                        T.C. Memo. 1997-73



                      UNITED STATES TAX COURT



      LARRY L. BEELER AND CYNTHIA J. BEELER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 16052-94.             Filed February 10, 1997.



     J. Paul Raymond and Marie De Marco, for petitioners.

     Judith C. Winkler and Benjamin A. de Luna, for respondent.


             MEMORANDUM FINDINGS OF FACT AND OPINION


     COLVIN, Judge:   Respondent determined a deficiency of

$266,375 in petitioners' income tax for 1991.

     After concessions, the issue for decision is whether

petitioners may defer recognition of all of the gain that they

received for an exchange involving real property in 1991 under

section 1031, as petitioners contend, or only part of the gain,
                               - 2 -


as respondent contends.   Our decision on this issue depends on

whether we decide, as respondent contends, that petitioners

exchanged, in addition to real estate, assets which do not

qualify under section 1031, such as property held for sale (i.e.,

sand), certain business operating permits, goodwill, and going-

concern value, or whether we decide, as petitioners contend, that

petitioners exchanged only property that qualifies under section

1031.1   We agree with petitioners, and hold that all of the gain

they received in the exchange qualifies under section 1031.

     Section references are to the Internal Revenue Code as in

effect for the relevant periods.    Rule references are to the Tax

Court Rules of Practice and Procedure.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

A.   Petitioners

     Petitioners are married and lived in Port Richey, Florida,

when they filed the petition in this case.

B.   The Real Property

     Petitioners owned a mobile home park called Brentwood

Estates in Pasco County, Florida.   On April 25, 1984, they paid

$766,808.78 to buy about 76.5 acres of vacant land zoned for a

     1
      Respondent determined in the notice of deficiency that
petitioners could not defer any gain under sec. 1031 for their
exchange of property in 1991. Respondent conceded at trial and
in the posttrial brief that the land qualifies for like-kind
exchange treatment.
                                - 3 -


mobile home park (the 76.5 acres) next to Brentwood Estates so

they could expand their mobile home park.   This was their primary

purpose in buying and holding the land until they listed the

property for sale or exchange (described below at par. D-1).

     The 76.5 acres had natural mounds of sand on it.

Petitioners bought the 76.5 acres on the condition that they

could obtain a Pasco County permit to mine sand from it.    Their

contract with the seller required that petitioners pay the seller

$.75 per cubic yard of sand that they removed.

C.   Petitioners' Sand Mining Activities

     1.   Issuance of Mining Permit to Petitioners

     Petitioners applied to Pasco County for a permit to mine

sand from the 76.5 acres.   At that time, Pasco County required an

applicant for a permit to mine sand to submit a plan showing how

he or she intended to mine and reclaim the property.    Pasco

County required the applicant to submit engineering studies,

subsurface boring tests, a legal description, an environmental

impact statement, a drainage and flood development plan, a

processing plan, and a transportation plan.   The applicant had to

show that he or she had a legal interest in the land.    The

applicant also needed to show financial responsibility, usually

by obtaining a performance bond for the required work.

     Pasco County staff reviewed the plan, made comments, and

returned it to the applicant.   The applicant responded to the
                               - 4 -


staff comments.   The staff then prepared a recommendation for a

development review committee that consisted of assistant county

administrators.   That committee reviewed it and submitted

recommendations to the Board of County Commissioners (B.C.C.).

The B.C.C. held a public hearing and made a decision.

     Petitioners obtained a mining permit on September 28, 1984,

that allowed them to extract 600,000 cubic yards of sand from

about 57 of the 76.5 acres.   They stated on their application

that they ultimately intended to use the 76.5 acres as a mobile

home park.

     2.   Permit Procedures When Property is Transferred

     A permit holder may not sell or transfer his or her Pasco

County sand mining permits.   Pasco County would have immediately

suspended the permit if its code enforcement staff discovered

that a permit holder had tried to sell or transfer it.

