## Facts

- Multiple taxpayers owned unencumbered fee simple interests in real property held for productive use in a trade or business or for investment.
- In 1973 and 1974, they exchanged those unencumbered fee simple interests with real estate companies.
- In return, they received fee simple interests in other real property that was subject to 99-year condominium leases granting long-term possessory rights to third-party lessees in exchange for rent.
- Taxpayers reported the exchanges as nonrecognition like-kind exchanges under I.R.C. § 1031(a), reporting no gain or loss.
- The Commissioner issued deficiency notices, asserting the properties received were not like kind because of the long-term leases; alternatively, the dispute implicated the fair market value of property received if gain were recognized.

## Issues

1. Whether an exchange of unencumbered fee simple real property for fee simple real property subject to 99-year condominium leases qualifies as a like-kind exchange under I.R.C. § 1031(a).
2. If the exchange does not qualify under § 1031(a), what is the fair market value of the properties received for purposes of gain recognition.

## Decision

- The Tax Court held the exchanged properties were of like kind under § 1031(a) and no gain was recognized.
- The court rejected the Commissioner’s view that the lessor’s interest should be separated into a nominal reversionary interest and a distinct right to an income stream.
- The court did not reach the fair market value issue because § 1031(a) nonrecognition applied.

## Legal Principles

- The § 1031(a) “like kind” inquiry focuses on the nature or character of the property interest exchanged, not differences in grade, quality, or particular economic attributes.
- A fee simple interest in real property remains a fee simple interest—and is like kind to another fee simple interest—even if the acquired property is subject to a long-term lease.
- A lessor’s rights under a long-term lease (including the right to receive rents and the reversion) are incidents of a single real property ownership interest and are not treated as separate “other property” for § 1031(b) purposes in this context.
- A regulation treating certain long-term leaseholds as like kind to real property does not require an inference that a lessor’s fee interest in leased real property is not like kind to an unencumbered fee.
- § 1031 is aimed at nonrecognition where the taxpayer continues an investment in the same general class of property and has not exchanged into cash or non-qualifying property.

## Conclusion

The Tax Court held that exchanging unencumbered fee simple real estate for fee simple real estate subject to 99-year condominium leases satisfies § 1031(a)’s like-kind requirement, so the taxpayers recognized no gain and the valuation dispute was unnecessary to decide.


Koch v. Commissioner, 71 T.C. 54 (1978)