Eighth Circuit: Like-kind exchange treatment denied

Eighth Circuit: Like-kind exchange treatment denied

The U.S. Court of Appeals for the Eighth Circuit affirmed a decision of a federal district court, finding that a taxpayer had improperly claimed "nonrecognition treatment" of gains from certain property exchanges involving a related party.

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The case is: North Central Rental & Leasing v. United States, No. 13-3411 (8th Cir. March 2, 2015)

 

Read the Eighth Circuit’s decision [PDF 41 KB]

Summary

Under the taxpayer’s like-kind exchange program, the taxpayer purchased its replacement property from a related party. The replacement property was equipment acquired by the related party from the manufacturer for purposes of transferring such property to the taxpayer. The related party had favorable financing terms with the manufacturer for the replacement property. Thus, under this program, the related party could use the sales proceeds it received for “essentially any business purposes it wanted”—such as paying bills or payroll.

In other words, as the Eighth Circuit found, the related party essentially received an up-to-six-month, interest-free loan from each exchange. The appeals court, thus, concluded that the program was structured to avoid the related-party rules of section 1031(f) and that, under section 1031(f)(4), the taxpayer could not defer its gain realized.

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