UNITED STATES TAX COURT

T.C. Memo. 1996-150

UNITED STATES TAX COURT

RAYMOND ST. LAURENT, Petitioner v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 23048-93.

Filed March 25, 1996.

Bryan M. Dench, for petitioner.

William T. Hayes and Louise R. Forbes, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WELLS, Judge:

Respondent determined a deficiency of

$125,887 in petitioner’s 1988 Federal income tax.

After

concessions, the only issue remaining for decision is whether,

pursuant to section 1031(a), petitioner may defer recognition of

gain realized upon the sale of certain real property.

Unless

- 2 otherwise indicated, all section references are to the Internal

Revenue Code as in effect for the year in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

At the time the petition in the instant case was filed,

petitioner resided in Lewiston, Maine.

During 1988, petitioner and his ex-wife, Phyllis St.

Laurent, owned, as tenants in common, an apartment complex known

as RPDS Estates (RPDS) located in Auburn, Maine.

Petitioner

decided to sell RPDS and acquire other real property in which Ms.

St. Laurent would not have an interest.

Petitioner intended to

dispose of his interest in RPDS by exchanging it for other

property in a manner that would entitle him to nonrecognition

treatment of the gain realized pursuant to section 1031(a).

On May 9, 1988, petitioner and Ms. St. Laurent agreed to

sell RPDS to Richard and Barbara Labbe for $1,900,000.

The

purchase and sale agreement (sale agreement) signed by them

provided that “It is agreed between the parties that Purchasers

shall assist Seller in consummating a Section 1031 Tax Deferred

Exchange.

Seller shall indemnify Purchaser of any legal or

accounting costs of said exchange.”

After the sale agreement was signed, petitioner began

looking for property to replace his interest in RPDS, but he had

not selected replacement property by the time the sale of RPDS

closed.

The closing was delayed pending regulatory approval of

- 3 the sale and performance of certain work on RPDS.

The closing

took place November 4, 1988, and on that date petitioner and Ms.

St. Laurent transfered RPDS to the Labbes for $1,880,000.

As

part of the closing, the sale agreement was amended (amendment)

to provide procedures by which an exchange of properties would be

effected.

The amendment provided in pertinent part:

In lieu of the terms of sale described above in this

Agreement, the Sellers may, at their exclusive option,

designate one or more properties (the "Exchange

Property") to be acquired by Buyer and exchanged with

the Sellers for the Property to be transferred

hereunder in a manner intended to qualify as a tax free

exchange of properties under Section 1031 of the United

States Internal Revenue Code of 1986, as amended (the

"Exchange"). Buyer makes no representation that the

Exchange will qualify under Section 1031 of the U.S.

Internal Revenue Code of 1986, as amended. Buyer

agrees to cooperate with the Sellers in the purchase of

the Exchange Property designated by the Sellers,

including negotiation for the purchase of the Exchange

Property; to execute, but not otherwise prepare,

contracts, documents and instruments as requested in

writing by the Sellers; to purchase the Exchange

Property designated by the Sellers; and to execute all

other documents necessary to consummate the Exchange as

reasonably requested in writing by the * * * Sellers.

Buyer shall have no obligation to find or select the

Exchange Property; shall not be responsible for the

negotiation of the terms of such acquisition or the

preparation of the documents containing such terms;

shall not be responsible for the failure of such

purchase of the Exchange Property to be fully closed or

settled; shall not be required to advance any funds on

behalf of the Exchange prior to the settlement

hereunder; and shall not be required to advance any

funds above the purchase price of the Property and

other sums otherwise payable by Purchaser hereunder for

the Property, as a result of any such Exchange. The

Exchange shall be accomplished by any of the following

methods, at the sole option of the Sellers:

*

*

*

*

*

*

*

- 4 (B)