     If property in Pasco County for which a sand mining permit

has been issued is sold, the buyer may not mine sand unless the

County issues a permit to the buyer.   The buyer must apply for a

permit under the procedures described above.   A buyer may use the

engineering studies that had been submitted by the seller if

nothing has changed.   The B.C.C. may approve, approve with

conditions, or deny the application.   The current permit holder

and the person who wants the permit may apply jointly.   Approval

is sometimes called a "transfer" of the permit, but Pasco County,
                                - 5 -


not the prior permit holder, decides whether to transfer a

permit.

     3.     Petitioners' Sand Mine

     Petitioners sold sand to customers on the 76.5 acres from

1984 to October 16, 1991.    Petitioners called their business

Sunset Sand Mine.    Their business office was a small recreational

vehicle at the mine site.

     Petitioners did not own any equipment to mine the sand.

They subcontracted removal and loading of sand.    The

subcontractor brought in a loader and operator to dig the sand

and put it in trucks.    Petitioners' first subcontractor was Aaro

Excavating, Inc. (Aaro).    Aaro had financial difficulty and

closed.   Petitioners then rented equipment and hired an operator

for a short time.    They later subcontracted with Bolton Road

Landfill, Inc. (Bolton Landfill) to dig and load the sand.      Milo

Dakic (Dakic) and Raymond Fontana (Fontana) owned Bolton

Landfill.

     Builders, excavating companies, and trucking companies

bought sand from petitioners.    Petitioner Cynthia J. Beeler (Mrs.

Beeler) or her mother sold sand and collected money.     Mrs. Beeler

was at the site about 3 days a week.    Petitioners reported the

income from the sand business on a Schedule C attached to their

income tax returns.    Petitioners claimed depletion deductions for

the sand totaling $712,317.14 from 1984 to October 16, 1991.
                                 - 6 -


     4.   Modification of Petitioners' Permits

     On September 17, 1985, the B.C.C. approved petitioners'

request to modify petitioners' sand mining permit.    The

modification allowed petitioners to extract 1.18 million cubic

yards of sand from the 76.5 acres.

     In 1989, petitioners asked the B.C.C. to modify the permit a

second time to increase the amount of sand that they could remove

from the 76.5 acres to 2.49 million cubic yards by permitting

removal of sand up to 12 feet below the surface.2    On the

application to modify the permit, petitioners stated that they

intended to apply for a construction and demolition debris dump

permit after mining is complete, and later to use the 76.5 acres

as a mobile home park.     The B.C.C. approved petitioners' second

request to modify the permit on March 21, 1989.

D.   Petitioners' Exchange of the 76.5 Acres

     1.   Listing the Property for Sale

     Petitioners listed the 76.5 acres with a realtor to sell as

a mobile home park, sand mine, or construction and demolition

debris dump.   There was a large demand for construction and

demolition debris dumps in Pasco County when petitioners listed

the 76.5 acres for sale.    David Gilmore (Gilmore) was




     2
      Petitioners sold about 1,277,470 cubic yards of sand while
they owned the 76.5 acres.
                                 - 7 -


petitioners' attorney.   He represented them in the exchange of

the 76.5 acres.

      Petitioners did not have a construction and demolition

debris dump permit when they listed the 76.5 acres for sale.

Petitioners applied to Pasco County for a construction and

demolition debris dump permit.    They stated on their application

that they ultimately intended to use the 76.5 acres as a mobile

home park.   The B.C.C. approved petitioners' application.

Potential buyers became more interested in the property after

petitioners obtained a construction and demolition debris dump

permit.

      The Pasco County permit was not the only permit petitioners

needed to operate a construction and demolition debris dump on

the 76.5 acres.   They did not operate a dump while they owned the

76.5 acres, and they did not have all the permits required to do

so.

      A prospective buyer of the 76.5 acres retained Triggs,

Catlett & Associates in June 1990 to estimate the value of the

land and various values and costs related to the prospective

buyer's operation of a sand mine on the 76.5 acres.   Frank A.

Catlett (Catlett), a real estate appraiser, estimated that the

value of the land was $1,163,000, before taking into account any

costs of equipment or other assets required to operate a sand

mine or any going-concern value of petitioners' sand mine.
                                 - 8 -


Catlett's client did not buy the 76.5 acres or petitioners' sand

mine business.

