## Facts

- The Aldersons owned 31.148 acres of agricultural land in Buena Park, California, held for productive use or investment.
- On May 21, 1957, the Aldersons and Alloy Die Casting Company (Alloy) opened escrow for Alloy to acquire the Buena Park property at $5,550 per acre (total $172,871.40), and Alloy deposited $17,205.
- After opening escrow, the Aldersons located replacement farmland in Monterey County (the Salinas property) and sought to dispose of Buena Park through a like-kind exchange rather than a cash sale.
- On August 19, 1957, the parties amended the Buena Park escrow to require Alloy to acquire the Salinas property and exchange it for Buena Park in place of the cash transaction, with a fallback to the original cash purchase if the exchange was not completed by September 11, 1957.
- Also on August 19, the Aldersons (through their daughter) opened escrow instructions for the Salinas property; Alloy provided the funds to acquire Salinas and arranged deed mechanics so that any interim title in Alloy would be immediately followed by a deed from Alloy to the Aldersons.
- Deeds for both properties were recorded on September 4, 1957, completing reciprocal transfers so the Aldersons ended with the Salinas property rather than cash proceeds from Buena Park.
- The Commissioner treated the overall arrangement as a taxable sale of Buena Park with recognized gain under I.R.C. § 1002, followed by the Aldersons’ purchase of Salinas, and assessed a 1957 deficiency of $39,530.58.
- The Tax Court sustained the deficiency, concluding the transaction was a sale rather than a like-kind exchange under I.R.C. § 1031(a).

## Issues

1. Whether the integrated Buena Park-to-Salinas transaction was a taxable sale with recognized gain under I.R.C. § 1002, followed by a purchase of replacement property.
2. Whether the transaction instead constituted a nonrecognition like-kind exchange of real property under I.R.C. § 1031(a) despite Alloy’s intermediary role and the deal’s initial cash-sale form.

## Decision

- The Ninth Circuit reversed the Tax Court.
- The court held the transaction qualified as a like-kind exchange under I.R.C. § 1031(a), not a taxable sale under I.R.C. § 1002.
- The court treated the steps (amended escrow, Alloy’s acquisition of Salinas, and reciprocal deeds) as a single exchange in substance, and held the intermediate mechanics did not convert the exchange into a sale.

## Legal Principles

- For § 1031(a), the controlling characterization turns on the substance of the completed, integrated transaction rather than the initial form of an agreement or the sequencing of escrow steps.
- A transaction may qualify as an “exchange” under § 1031(a) when the counterparty acquires replacement property solely to transfer it to the taxpayer in a reciprocal property-for-property swap.
- Coordinated, multi-step transfers that culminate in reciprocal deeds can constitute an exchange, even if one party briefly holds title to the replacement property as part of the implementation.
- Where the taxpayer does not, in substance, receive cash proceeds but instead receives like-kind real property in return, gain is not recognized under § 1031(a).

## Conclusion

The Ninth Circuit held that the Aldersons’ disposition of the Buena Park property and acquisition of the Salinas property, implemented through amended escrow instructions and reciprocal deed recordings, was a single like-kind exchange under I.R.C. § 1031(a), so the gain was not recognizable under I.R.C. § 1002.


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