A delayed like kind exchange, whereby the

purchase price shall be paid by Buyer to

Coastal Savings Bank of Portland, Maine (the

“Escrow Agent”), as escrow holder, for a term

of one hundred eighty (180) days after

settlement (the “Exchange Period”) and the

deed conveyed to Buyer and the settlement

otherwise consummated as elsewhere herein

provided. The entire purchase price shall be

held by the Escrow Agent in an interestbearing account. Within forty-five (45) days

of the settlement (the “Designation Period”),

the Sellers may designate in writing the

Exchange Property to be acquired by Buyer

with the escrowed money, the costs of which

are to be paid from the escrowed money. If

the Sellers fail to designate an Exchange

Property within the Designation Period, then

upon the expiration of the Designation

Period, the Escrow Agent shall pay to the

Sellers the escrowed money and all interest

accrued thereon. If the Sellers designate

the Exchange Property during the Designation

Period, but the Exchange Property is not

transferred to the Sellers before the end of

the Exchange Period, then upon termination of

the Exchange Period, the Escrow Agent shall

pay to the Sellers the escrowed money and all

interest accrued thereon. The Sellers shall

have no right to receive the escrowed money

or interest accrued thereon prior to the

earlier of (i) settlement on the Exchange

Property, (ii) termination of the Designation

Period without the Sellers having designated

the Exchange Property, or (iii) termination

of the Exchange Period. All funds remaining

in the escrow upon termination of the

Exchange Period or after settlement on the

Exchange shall, after paying the Exchange

Price, be paid to the Sellers.

(C)

Any other arrangement mutually satisfactory

to the Sellers and Buyer whereby the Exchange

Property is conveyed to the Sellers and the

Property is conveyed to Buyer.

Two checks in the amount of $390,500.30, made payable to the

order of Coastal Savings Bank-Escrow Agent (escrow agent), were

- 5 received by petitioner and Ms. St. Laurent at the closing.

Petitioner delivered his check to the escrow agent on November 4,

1988, and it was deposited in an escrow account that was opened

for the benefit of petitioner on November 14, 1988.

A bank

officer assisted petitioner in establishing the escrow account,

and thereafter, the officer’s function was as a signatory on the

account.

The officer was not an agent of petitioner.

Petitioner continued to search for suitable exchange

properties subsequent to the closing on RPDS, viewing 40 to 50

properties.

The Labbes did not search for the properties, and

petitioner did not discuss with them the properties he was

considering.

Petitioner was advised to furnish a list of

replacement properties to the escrow agent because it was

required under the law governing like-kind exchanges.

Pursuant

to that advice, petitioner sent a letter dated December 16, 1988,

to the escrow agent in which he listed 20 properties that were

identified pursuant to section 1031 as like-kind property to be

received in exchange for his interest in RPDS.

The letter was

received by the escrow agent on or before December 19, 1988.

The

properties designated included Hillview Estates (Hillview), a 40unit trailer park in Turner, Maine, and a lot on Sheffield Street

in Lewiston, Maine (Sheffield lot).

Petitioner subsequently negotiated for the purchase of

Hillview, and, on January 30, 1989, petitioner signed an

agreement to buy Hillview.

The Labbes were not parties to the

- 6 agreement.

The agreed purchase price was $500,000, consisting of

$390,000 to be paid from the escrow account and a $110,000

seller-financed mortgage.

By letter dated March 20, 1989,

petitioner requested the escrow agent to release the funds in the

escrow account to the law firm handling the closing for Hillview.

On March 22, 1989, petitioner closed on Hillview.

The Labbes did

not participate in, nor were they present at, the closing.

Petitioner and Ms. St. Laurent timely filed a joint Federal

income tax return for 1988 on April 15, 1989.

They did not

request an extension of time to file such return.

On May 17, 1989, petitioner closed on the Sheffield lot.

OPINION

Section 1001 generally requires recognition of the entire

amount of gain or loss on the sale or exchange of property.

Section 1031(a)(1), however, provides for the nonrecognition of

such gain or loss on “the exchange of property held for

productive use in a trade or business or for investment if such

property is exchanged solely for property of like kind which is

to be held either for productive use in a trade or business or

for investment.”

For transfers after July 18, 1984, section

1031(a)(3), enacted as part of the Deficit Reduction Act of 1984

(DEFRA), Pub. L. 98-369, sec. 77(a), 98 Stat. 494, 595, governs

deferred like-kind exchanges.