     2.     The Buyers

     Dakic and Fontana (the buyers) wanted to buy a construction

and demolition debris dump site in Pasco County.    They had one

landfill that was nearly full.

     Operating a construction and demolition debris dump was more

profitable to the buyers than operating a sand mine.    The sand on

the 76.5 acres had no value to the buyers.    The buyers would have

preferred to have obtained land with a hole in the ground.

     The buyers did not want to acquire petitioners' sand mine

business.    They did not ask to see petitioners' sand mine

business records.    Petitioners did not show their business

records to the buyers.

     Initially, Dakic negotiated for the buyers.    Later, attorney

Robert C. Burke (Burke) represented the buyers to help them

acquire the 76.5 acres and Pasco County permits.    The only item

or property that petitioners conveyed was the 76.5 acres.

Petitioners did not have a customer list, trucks, or other

equipment.    The buyers did not want those items and did not

obtain them from petitioners.

     Gilmore negotiated the exchange of the 76.5 acres for

petitioners.    The subject of conveying petitioners' business was

not discussed during the negotiations.
                               - 9 -


     3.   Contract for Like-Kind Exchange

     On October 3, 1990, petitioners signed a contract entitled

"Real Estate Contract for Like-Kind Exchange" (the contract) to

convey the property to the buyers.     An addendum to the contract

gave the buyers 30 days after signing the contract to perform

field tests to see whether the 76.5 acres was suitable for use as

a landfill and sand mine.   The buyers could have their deposit

returned only if they decided that the 76.5 acres was not

suitable for use as a construction and demolition debris dump and

sand mine, or if they did not obtain construction and demolition

debris dump and sand mine permits from Pasco County.

     The addendum allowed petitioners to operate the sand mine

until the transfer to the buyers closed.    This benefited the

buyers, who wanted sand to be removed.    The buyers had the right

to review petitioners' records to verify that petitioners did not

jeopardize the property, e.g., create liens.

     The addendum provided that if the buyers obtained new

permits and then defaulted on the contract, the buyers agreed to

pay petitioners' expenses to obtain the permits that petitioners

had obtained before signing the contract.

     On November 9, 1990, the parties extended the closing date

under the contract because the buyers did not know if Pasco

County would permit them to deposit debris from outside the
                                - 10 -


county in a dump on the 76.5 acres.      The buyers had the right to

cancel the contract if they could not do so.

     Petitioners transferred the 76.5 acres to the buyers by

warranty deed on October 16, 1991.       The buyers paid $1.2 million

for the 76.5 acres.    Petitioners mined about 130,000 cubic yards

of sand from the 76.5 acres during the time the contract was

executory.    The buyers did not request any price adjustment.

     Florida had a bulk sale law when petitioners exchanged the

76.5 acres with the buyers that required parties to a transfer of

a business to list all equipment, materials, and stock in trade

to avoid the presumption that the transfer is a fraudulent

conveyance.    Fla. Stat. Ann. secs. 676.101-109 (West

1993)(repealed by 1993 Fla. Laws ch. 93-77, sec. 3).      Burke did

not try to comply with the bulk sale law because he believed

petitioners exchanged real estate, not a business with equipment

or stock in trade.    The buyers did not receive a bill of sale for

any chattels.    Burke obtained land title insurance and paid for

real estate documentary stamps based on the $1.2 million contract

price.

     The 76.5 acres remained zoned for a mobile home park during

the time petitioners held it.

     In exchange for the 76.5 acres, petitioners received title

to the Mosquito Control Building, Palm Coast Storage, and a bank

building (the acquired properties).      The acquired properties were
                                  - 11 -


rental properties.       Petitioners identified the acquired

properties within 45 days of October 16, 1991.       They received

title to the acquired properties within 180 days of October 16,

1991.       The acquired property was real property held for

productive use in a trade or business or for investment.

