provides that "A partner is co-owner with his partners of specific partnership property holding as a tenant-in-partnership.” Under such circumstances, I need not explore the troublesome question of whether the Internal Revenue Code adopts the entity theory as argued by respondent so as to create a partnership interest distinct from an interest of a general partner in the partnership assets. See Casel v. Commissioner, 79 T.C. 424, 430-433 (1982). My assumption, however, is merely the beginning, rather than the end, of my analysis because it is still necessary to determine the nature of the general partner’s interest, which is a question of local law. See Aquilino v. United States, 363 U.S. 509 (1960); Commissioner v. Crichton, 122 F.2d 181 (5th Cir. 1941), affg. 42 B.T.A. 490 (1940); Oregon Lumber Co. v. Commissioner, 20 T.C. 192 (1953); sec. 301.7701-1(c), Proced. & Admin. Regs. Petitioners’ second contention, which reflects the core of the controversy herein, is that, whether the situation is viewed as (1) an exchange of a fee interest in the Iowa Street Property for a tenancy-in-partnership interest in the Plaza Property pursuant to an integrated transaction, or (2) an exchange of a fee interest in the Iowa Street Property for a tenancy-in-common interest in the Plaza Property followed by a section 721 contribution of the tenancy-in-common interest to the partnership, like-kind exchanges which qualify under section 1031 are involved. Each scenario presents different questions. The first scenario turns on whether petitioners’ fee interest in the Iowa Street Property and their tenancy-in-partnership interest in the Plaza Property were of like kind, it being conceded that petitioners "held” these interests for investment purposes. The second scenario assumes that petitioners’ first position is not sustained and presents two questions: (1) Whether petitioners’ fee interest in the Iowa Street Property and their tenancy-in-common interest in the Plaza Property were of like kind; (2) whether petitioners held their tenancy-in-common interest in the Plaza Property for investment purposes. I turn first to the questions of whether petitioners’ various rights in the properties were of like kind. The owner of a fee simple interest has vested title to his property. Such title is inheritable and the holder thereof has full power to convey it. Hagge v. Drew, 27 Cal. 2d 368, 165 P.2d 461, 465 (1945). A tenant in common owns an undivided interest in the property and is entitled to possession of the entire common property against all persons except his co-tenants. Dimmick v. Dimmick, 58 Cal. 2d 417, 374 P.2d 824,24 Cal. Rptr. 856 (1962); Wilkerson v. Thomas, 121 Cal. App. 2d 479, 263 P.2d 678 (1953); Swartzbaugh v. Sampson, 11 Cal. App. 2d 451, 54 P.2d 73 (1936); Wood v. Henley, 88 Cal. App. 441, 263 P. 870 (1928). Title to his interest is vested in him and he may sell or encumber it without the knowledge, consent, or approval of the other co-owners. Meyer v. Wall, 270 Cal. App. 2d 24, 75 Cal. Rptr. 236 (1969). A tenant-in-common’s interest is inheritable. Wilkerson v. Thomas, supra. Unlike the forms of ownership discussed above, a partner has no legal title to property "owned” by him under section 15025(1), California Corporations Code, as a tenant in partnership; the interest of a partner in firm assets "is the share to which he is entitled after claims against the firm and accounts between the partners are settled; it is an equitable interest enforceable by an action for an accounting.” Comstock v. Fiorella, 260 Cal. App. 2d 262, 67 Cal. Rptr. 104, 106 (1968). See also Clarke v. Fiedler, 44 Cal. App. 2d 838, 113 P.2d 275 (1941). Section 15025(2) of the California Corporations Code provides that— The incidents of [the tenancy in partnership] are such that: (a) A partner, subject to the provisions of this chapter and to any agreement between the partners, has an equal right with his partners to possess specific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without the consent of his partners. (b) A partner’s right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the same property. (c) A partner’s right in specific partnership property is not subject to attachment, or execution, except on a claim against the partnership. When partnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws. (d) On the death of a partner his right in specific partnership property vests in the surviving partner or partners, except where the deceased was the last surviving partner, when his right in such property vests in his legal representative. Such surviving partner or partners, or the legal representative of the last surviving partner, has no right to possess the partnership property for any but a partnership