Section 1031(a)(3) provides:

(3) Requirement that property be identified and

that exchange be completed not more than 180 days after

transfer of exchanged property.--For purposes of this

- 7 subsection, any property received by the taxpayer shall

be treated as property which is not like-kind property

if-(A) such property is not identified as

property to be received in the exchange on or

before the day which is 45 days after the date on

which the taxpayer transfers the property

relinquished in the exchange, or

(B) such property is received after the

earlier of-(i) the day which is 180 days after the

date on which the taxpayer transfers the

property relinquished in the exchange, or

(ii) the due date (determined with

regard to extension) for the transferor’s

return of the tax imposed by this chapter for

the taxable year in which the transfer of the

relinquished property occurs.

Although the transactions in issue are deferred like-kind

exchanges the tax consequences of which are governed by section

1031(a)(3), we precede our consideration of the statute by

looking to certain pre-DEFRA case law that continues to be

generally applicable to like-kind exchanges.

In structuring

their transactions as tax-deferred like-kind exchanges, taxpayers

have been allowed great latitude.

Biggs v. Commissioner, 69 T.C.

905, 913 (1978), affd. 632 F.2d 1171 (5th Cir. 1980).

For

instance, an agreement to sell property for cash may be converted

into a like-kind exchange before substantial implementation of

the transaction occurs.

(1969).

Coupe v. Commissioner, 52 T.C. 394, 405

Multiple parties may be involved in an exchange where

the potential buyer of the taxpayer’s property does not own any

- 8 property at the time that the agreement to exchange is signed.

Biggs v. Commissioner, supra at 913-914.

Exchange property need

not be identified at the time an agreement to effect an exchange

Alderson v. Commissioner, 317 F.2d 790 (9th Cir. 1963),

is made.

revg. 38 T.C. 215 (1962).

Proceeds of the sale of property to be

exchanged may be placed in escrow and, provided the taxpayer does

not constructively receive the proceeds, an exchange involving

property acquired with the proceeds will qualify for the benefits

of section 1031(a).

(1983).

Garcia v. Commissioner, 80 T.C. 491, 499-500

The taxpayer may locate and negotiate for the property

to be exchanged.

Biggs v. Commissioner, supra at 915.

The buyer

need not hold title to the exchange property received by the

taxpayer.

Biggs v. Commissioner, 632 F.2d at 1177.

Where a

preference for exchange is manifest, and an exchange actually

occurs, courts generally ignore the possibility that a sale of

the taxpayer’s property may occur if the exchange does not

actually take place.

Mercantile Trust Co. v. Commissioner, 32

B.T.A. 82, 87 (1935).

Although considerable latitude has been allowed by the

courts with respect to the structure of like-kind exchanges, that

latitude is not open ended.

T.C. 582, 590 (1990).

Estate of Bowers v. Commissioner, 94

A taxpayer’s intent to effect a section

1031(a) transaction is not determinative of the transaction’s tax

treatment, although intent is given deference where the parties

- 9 to the transaction have acted consistently therewith.

Garcia v.

Commissioner, supra at 498.

In the instant case, respondent makes two principal

arguments that the RPDS/Hillview exchange transaction fails to

qualify for tax-deferred treatment pursuant to section 1031(a).

Respondent’s first objection is that, in acquiring Hillview

himself, petitioner failed to observe the terms of the amendment

to the sale agreement that provided that the Labbes would

purchase the property to be exchanged for his interest in RPDS.

Secondly, respondent contends that petitioner’s identification of

20 replacement properties exceeds the limitation on the number of

replacement properties that may be designated pursuant to section

1031(a)(3), and that the particular replacement property received

in the exchange was not subject to determination by contingencies

beyond the control of the parties to the exchange.

As to respondent’s first contention, the amendment to the

sale agreement makes clear that the manner in which the exchange

transaction was to be effected was almost exclusively within

petitioner’s control.

We view the Labbes’ undertakings in the

amendment with respect to the acquisition of property to be

exchanged for petitioner’s interest in RPDS as merely

accommodations to petitioner to ensure that the Labbes would

perform whatever acts that might be deemed necessary to cause an

exchange to qualify for like-kind exchange treatment pursuant to

section 1031(a).

Moreover, the amendment provides that, in

- 10 addition to the methods set forth therein, the exchange of

petitioner’s interest in RPDS for like-kind property may be

effected in any other manner mutually satisfactory to the parties

thereto.