       4.      Permits for the Buyers

        Burke obtained new permits from Pasco County for the buyers

to operate a sand mine and a construction and demolition debris

dump at the 76.5 acres.       He obtained all of the permits that the

buyers would need to operate a construction and demolition debris

dump, including permits from the Florida Department of Natural

Resources.       The buyers paid more than $100,000 to their

attorneys, engineers, and to Pasco County to obtain the permits.

The buyers gave sand away from the 76.5 acres.

        The buyers incorporated their business as Sunset Sand Mine,

Inc. and transferred the 76.5 acres to it.

E.      Pasco Lakes, Inc.

        In 1989, Larry Gilford (Gilford) owned 50 percent of the

stock of Pasco Lakes, Inc. (Pasco Lakes).       In September 1989,

Pasco Lakes paid $675,000 for vacant land zoned for agricultural

use.     Pasco Lakes obtained permits to mine sand from the land.

Gilford sold the stock of Pasco Lakes to Environmental Capital

Holdings, Inc. (Environmental) on September 19, 1991.

Environmental bought stock instead of the land because it wanted
                              - 12 -


the permits and an operating business.    Otherwise it would have

been required to apply to Pasco County and follow the rigorous

procedure to obtain permits for itself.

F.   Petitioners' Income Tax Returns

     Petitioners filed a joint income tax return for 1991.    They

reported on Form 4797, Sale of Business Property, that they

exchanged for $1.2 million sand mine property that they bought in

1984.   They attached a statement to the return which was

entitled, "Exchange of Sand Mine for Like Business Real Estate."

In their statement they reported that they took depletion

deductions from 1984 to 1991 totaling $712,317.14.

                              OPINION

A.   Contentions of the Parties and Background

     A taxpayer may defer recognition of gain or loss from

qualifying exchanges of like-kind property.   Sec. 1031(a)(1).   A

like-kind exchange occurs if property held for productive use in

a trade or business or for investment is exchanged solely for

property of like kind that is to be held either for productive

use in a trade or business or for investment.    Sec. 1031(a)(1).

A taxpayer recognizes gain in a like-kind exchange under section

1031 to the extent of the fair market value of any nonqualifying

property exchanged.   Sec. 1031(b).

     Petitioners contend that the only property they exchanged

was the 76.5 acres, and that they may defer recognition of the
                                - 13 -


gain from the $1.2 million exchange price for the 76.5 acres

under section 1031.     Respondent concedes that petitioners may

defer the gain under section 1031 to the extent that it relates

to the land.    However, respondent contends that petitioners

exchanged certain business operating permits, goodwill, going-

concern value, and property held for sale (i.e., sand), which are

nonqualifying properties under section 1031.

B.   What Petitioners Transferred to the Buyers

     1.      Whether Petitioners Transferred Tangible Property Other
             Than Land

     Petitioners contend that they transferred only land to the

buyers.     Respondent contends that petitioners exchanged land and

other assets.     We agree with petitioners.

     Mrs. Beeler, Dakic, Burke (the buyers' attorney), and

Gilmore (petitioners' attorney) testified that the only asset

petitioners transferred was real property.     The deed conveying

the 76.5 acres states that petitioners conveyed land to the

buyers; it does not state that petitioners conveyed anything

else.     There are no other documents conveying title from

petitioners to the buyers for any other property.     The parties

treated the land as the only property transferred for title

insurance and real estate transfer tax purposes.     There were no

bills of sale for any chattels.     There is no evidence to support

respondent's contention that petitioners exchanged an office, a

fence, vehicles, equipment, or anything other than land.
                                - 14 -


     Respondent contends that we should give no weight to the

testimony of Mrs. Beeler, Dakic, Burke, and Gilmore because it

was self-serving and unbelievable.       We disagree.   We may not

arbitrarily disregard unimpeached, competent, and relevant

testimony.     Conti v. Commissioner, 39 F.3d 658, 664 (6th Cir.

1994), affg. 99 T.C. 370 (1992) and T.C. Memo. 1992-614; Loesch &

Green Constr. Co. v. Commissioner, 211 F.2d 210, 212 (6th Cir.

