## Facts

- Bennie D. Rutherford (and his wife, Marijon) operated a farming and cattle-raising business.
- Rutherford entered into an agreement with Wardlow involving breeding cattle to obtain improved genetic stock.
- Under the agreement, Wardlow delivered 12 “half-blood” cows to Rutherford.
- Rutherford agreed to breed the cows using his registered bull and to deliver to Wardlow the first 12 “three-quarter-blood” cows produced under the program.
- The arrangement was performed over about three years: Rutherford received the half-blood cows first and delivered the three-quarter-blood cows to Wardlow as they became available.
- On his income tax returns for the years in which he produced and delivered the three-quarter-blood cows, Rutherford deducted the costs of producing the cows as farm business expenses.
- Rutherford also took the position that his basis in the half-blood cows received from Wardlow was their fair market value.
- The Commissioner asserted that the transaction was an exchange of like-kind property under I.R.C. § 1031 and that Rutherford could not take a fair market value basis in the cattle received (and, on the Commissioner’s theory, Rutherford’s basis in the received cattle was not increased simply because Rutherford had deducted production costs associated with the cattle he transferred).
- Rutherford petitioned the U.S. Tax Court for redetermination of the resulting deficiencies.

## Issues

1. Whether Rutherford’s multi-year cattle arrangement, in which he received cattle first and later transferred other cattle, qualified as a like-kind exchange under I.R.C. § 1031.
2. If § 1031 applied, whether Rutherford’s basis in the cattle he received was their fair market value (as Rutherford argued) or a substituted/carryover basis determined under § 1031 (as the Commissioner argued).

## Decision

- The Tax Court treated the transaction as a qualifying like-kind exchange under I.R.C. § 1031 even though Rutherford received the cattle first and completed his delivery obligation over time.
- Because § 1031 governed, the court rejected Rutherford’s attempt to assign the received cattle a fair market value basis and instead applied the § 1031 basis rules for property received in an exchange (substituted/carryover basis, as adjusted under the statute).

## Legal Principles

- I.R.C. § 1031 provides nonrecognition for exchanges of like-kind property held for productive use in a trade or business (including livestock used in a ranching operation), when the transaction is properly characterized as an exchange rather than a taxable receipt for services.
- An exchange can qualify under § 1031 even when it is not simultaneous; receiving replacement property before transferring the relinquished property does not automatically prevent exchange treatment when the parties’ rights and duties reflect a reciprocal property swap.
- For § 1031 purposes, the “held for” requirement focuses on the taxpayer’s business or investment use of the property as part of a continuing enterprise; it is not defeated solely because the acquisition and disposition occur as parts of a planned exchange.
- When § 1031 applies, the basis of the property received is determined under § 1031’s substituted-basis rules rather than by assigning fair market value basis simply because the taxpayer acquired property through an exchange arrangement.
- A taxpayer generally may not obtain both current deductions for production costs and, at the same time, a stepped-up fair market value basis in replacement property received in a like-kind exchange; basis is governed by the exchange provisions and the basis of the property given up (as adjusted under the Code).

## Conclusion

The Tax Court characterized Rutherford’s cattle-breeding arrangement with Wardlow as a like-kind exchange under § 1031 even though Rutherford received the half-blood cows first and delivered the three-quarter-blood cows over several years. As a result, Rutherford was not entitled to treat the received cattle as newly purchased property with a fair market value basis; instead, the basis of the cattle received was determined under § 1031’s substituted-basis rules.


Rutherford v. Commissioner, T.C. Memo. 1978-505