## Facts

- Bell Lines, Inc., an interstate trucking company, undertook a program (1959–1961) to replace a major portion of its truck tractors.
- Rather than trade in old tractors to the manufacturer, Bell arranged two formally separate transactions:
  - a cash purchase of new tractors from the manufacturer; and
  - a cash sale of used tractors to a third party (Horner Service Corporation).
- Bell recorded the transactions as distinct sale and purchase contracts and depreciated the new tractors using their full cash purchase price as basis.
- Unknown to Bell, the third-party buyer had an arrangement under which the manufacturer would later acquire the used tractors from the third party.
- The Commissioner recharacterized the overall replacement program as a like-kind exchange under I.R.C. § 1031, reduced the basis of the new tractors accordingly, and assessed a deficiency.
- Bell paid the assessment and sued for a refund; the district court ruled for Bell, and the United States appealed.

## Issues

1. Whether a truck-replacement program structured as a cash sale of used equipment to a third party and a separate cash purchase of new equipment must be treated, in substance, as a like-kind exchange under I.R.C. § 1031.
2. Whether, if § 1031 does not apply, Bell’s depreciable basis in the new tractors is the full cash purchase price under the general recognition rule of I.R.C. § 1002.

## Decision

- The Fourth Circuit affirmed the judgment for Bell.
- The court held the transactions were properly treated as a cash sale to a third party and a separate cash purchase from the manufacturer, not a § 1031 exchange.
- Because there was no qualifying exchange between Bell and the seller of the new tractors, Bell was entitled to use the full cash cost of the new tractors as depreciable basis, and the deficiency assessment was improper.

## Legal Principles

- I.R.C. § 1031 applies only when property held for productive use in a trade or business (or for investment) is exchanged solely for like-kind property to be held for similar qualifying purposes.
- When a taxpayer enters bona fide, legally effective contracts with different counterparties for (1) a cash sale of old property and (2) a cash purchase of new property, the transactions are not an “exchange” under § 1031 merely because their economic effect resembles a trade-in.
- Absent sham transactions or disregard of real legal relationships, the government may not collapse separate sale-and-purchase steps into a § 1031 exchange.
- If § 1031 does not apply, I.R.C. § 1002 supplies the default rule: gain on a sale is recognized, and the basis of property acquired by purchase is its cost for depreciation purposes.

## Conclusion

The court refused to recharacterize Bell’s separate cash sale and cash purchase as a like-kind exchange, holding that Bell could depreciate the new tractors using their full cash purchase price because § 1031 did not apply to the transactions as structured and executed.


Bell Lines, Inc. v. United States, 480 F.2d 710 (4th Cir. 1973)