In 1972, US investor received property, agreed to swap it same day, IRS challenged his tax treatment: Why court couldn't tax the exchange

A US investor acquired a property and, on the same day, agreed to exchange it for another investment property. The IRS challenged his attempt to receive tax-deferred treatment, arguing that he had never truly held the property as investment. But a federal appeals court disagreed, ruling that the plan to swap one investment property for another did not by itself disqualify the transaction under Section 1031.

The case involved Joseph R. Bolker and a property known as Montebello. The US Court of Appeals for the Ninth Circuit decided the case on May 17, 1985, after the dispute reached the court from the US Tax Court.

Why did Bolker acquire the property?

Bolker was the sole shareholder of Crosby Corporation, which owned Montebello. He had initially decided to liquidate the corporation and distribute the property to himself. The plan was connected to the anticipated development of Montebello.


However, financing problems changed those plans. Bolker decided that he would dispose of Montebello rather than develop it himself.

The important part of the case came when the corporate liquidation took place. On March 13, 1971, Crosby transferred its assets and liabilities to Bolker in exchange for his shares. The deed transferring Montebello to Bolker was recorded that same day.

Bolker also entered into a contract to exchange Montebello for other like-kind investment property.

What did Bolker do with the property?

Bolker did not keep Montebello for years before arranging the exchange. Instead, the exchange process began almost immediately after he received the property.

A corporation called Parlex, formed by Bolker's attorneys to facilitate the exchange, also became part of the transaction. Parlex contracted to convey Montebello to Southern California Savings & Loan.

The transactions were completed in 1972. Bolker reported no gain from the transaction, claiming that it qualified for nonrecognition under Section 1031(a) of the Internal Revenue Code.

The Commissioner of Internal Revenue argued that the transaction did not qualify under Section 1031. The IRS argued that a taxpayer needed to have an intention to keep the property as investment before deciding to exchange it. The Tax Court rejected that argument, and the Commissioner appealed.

Why did the Court side with the investor?

The Ninth Circuit said the language of the law did not require a taxpayer to intend to keep the first property indefinitely before deciding to exchange it.

The court found that a taxpayer could satisfy the holding requirement by owning the property and not intending to liquidate the investment or use it for personal purposes. In Bolker's case, his intention was to exchange Montebello for another like-kind investment property. The Ninth Circuit therefore held that Bolker had held Montebello for investment purposes under Section 1031 and affirmed the Tax Court's decision