Section 1031 Exchange of Like Kind Property: A Court in Trouble
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in Trouble
Taxpayers, Mr. and Mrs. Carlton, granted an option contract to General
Development Corporation to acquire their ranch land. The contract pro-
vided that the Carltons could require General to purchase other ranch prop-
erty for the purpose of exchanging the properties in lieu of cash payment.'
Throughout the negotiations Carlton intended to execute, pursuant to sec-
tion 1031 of the Internal Revenue Code of 1954,2 a non-taxable exchange
of his ranch for other property suitable for ranching. Pursuant to the op-
tion contract, Carlton arranged for General's purchase from third parties
of two other properties, which Carlton would accept in the exchange.
When General exercised its option to acquire Carlton's property, it signed
purchase contracts for the exchange properties. To avoid duplication in
title transfer, arrangements were made whereby title to the two exchange
properties would be conveyed directly to Carlton. General assigned its
purchase contracts for these two properties to Carlton and gave him the
total amount of their purchase price. In addition, General gave Carlton a
mortgage note for the balance of the acquisition cost of the Carlton ranch.'
On the same day, Carlton executed a deed to General for his ranch and
proceeded to consummate the purchase of one of the two exchange prop-
erties under the contract assigned to him by General. He gave his personal
check to the seller and received title to that property. On the following
day Carlton closed the transaction for the second property in a similar
manner. The Commissioner contended, and the district court concluded,
that because General had never acquired legal title to the exchange prop-
erties, it had no property to exchange. Thus, the transaction constituted a
sale and repurchase which did not qualify as a like kind exchange under
section 103 1.4 Carlton, on appeal, maintained that the transaction should
be viewed in its entirety, and that his intent to create an exchange of
properties of like kind was accomplished as the end result. Held, affirmed:
The substance of the transaction, rather than the intention of the tax-
payer, determines the incidence of taxation. The substance of this transac-
tion was that the appellants received cash for the deed to their ranch prop-
erty and not another parcel of land and this constituted a sale of the
ranch property which rendered the non-recognition of gain provisions of
§ 1031 inapplicable. Carlton v. United States, 385 F.2d 238 (5th Cir.
1967).
1 The contract also provided that if no suitable exchange property could be found, General
could acquire Carlton's ranch for a specified cash payment plus a mortgage note.
2 INT. REV. CODE of 1954, § 1031 (a) provides that no gain or loss shall be recognized upon
an exchange of like-kind properties held for productive use or investment.
'This mortgage and cash are considered boot and are taxable to the taxpayer under 5
1031(b). The tax on the boot is not in issue in the Carlton case nor in this Note. See Dean,
Like Kind Exchanges and Involuntary Conversion of Real Estate, 18 A.B.A. BULL. SECTION ON
TAXATION, PART 2, at 56 (1965).
'Carlton v. United States, 255 F. Supp. 812 (S.D. Fla. 1966). In their tax return of 1959
the Carltons treated the transaction as an exchange under § 1031. The Internal Revenue Service
considered it a sale and assessed taxpayer with a deficiency. Taxpayer paid the deficiency and filed
suit in the district court for refund.
1968]
NOTES](ViewImageLocal?handle=hein.journals/smulr22&div=55&collection=&method=preview&ext=.png&size=3)
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Section 1031 Exchange of Like Kind Property: A Court in Trouble
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