Respondent concedes that it was not necessary for the Labbes

to take title to Hillview in order for the exchange of

petitioner’s interest in RPDS for such property to meet the

requirements of section 1031(a).

F.2d at 1177.

See Biggs v. Commissioner, 632

Consequently, we do not consider it significant,

for purposes of section 1031(a), that the parties to the

amendment did not follow the procedure for acquiring the

replacement property (i.e., Hillview).

Moreover, by their

conduct, we treat petitioner and the Labbes as having adopted,

pursuant to the provisions of the amendment, a mutually

satisfactory alternative method for accomplishing the exchange of

petitioner’s interest in RPDS for Hillview.

We next consider respondent’s argument concerning the

provisions of section 1031(a)(3).

As noted above, respondent

argues that petitioner’s identification of replacement properties

did not satisfy section 1031(a)(3)(A) because (1) petitioner

identified 20 properties as replacement properties, and (2) the

particular replacement properties to be received were not to be

determined by contingencies beyond the control of the parties to

the exchange.

Respondent relies on the following passage in the

conference report on DEFRA:

- 11 The conferees note that the designation requirement in

the conference agreement may be met by designating the

property to be received in the contract between the

parties. It is anticipated that the designation

requirement will be satisfied if the contract between

the parties specifies a limited number of properties

that may be transferred and the particular property to

be transferred will be determined by contingencies

beyond the control of both parties. For example, if A

transferred real estate in exchange for a promise by B

to transfer property 1 to A if zoning changes are

approved and property 2 if they are not, the exchange

would qualify for like-kind treatment. * * * [H. Conf.

Rept. 98-861, at 866 (1984), 1984-3 C.B. (Vol. 2) 1,

120; emphasis supplied.]

After the year in issue, the Commissioner issued regulations

providing that, in general, a taxpayer may identify either (1) a

maximum of three properties as replacement properties, or (2) any

number of properties provided the fair market value of the

designated properties does not exceed 200 percent of the fair

market value of all properties relinquished by the taxpayer in

the exchange.

Sec. 1.1031(k)-1(c)(4), Income Tax Regs., T.D.

8346, 1991-1 C.B. 150, 157.

The regulations, however, are

prospective only, as they apply to transfers of property made on

or after June 10, 1991, or in certain cases, to transfers made on

or after May 16, 1990.1

Sec. 1.1031(k)-1(o), Income Tax Regs.,

1

Because the Commissioner’s regulations are not applicable to

the transactions in issue, we express no opinion concerning the

regulations’ validity. We note, however, where a statute is

silent or ambiguous with respect to an issue that is the subject

of a regulation, a reviewing court need only decide whether the

regulation is based on a permissible construction of the statute.

Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.,

467 U.S. 837, 843 (1984).

- 12 T.D. 8346, 1991-1 C.B. at 165.

The Commissioner included no

requirement in the regulations that the particular replacement

property to be received by a taxpayer be determined by

contingencies beyond the control of the parties to the exchange.

Sec. 1.1031(k)-1(c), Income Tax Regs., T.D. 8346, 1991-1 C.B. at

156.

Petitioner argues that section 1031(a)(3)(A) does not

expressly limit to less than 20 the number of replacement

properties that may be designated and that the exchange of

petitioner’s interest in RPDS for Hillview complied with the

literal language of section 1031(a)(3).

We agree.

As the regulations are not before us, the issue presented in

the instant case is one of statutory interpretation.

In

construing section 1031(a)(3)(A), our task is to give effect to

the intent of Congress, and we must begin with the statutory

language, which is the most persuasive evidence of the statutory

purpose.

United States v. American Trucking Associations, Inc.

310 U.S. 534, 542-543 (1940).

Ordinarily, the plain meaning of

the statutory language is conclusive.

United States v. Ron Pair

Enters., Inc., 489 U.S. 235, 241-242 (1989).

Where a statute is

silent or ambiguous, we may look to legislative history in an

effort to ascertain congressional intent.2

Burlington No. R. Co.

2

Of course, even where the statutory language appears to be

clear, we are not precluded from consulting legislative history.

(continued...)

- 13 v. Oklahoma Tax Commn., 481 U.S. 454, 461 (1987); Griswold v.