1954), revg. a Memorandum Opinion of this Court.        Mrs. Beeler,

Dakic, Burke, and Gilmore testified in a manner fully consistent

with the documents related to the transaction at issue and with

each other's testimony.     Respondent produced no evidence to the

contrary.

     We conclude that petitioners transferred land and no other

tangible property to the buyers.

     2.      Whether Petitioners Exchanged Their Mining and
             Construction and Demolition Debris Dump Permits

     Respondent contends that petitioners exchanged their Pasco

County sand mining and construction and demolition debris dump

permits with the 76.5 acres.     We disagree.

     The parties to the exchange and their attorneys testified

that petitioners did not exchange their Pasco County permits.

The documents conveying property in the exchange did not list the

permits.

     Cynthia Jolly (Jolly) was the Code Enforcement Director for

Pasco County at the time of trial.       She was very knowledgeable
                              - 15 -


about Pasco County permit procedures.    Respondent relies on the

fact that Jolly answered in the affirmative when asked, "Is a

permit transferrable?"   Respondent misses the point made clear by

Jolly's other testimony, that a permit may be transferred only by

Pasco County, and not by a permit holder.    Jolly testified

clearly that petitioners could not transfer their Pasco County

permits and that the B.C.C. must independently approve issuance

of a permit to a new permittee.   Thus, petitioners could not sell

or exchange their Pasco County sand mine or construction and

demolition debris dump permits.

     Respondent contends that Pasco County permits are analogous

to easements, grazing rights, FCC licenses, and liquor licenses,

which are generally transferrable.     E.g., In re Atlantic Bus. and

Community Dev. Corp., 994 F.2d 1069, 1075 (3d Cir. 1993); Ward v.

Commissioner, 58 F.2d 757 (9th Cir. 1932); Osborne v.

Commissioner, 87 T.C. 575 (1986); Uecker v. Commissioner, 81 T.C.

983 (1983), affd. 766 F.2d 909 (5th Cir. 1985); Radio Station

WBIR, Inc. v. Commissioner, 31 T.C. 803, 813 (1959); Tube Bar,

Inc. v. Commissioner, 15 T.C. 922 (1950).    Respondent's argument

does not apply because petitioners did not transfer their Pasco

County permits.

     Respondent called Catlett as an expert witness to appraise

the 76.5 acres as of June 1990.   He testified that the 76.5 acres

would be worth $1,163,000 with permits and $710,000 without
                               - 16 -


permits.   Respondent contends that this shows that petitioners

transferred the permits.   We disagree.   The $1.2 million exchange

value is consistent with Catlett's appraisal of the 76.5 acres

because it was contingent on issuance by Pasco County of the

needed permits to the buyers, not because petitioners transferred

their permits to the buyers.   The effect on the value of the land

of a seller having Pasco County permits is analogous to the

effect of receipt of a favorable zoning classification.   The

existence of both depends on governmental action.   Both can add

value to the land.   A new buyer may expect that zoning will not

change and may pay more for property because of that expectancy.

Similarly, a buyer of land, the seller of which has a Pasco

County permit, may expect that his or her application for a new

permit will be approved, and may pay more for the land because of

that expectancy.   However, a seller cannot sell either a permit

or a zoning classification.

     We conclude that petitioners did not sell their Pasco County

permits.

     3.    Whether Petitioners Conveyed Goodwill or Going-Concern
           Value

     Respondent contends that petitioners transferred $37,000 of

goodwill or going-concern value with the 76.5 acres.   Respondent

points out that petitioners called their sand business the

"Sunset Sand Mine," and the buyers formed a corporation named

"Sunset Sand Mine, Inc."   Respondent contends this shows that
                                - 17 -


petitioners sold goodwill and a going-concern to the buyers.

Respondent points out that petitioners had a good business

location and customers and that the contract for exchange

required petitioners to operate and maintain their business.

     Going-concern value is the ability of a business to produce

income even though there has been a change in ownership; goodwill

is the existence of preexisting business relationships which may

be expected to continue indefinitely.       Ithaca Indus., Inc. v.

