Rev. Rul. 57-244

Advice has been requested whether an exchange of lots by three taxpayers under the circumstances set forth below constitutes a nontaxable exchange of property within the purview of section 1031 of the Internal Revenue Code of 1954.

In 1950, three taxpayers, A, B , and C , acquired from another individual a tract of 25 acres of undeveloped land in a residential suburb of a city. After the property was divided into three separate lots slightly unequal in size, the parties entered into an agreement among themselves that the lots could not be subdivided in the future. The agreement also contained a statement that the land was purchased by each of them for the purpose of constructing homes thereon.

Shortly after the acquisition of the property, the three individuals abandoned their plans to construct homes on the property because A acquired a home elsewhere in the city; B , by reason of his employment, moved to another city; and C , a single individual, decided not to build a home for himself. However, they did not then dispose of the property but continued to hold it for investment purposes.

In 1955, the three individuals agreed to exchange lots, with any difference in acreage to be paid for at the rate of 100 x dollars per acre. In the exchange, C acquired the lot owned by B, B acquired the lot owned by A , and A acquired the lot owned by C . After the exchange, A sold the lot acquired from C to another individual.

Section 1031(a) of the Code provides, in effect, that no gain or loss shall be recognized if property held for productive use in a trade or business of for investment is exchanged solely for property of a like kind to be held either for productive use in a trade or business or for investment.

Where money is received as boot in an exchange, section 1031 of the Code provides, in effect, that if an exchange would be within the provisions of section 1031(a) of the Code if it were not for the fact that money was also received in the exchange, then the gain, if any, to the recipient shall be recognized but not in excess of the money received.

In view of the foregoing, it is held that the above-described transactions constitute exchanges within the meaning of section 1031 of the Code, and the gain, if any, is recognized only to the extent of the cash received. Compare W. D. Haden Co. v. Commissioner , 165 Fed.(2d) 588. The basis of the property acquired in the exchange is the basis of the property transferred by the taxpayer, decreased by the amount of any money received and increased by the amount of any gain recognized on the exchange.