United States, 59 F.3d 1571, 1575-1576 (11th Cir. 1995);

Mississippi Poultry Association, Inc. v. Madigan, 992 F.2d 1359,

1364 n.28 (5th Cir. 1989).

Legislative history that is

inconclusive, however, should not be relied upon to supply a

provision not enacted by Congress.

United States v. American

College of Physicians, 475 U.S. 834, 846-847 (1986).

The statute is silent and does not contain either a

restriction on the number of replacement properties that may be

identified or a requirement that the replacement property be

determined by contingencies beyond the control of the parties to

the exchange.

Consequently, we may look to the legislative

history in order to decide whether Congress intended that an

identification of replacement properties conform to the

requirements urged by respondent in order to be effective.

We,

however, do not find the conference report to be conclusive as to

the number of replacement properties that a taxpayer may

identify.

The conference report merely states:

“It is

anticipated that the designation requirement will be satisfied if

the contract between the parties specifies a limited number of

properties that may be transferred”.

H. Conf. Rept. 98-861,

supra at 866, 1984-3 C.B. (Vol 2) at 120 (emphasis supplied).

2

It

(...continued)

United States v. American Trucking Associations, Inc., 310 U.S.

534, 543-544 (1940).

- 14 does not specify the number.

The foregoing sentence from the

conference report is also vague in that it is a statement of what

will pass muster under the statute; it does not purport to define

what will not satisfy the statute.

Although the example given in

the conference report mentions only two properties, as we read

the example, it merely illustrates a contingent exchange

arrangement that would qualify for like-kind treatment.

It does

not purport to restrict to two the maximum number of properties

that may be identified.

Id.

Moreover, it should be noted that

the primary concern addressed by Congress in amending section

1031(a) was to prevent long periods of delay between the exchange

of properties, as was present in the case of Starker v. United

States, 602 F.2d 1341 (9th Cir. 1979) (where the exchange could

have occurred up to 5 years after the initial transaction).

See

H. Conf. Rept. 98-861, supra at 866, 1984-3 C.B. (Vol 2) at 120.

Nonetheless, we do believe that Congress intended that

taxpayers identify only a finite number of replacement

properties.3

To construe the statute otherwise, i.e., as

3

We note the following dictionary definitions of the word

“limited”: “Confined within limits, restricted in extent,

number, or duration”, Webster’s Third New International

Dictionary (1993); “Restricted; bounded; prescribed. Confined

within positive bounds; restricted in duration, extent, or

scope”, Black’s Law Dictionary (6th ed. 1990); “confined or

restricted within certain limits”, Webster’s II New Riverside

University Dictionary (1984). Petitioner’s identification of

replacement properties was “limited” within the everyday,

ordinary meaning of the term. Cf. Malat v. Riddell, 383 U.S.

(continued...)

- 15 allowing an unlimited number of replacement properties to be

identified, would make the identification requirement

meaningless.

The fact that Congress included an identification

requirement suggests that an identification of an unlimited

number of properties could result in none being identified.

In the instant case, however, we need not, and do not,

decide the outer limit of how many replacement properties the

statute permits taxpayers to identify.

Petitioner’s effort to

comply with the statute by identifying 20 specific properties to

be received in the exchange appears to have been made in good

faith and does not cause an absurd result, given the fact that

the statute is silent as to the permissible number and the

legislative history is an unreliable indicator of the proper

limitation.4

Petitioner sought advice and, because the

regulations were not published, even in proposed form, at the

3

(...continued)

569, 571 (1966).

4

This is not to say, however, that the requirements of sec.

1.1031(k)-1(c)(4), Income Tax Regs., T.D. 8346, 1991-1 C.B. 150,

157, generally limiting to three the number of properties that

taxpayers are entitled to identify, or any number of properties

where their total value does not exceed 200 percent of the fair

market value of the properties relinquished, is not a valid

exercise of the Commissioner’s authority to interpret a statute

which is silent on the matter. As stated above, that regulation

is not before us because it is not effective for the year in

issue.

- 16 time the identification was made,5 neither petitioner nor his

adviser was on notice that the Commissioner would take the

position that the number of replacement properties that could be

identified pursuant to the statute generally would be limited to

three.