purpose. (e) A partner’s right in specific partnership property is not subject to dower, curtesy, or allowances to widows, heirs, or next of kin, and is not community property. On its face, section 15025(2) reflects a number of differences between a fee interest or an interest as a tenant in common on the one hand and an interest as a tenant in partnership on the other. For example, the former are assignable (Hagge v. Drew, supra; Russell v. Lescalet, 248 Cal. App. 2d 310, 56 Cal. Rptr. 399 (1967); see also Tenhet v. Boswell, 18 Cal. 3d 150, 554 P.2d 330, 133 Cal. Rptr. 10 (1976)), while the latter is not (sec. 15025(2)(b)); the former are subject to attachment (Hagge v. Drew, supra; Caito v. United California Bank, 20 Cal. 3d 694, 576 P.2d 466, 144 Cal. Rptr. 751 (1978); see also People v. Nogarr, 164 Cal. App. 2d 591, 330 P.2d 858 (1958); Hagge v. Drew, supra; Wilkerson v. Thomas, supra), while the latter is not (sec. 15025(2)); the former are subject to community property rules (Estate of Murphy v. Murphy, 15 Cal. 3d 907, 544 P.2d 956, 126 Cal. Rptr. 820 (1976); Franklin v. Franklin, 67 Cal. App. 2d 717, 155 P.2d 637, 641 (1945)), while the latter is not (sec. 15025(2)(e)).4 Nothing in section 15025(1) undermines the impact of these differences. In view of the foregoing, I am satisfied that, while under California law, petitioners’ rights in respect of their fee interest in the Iowa Street Property and their rights in respect of their tenancy-in-common interest in the Plaza Property were of like kind, their rights in respect of those interests and their rights in respect of their tenancy-in-partnership interest were not of like kind.5 Legal title to petitioners’ interest in the Plaza Property ceased to be in their names; by deed, petitioners "remise[d] and forever quitclaimfed]” their interest in that property to the partnership. Consequently, the transformation of petitioners’ outright ownership of an interest in real property into a partnership interest so changed their legal relationship to that property as to disqualify the exchange from section 1031(a) treatment.6 Cf. M.H.S. Co. v. Commissioner, 575 F.2d 1177 (6th Cir. 1978), affg. a Memorandum Opinion of this Court; Estate of Meyer v. Commissioner, 503 F.2d 556 (9th Cir. 1974), affg. 58 T.C. 311 (1972); Lakritz v. United States, 418 F. Supp. 210, 213 (E.D. Wis. 1976); Gulfstream Land & Development v. Commissioner, 71 T.C. 587 (1979); 4A R. Powell & P. Rohan, Powell on Real Property, sec. 614 (1982); 60 Am. Jur. 2d, Partnership, sec. 101 (1972); 2 American Law of Property, sec. 6.9 (1952); Jensen, "Is a Partnership Under the Uniform Partnership Act an Aggregate or an Entity?” 16 Vand. L. Rev. 377 (1963); 2 W. McKee, W. Nelson & R. Whitmire, Federal Taxation of Partnerships and Partners, sec. 15.04(3)(b) (1977). But cf. 2 B. Bittker, Federal Taxation of Income, Estates and Gifts, sec. 44.3.4 (1981). Since the underlying properties were of a like kind, petitioners can still prevail, despite the differences between rights in an interest as a tenant in common and rights in an interest as a tenant in partnership, if they "held” their tenancy-in-common interest in the Plaza Property for a section 1031(a) purpose. The majority resolves this issue in petitioners’ Javor by concluding that petitioners "held” the general partnership interest simply as a continuation of their holding as tenants in common of the 10-percent interest of the Plaza Property. In so concluding, the majority has subverted the express requirement of section 1031(a) that the property received in the exchange "be held either for productive use in trade or business or for investment.” (Emphasis added.) Whatever the reach of that requirement may be where the taxpayer immediately exchanges the property received in the transaction for which the benefits of section 1031(a) is claimed in a tax-free transaction for an interest in the property of a like kind and the rights of the taxpayer are substantially the same as those which it had in the property previously received, that requirement is clearly not satisfied where those rights are not substantially the same.7  The majority’s analysis of the ancillary tax-free consequences of the exchange of the petitioners’ tenancy-in-common interest for the general partnership interest is beside the point. These same consequences (no recapture of investment credit, nonapplication of sections 1245,1250, and 453, and the carryover of basis and the tacking of holding periods) ensue in the case of a section 351 exchange where the property received in the exchange would be stock. See Rev. Rul. 75-292, 1975-2 C.B. 333; Comment, "Analysis of Revenue Ruling 75-292: A Proposal To Allow the Combined Use of Sections 1031 and 351 