## Facts

- An individual taxpayer was the sole shareholder of a corporation.
- In 1958, the taxpayer purchased land and a house and used it continuously as rental, income-producing property.
- In 1970, the corporation owned farm land and improvements (real property) and farm machinery (tangible personal property).
- In 1970, the taxpayer transferred the rental house and lot to the corporation in exchange for the corporation’s transfer of (i) farm land and improvements and (ii) farm machinery.
- The taxpayer intended to use the farm property to raise cattle for profit and did not intend to live on the farm.
- The corporation intended to hold the house and lot as rental, income-producing property.
- The fair market value of the rental real property equaled the fair market value of the farm real property at the time of the exchange.

## Issues

1. Whether the exchange of rental real property for farm real property between a sole shareholder and the shareholder’s corporation qualifies for nonrecognition under I.R.C. § 1031(a).
2. Whether the receipt of farm machinery in the exchange affects nonrecognition treatment and triggers gain recognition under I.R.C. § 1031(b).
3. Whether the related-party relationship (sole shareholder and wholly owned corporation) prevents § 1031(a) treatment on these facts.

## Decision

- The exchange of the taxpayer’s rental real property for the corporation’s farm real property qualified as an exchange of like-kind property under § 1031(a), so gain or loss attributable to that real-property component was not recognized.
- Farm machinery was not like kind to real property; to the extent the taxpayer received the machinery, the machinery was non-qualifying property, and gain (if any) was recognized under § 1031(b) up to the machinery’s fair market value.
- The sole-shareholder/wholly-owned-corporation relationship did not, by itself, disqualify the otherwise qualifying real-property exchange from § 1031(a) treatment.

## Legal Principles

- Under § 1031(a), no gain or loss is recognized 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.
- For “like kind,” the controlling inquiry is the nature or character of the property (not grade or quality); different types of real property (e.g., rental residential realty and farm realty) are generally like kind if held for qualifying business or investment purposes.
- Real property and tangible personal property are different classes; tangible personal property (e.g., farm machinery) is not like kind to real property for § 1031(a) purposes.
- When an otherwise qualifying § 1031 exchange includes receipt of non-like-kind property, § 1031(b) requires recognition of realized gain up to the fair market value of the non-like-kind property received.
- A related-party exchange may qualify under § 1031(a) when the statutory requirements are met; relatedness alone is not a per se bar in the absence of an applicable statutory restriction.

## Conclusion

The IRS concluded that a sole shareholder’s exchange of rental real estate for the corporation’s farm real estate qualified for § 1031(a) nonrecognition because the real properties were like kind and held for business or investment, but that receipt of farm machinery was non-like-kind property requiring gain recognition under § 1031(b) to the extent of the machinery’s value.


Rev. Rul. 72-151, 1972-1 C.B. 224 (1972)