Consequently, a trap for unwary taxpayers was set.6

We also do not accept respondent’s contention that

petitioner’s identification of replacement properties did not

satisfy section 1031(a)(3)(A) because the determination of the

particular replacement property or properties to be received was

not based on contingencies beyond the control of the parties to

the exchange.

As noted above, the legislative history relied on

by respondent states:

“It is anticipated that the designation

requirement will be satisfied if * * * the particular property to

be transferred will be determined by contingencies beyond the

control of both parties.”

H. Conf. Rept. 98-861, supra at 866,

1984-3 C.B. (Vol. 2) at 120.

As we stated above, we believe that

Congress was merely illustrating that a contingent identification

5

We note that the proposed regulations setting forth the

Commissioner’s construction of the statute and legislative

history were not published until May 16, 1990, after the

transactions in issue occurred. Sec. 1.1031(a)-3, Proposed

Income Tax Regs., 55 Fed. Reg. 20282.

6

The difficulty taxpayers faced in interpreting the

legislative history has been noted by at least one commentator.

Wasserman, “Mr. Mogul’s Perpetual Search for Tax Deferral:

Techniques and Questions Involving Section 1031 Like-Kind

Exchanges In a World of Changing Tax Alternatives”, 65 Taxes 975,

1000 n.211 (1987).

- 17 would satisfy the statutory requirement.

It does not appear to

mean, even by implication, that an identification of multiple

properties without a contingency would not satisfy the

identification requirement.

As with the number of replacement

properties that may be identified, we similarly consider the

conference report inconclusive as to any contingency requirement.

As noted above, the Commissioner did not see fit to adopt such a

requirement in the regulations.

We do not believe that our

construction of the statute as not imposing a contingency

requirement would make the identification requirement

meaningless.

Accordingly, we are not persuaded that Congress

intended that an identification of replacement properties would

satisfy the identification requirement only if the particular

property to be received were to be determined by contingencies

beyond the control of the parties to an exchange.

Consequently, we conclude that petitioner made a valid

identification of replacement properties within the statutorily

prescribed period and that Hillview constitutes property of a

like kind received in exchange for petitioner’s interest in RPDS

pursuant to section 1031(a)(3).

Petitioner’s exchange of his interest in RPDS for the

Sheffield lot, however, does not qualify as a like-kind exchange

pursuant to the provisions of section 1031(a)(3).

As noted

above, section 1031(a)(3)(B) provides that, in order to be

considered like-kind property, replacement property may not be

- 18 received after the earlier of (1) 180 days after the transfer of

property relinquished in such exchange, or (2) the due date of

the return, including extensions, for the year in which the

relinquished property is transferred.

Petitioner’s return for

1988, the year in which the transfer of his interest in RPDS

occurred, was due on April 15, 1989.

That due date was less than

180 days after the transfer of his interest in RPDS, and so it

marks the end of the time allowed for completing the exchange of

such interest for like-kind property.

Petitioner did not receive

the Sheffield lot until May 17, 1989.

Consequently, petitioner

failed to complete the exchange of his interest in RPDS for the

Sheffield lot within the statutorily prescribed time limit.

1031(a)(3)(B)(ii).

Sec.

Furthermore, respondent contends, and

petitioner does not dispute, that the transfer of the Sheffield

lot to petitioner occurred 194 days after petitioner transferred

his interest in RPDS.7

Consequently, the exchange of

petitioner’s interest in RPDS for the Sheffield lot was not

completed within the 180-day period prescribed by section

1031(a)(3)(B)(i).

Accordingly, the Sheffield lot is not property

of a like kind received in exchange for petitioner’s interest in

7

Indeed, other than objecting to respondent’s proposed

ultimate finding of fact that the transaction involving the

Sheffield lot was not a qualified exchange under sec. 1031(a),

petitioner makes no argument on brief with respect to the

Sheffield lot transaction.

- 19 RPDS for purposes of the statutory provisions governing deferred

like-kind exchanges.

Sec. 1031(a)(3).

In sum, we hold that petitioner must recognize gain realized

upon the disposition of his interest in RPDS only with respect to

the exchange of his interest in RPDS for the Sheffield lot.

To reflect concessions and the foregoing,

Decision will be entered

under Rule 155.