Without Destroying the Tax-Free Status of Either,” 17 Wm. & Mary L. Rev. 599 (1976). Indeed, the majority’s analysis in these respects substantially undermines its declination to decide whether a subsequent section 351 exchange would destroy the tax-free character of the original exchange under section 1031(a).8  Petitioners also argue that substance and intent should govern over the form of the transaction and that since petitioners intended the entire transaction to be tax free, this Court must find it so. Petitioners’ argument on this basis is founded on the premise that they could have accomplished a completely tax-free transaction by first contributing the Iowa Street Property to the partnership in exchange for their partnership interest (sec. 721) and then having the partnership exchange that property for the Plaza Property (sec. 1031). In the first place, petitioners’ premise may not be valid. The exchange by the partnership may not have satisfied the "held for productive use in a trade or business or for investment” (emphasis added) requirement of section 1031(a) with respect to the Iowa Street Property. See 2 A. Willis, J. Pennell & P. Postlewaite, Partnership Taxation, sec. 101.07 (3d ed. 1983); 2 W. McKee, W. Nelson & R. Whitmire, Federal Taxation of Partnerships and Partners, sec. 15.04(3)(b) (1977). See also note 7 supra. Secondly, the hard fact is that petitioners, for reasons of their own, structured the transaction as they did and they should not now be able to disavow that structuring because the tax consequences turned out to be different from what they had anticipated. See Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974), affg. 57 T.C. 46 (1971); Waltham Netoco Theatres, Inc. v. Commissioner, 49 T.C. 399 (1968), affd. 401 F.2d 333 (1st Cir. 1968). Compare United States v. Cumberland Public Service Co., 338 U.S. 451 (1950), with Commissioner v. Court Holding Co., 324 U.S. 331 (1945). Compare also Foxman v. Commissioner, 41 T.C. 535 (1964), affd. 352 F.2d 466 (3d Cir. 1965). Our opinion in Wagensen v. Commissioner, 74 T.C. 653 (1980), does not support petitioners’ position. In Wagensen, we merely held that the taxpayer was entitled to nonrecognition under section 1031 even though he intended, when he acquired the property, eventually to transfer the property to his children. We distinguished Mr. Wagensen’s eventual gift of the property from cases such as Regáis Realty Co. v. Commissioner, 127 F.2d 931 (2d Cir. 1942), affg. 43 B.T.A. 194 (1940), wherein the taxpayer had the present intent, when he received the like-kind property, to sell it. We applied this distinction in Click v. Commissioner, 78 T.C. 225 (1982), and held against the taxpayer under analogous circumstances. The instant case clearly falls within the ambit of Click. I would hold for respondent. Fay, Sterrett, and Cohen, J J., agree with this dissent.  I assume that the majority’s use of the phrase "joint ownership” is colloquial and in fact refers to a tenancy-in-common interest which was petitioners’ interest in the Plaza Property contributed to the partnership.   This requirement of sec. 1031(a) is generally unstated when the ownership interests, involved are equivalent (e.g., fee interest in improved realty for fee interest in unimproved realty). However, sec. 1.1031(a)-1(c), Income Tax Regs., alludes to this requirement by stating that an exchange of a 30-year lease for a fee interest will qualify under sec. 1031. A leasehold of less than 30 years, however, is not the equivalent of a fee interest. See Capri, Inc. v. Commissioner, 65 T.C. 162, 181-182 (1975); May Department Stores Co. v. Commissioner, 16 T.C. 547, 556 (1951); Standard Envelope Mfg. Co. v. Commissioner, 15 T.C. 41, 48 (1950). The nature-of-ownership-interests requirement has also arisen in the oil and gas lease area. See, e.g., Crichton v. Commissioner, 42 B.T.A. 490, 492-493 (1940), affd. 122 F.2d 181 (5th Cir. 1941); Midfield Oil Co. v. Commissioner, 39 B.T.A. 1154, 1157-1158 (1939). See also Rev. Rul. 68-331, 1968-1 C.B. 352. Similarly, respondent has conceded that a like-kind exchange occurs when the taxpayers exchange their undivided interests as tenants in common in three parcels of real estate for a 100:percent ownership interest in one parcel. Rev. Rul. 73-476, 1973-2 C.B. 300. See also Rev. Rul. 55-351, 1955-1 C.B. 343; Rev. Rul. 57-154, 1957-1 C.B. 262.   