## Facts

- A owned a ranch (first ranch) used in a livestock-raising business and sought to dispose of it and acquire another ranch for similar use.
- A and B signed a written agreement for B to acquire A’s ranch; the agreement also required B to cooperate if A located replacement property.
- A located a second ranch owned by C that was suitable for livestock-raising.
- B contracted to purchase the second ranch from C; A was not a party to that contract, and B was not acting as A’s agent.
- At closing, B purchased the second ranch from C and immediately transferred it to A in exchange for A’s first ranch.
- As part of the exchange/closing arrangements, liabilities encumbering the ranches were assumed and shifted among A and B, and C released B from a note once A assumed it.
- Escrowed funds deposited by B under the initial A–B agreement were returned to B because the escrow conditions were not satisfied; the funds were never available to A.
- A intended to hold the replacement ranch for productive use in its livestock business.
- B did not intend to hold the second ranch for productive use in a trade or business or for investment; B’s participation was transactional.

## Issues

1. Whether the integrated steps among A, B, and C constituted an “exchange” of like-kind real property under IRC § 1031(a), rather than a taxable sale by A followed by a purchase.
2. Whether nonrecognition under § 1031(a) applied to A and/or B, including the effect of liabilities assumed in the transaction.

## Decision

- The IRS treated the overall arrangement as an exchange of like-kind real property for purposes of § 1031(a).
- As to A, the exchange qualified for nonrecognition of gain or loss under § 1031(a).
- As to B, the exchange did not qualify for nonrecognition under § 1031(a) because B did not hold the relevant property for productive use in a trade or business or for investment.
- For A, liabilities assumed and relieved were treated under the § 1031 liability netting rules so that A did not have net “boot” from debt relief.

## Legal Principles

- A multi-party transaction may qualify as a § 1031 exchange when, in substance, the taxpayer relinquishes real property and receives like-kind replacement real property as part of an integrated exchange, even if an initial contract was framed as a sale.
- Nonrecognition under § 1031(a) applies only to a taxpayer who both relinquishes and receives property held for productive use in a trade or business or for investment; this holding-purpose requirement is applied separately to each participant.
- A third party’s acquisition of replacement property is not treated as the taxpayer’s direct purchase where the third party is not the taxpayer’s agent and the taxpayer is not obligated on the third party’s purchase contract.
- In a § 1031 exchange, liabilities assumed by each side are netted under Treas. Reg. § 1.1031(b)-1(c) to determine whether a taxpayer received net non-like-kind value (boot) that could trigger current gain recognition.

## Conclusion

The IRS concluded that an integrated three-party ranch transaction could be treated as a like-kind exchange under § 1031 for the ranch owner who exchanged business-use real property for like-kind business-use real property, while denying § 1031 treatment to the intermediary who acquired and transferred the replacement ranch without a qualifying holding purpose; assumed liabilities were netted in evaluating whether the owner received boot.


Rev. Rul. 77-297, 1977-2 C.B. 304 (1977)