Rev. Rul. 75-291

Advice has been requested whether the transaction described below is an exchange of property in which no gain or loss is recognized pursuant to section 1031(a) of the Internal Revenue Code of 1954.

Y, a corporation, desired to acquire a tract of land and a factory owned by X, an unrelated corporation engaged in the business of manufacturing certain products. Y entered into a written agreement with X for the acquisition of a tract of land and a factory owned by X. Pursuant to the agreement, Y acquired another tract of land and constructed a factory thereon solely for the purpose of exchanging the tract of land and new factory for X's land and existing factory. Under the terms of the agreement, Y could terminate the agreement if the costs of purchasing the land and building the factory exceeded a specified amount. Y purchased the land, built the factory solely on its own behalf, and consummated the exchange. No personal property was involved in the exchange.

Section 1031(a) of the Code provides that no gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.

In the instant case X exchanged land and an existing factory for other land and a new factory that Y had respectively acquired and built solely for the purpose of making the exchange. With respect to X, a taxable exchange is not deemed to arise merely because Y acquired the property specifically to complete the exchange, if the transaction otherwise qualifies for nonrecognition of gain under section 1031(a) of the Code. See Mercantile Trust Company of Baltimore, 32 B.T.A. 82 (1935), acq. XIV-1 C.B. 13 (1935), and Alderson v. Commissioner, 317 F.2d 790 (9th Cir. 1963), rev'g 38 T.C. 215 (1962), in which the transactions were treated as nontaxable exchanges even though property acquired in exchanges by the taxpayers had been acquired immediately prior thereto by the other parties to the exchanges. In each of those cases, as in the instant case, the party acquiring property to be exchanged with the taxpayer did so on his own behalf and not as an agent of the taxpayer.

Accordingly, as to X, the exchange of land and factories between X and Y qualifies for nonrecognition of gain or loss under section 1031(a) of the Code. However, any depreciation recaptured as a result of the exchange of X's property is subject to tax as ordinary income under the provisions of section 1250(d)(4).

On the other hand, Y acquired the property transferred to X immediately prior to the exchange and did not hold such property for productive use in its trade or business or for investment. Thus, as to Y, the exchange does not qualify for nonrecognition of gain or loss under section 1031(a) of the Code.