This dual standard is reflected in Estate of Meyer v. Commissioner, 58 T.C. 311 (1972), affd. 503 F.2d 556 (9th Cir. 1974), wherein we held that an exchange of a general partnership interest for a general partnership interest satisfied the requirements of sec. 1031(a), while an exchange of a general partnership interest for a limited partnership interest did not so qualify even though in both instances the characteristics of the underlying partnership property were the same. By way of contrast, the primary focus of the more recent cases (Pappas v. Commissioner, 78 T.C. 1078 (1982); Long v. Commissioner, 77 T.C. 1045 (1981); Gulfstream Land & Development v. Commissioner, 71 T.C. 587 (1979)) was on the characteristics of the underlying partnership property. As a consequence of the presence in this case of like-kind real estate, there is no occasion to explore the nuances of the varying language in Gulfstream Land & Development v. Commissioner, supra, and Pappas v. Commissioner, supra, where we stated that, in an exchange of general partnership interests, we look to the underlying assets "only to determine whether that bona fide exchange of partnership interests violates clear congressional intent to exclude exchanges of stock in trade from qualification under section 1031(a),” Gulfstream Land & Development v. Commissioner, supra at 595-596, and in Long v. Commissioner, supra, where we stated that sec. 1031 "require[s] that the underlying assets of each partnership be of like kind[.]” Long v. Commissioner, supra at 1072. See Brier, "Like-Kind Exchanges of Partnership Interests: A Policy Oriented Approach,” 38 Tax L. Rev. 389, 405 (1983).   Dower and curtesy have been abolished in California. See Cal. Civ. Code sec. 5129 (West 1983).   See Wright, "California Partnership Law and the Uniform Partnership Act,” 9 Cal. L. Rev. 116 (1921), published prior to California’s adoption of the Uniform Partnership Act, which contains an exhaustive analysis of the differences between a tenancy in common and a tenancy in partnership in light of the effect of the changes made by the UPA on a partner’s ownership rights in the partnership’s underlying property.   In view of this conclusion, it is unnecessary for me to decide whether the property exchanged for the partnership interest was the Iowa Street Property or the Plaza Property. In either case, the nature of petitioners’ rights was substantially altered.   With one exception, the legislative history of sec. 1031(a) does not specifically address the application of the "held” requirement to property received in the exchange. Nevertheless, it is clear that Congress was concerned that such requirement not be broadly applied. See H. Rept. 486, 67th Cong., 1st Sess. 10 (1921), 1939-1 C.B. (Part 2) 168, 175-176; S. Rept. 275, 67th Cong., 1st Sess. 11 (1921), 1939-1 C.B. (Part 2) 181, 188-189; Hearings on H.R. 8245 Before the Senate Committee on Finance, 67th Cong., 1st Sess. 201 (1921), 1939-1 C.B. (Part 2) 206, 209; S. Rept. 1113, 67th Cong., 1st Sess. 1-2 (1923), 1939-1 C.B. (Part 2) 845, 846; S. Rept. 398,68th Cong., 1st Sess. 14 (1924), 1939-1 C.B. (Part 2) 266,276. See also 65 Cong. Rec. 2856 (1923), where Congressman Hawley stated, in describing how the like-kind nonrecognition provision worked, that the taxpayer "then * * * must hold the land he receives in exchange as an investment, at least for a time." (Emphasis added.) There may be situations in which a taxpayer exchanges his interest in property for an interest as a tenant in partnership (where the property involved represents the bulk of the holdings of the partnership) and the latter interest is so substantial that it may well be concluded that no significant change in the taxpayer’s interest occurred. See Brier, supra note 3, at 406. Compare Rev. Rul. 75-292,1975-2 C.B. 333. A 10-percent interest as a tenant in partnership simply does not fall within such an exceptional category. On the other hand, a transaction which might fall within this exceptional category, such as an interest in a tenancy in partnership as a general partner acquired and then exchanged for another such interest in an integrated transaction such as that involved herein (the underlying properties being of a like kind), might still be subject to the "held” requirement of sec. 1031.   A similar problem arises in a situation where an individual who is the sole shareholder of a corporation holding real property for investment desires to have that property exchanged for other like-kind property which he then intends to hold for investment in his individual capacity. Whether the shareholder, pursuant to an integrated transaction, liquidates the corporation first and then makes the exchange or has the corporation make the exchange first and then liquidates, there has been a transmutation of petitioner’s investment from stock to real estate. The majority’s rationale would appear to lead to the conclusion that the "held” requirement of sec. 1031(a) has been met with the result that the preliquidation exchange in one case or the postliquidation exchange in the other would be tax free.