Commissioner, 97 T.C. 253, 264 (1991), affd. 17 F.3d 684 (4th

Cir. 1994).   Whether goodwill and going-concern value exist is a

question of fact.     Id. at 263-264.

     The parties did not discuss transferring or exchanging the

sand mine business.    Petitioners did not transfer any customer

lists to the buyers.    Petitioners did not transfer management

systems or records to the buyers.       The record does not show that

petitioners had any property rights to the business name.

Petitioners did not charge the buyers for transferring rights to

use the business name.    Dakic, Burke, Gilmore, and Mrs. Beeler

testified that petitioners did not transfer to the buyers

goodwill, going-concern value, or an ongoing business.      The

documents conveying property from petitioners to the buyers did

not refer to goodwill or going-concern value.      We conclude that

any goodwill or going-concern value transferred by petitioners to

the buyers was de minimis.
                              - 18 -


C.   Whether the Sand Was Stock in Trade or Property Held
     Primarily for Sale

     Respondent contends that petitioners' unmined sand was stock

in trade or other property held primarily for sale.

     A taxpayer may not defer gain or loss under section 1031 for

the exchange of stock in trade or other property held primarily

for sale.   Sec. 1031(a)(2)(A).   Whether property is stock in

trade or held primarily for sale for purposes of section 1031 is

a question of fact.   See Verito v. Commissioner, 43 T.C. 429,

441-442 (1965).

     Respondent points out that petitioners operated a sand mine

on the 76.5 acres throughout the time they owned it.    They

obtained a Pasco County sand mine permit before they bought the

land and had the permit modified twice to increase the amount of

sand they could remove from 600,000 cubic yards to 2.49 million

cubic yards, of which they eventually removed 1.28 million cubic

yards.

     While petitioners did mine sand from the 76.5 acres, that

was not their primary purpose in holding the land.    Their primary

purpose was to expand their adjacent mobile home park, and that

purpose never changed during the time they owned the 76.5 acres.

This intent is shown by Mrs. Beeler's testimony and by

petitioners' consistent statements on permit applications filed

with Pasco County in 1984, 1985, 1989, and 1990.
                               - 19 -


     Respondent points out that Earl Hoover (Hoover),

respondent's expert, testified that the unmined sand was

inventory and not real estate.

     Hoover estimated that there were about 1.28 million cubic

yards of unmined sand on the 76.5 acres that was worth $569,460

at the time of the exchange.    He also estimated that the air

space to be used as a dump was worth $732,240.    His analysis is

unpersuasive because those two amounts total $1,301,700, more

than the arm's-length exchange price of $1.2 million for the

land.   Hoover treated the unmined sand as inventory.   He gave the

real estate no value.    We believe that the land had value.

Catlett, who was not respondent's employee, estimated that the

land was worth $1,163,000.    We give Hoover's testimony little

weight.

     If property is exchanged as part of the land, it is not

property held primarily for sale.    Asjes v. Commissioner, 74 T.C.

1005, 1013-1014 (1980) (unharvested crop exchanged as part of

land not property held primarily for sale for purposes of section

1031); Butler Consol. Coal Co. v. Commissioner, 6 T.C. 183, 188-

189 (1946) (coal in an abandoned coal mine was part of the real

property, not a separate asset).    Here, sand was not separated

from and was part of the land when petitioners exchanged it.      The

parties to the transaction did not list sand as property

petitioners exchanged.    Petitioners received no consideration
                               - 20 -


from the buyers for unmined sand.    The parties to the exchange

believed they were not required to comply with Florida's bulk

sales law, which applied to sales of stock in trade.      From the

time petitioners first agreed to exchange the property for $1.2

million to the time they closed on the exchange, petitioners sold

about 130,000 cubic yards of sand.      Petitioners did not adjust

the price of the 76.5 acres based on the sales.

       Respondent cites Watson v. Commissioner, 345 U.S. 544

(1953), to support the contention that petitioners held the

unmined sand primarily for sale at the time of the exchange.      In

that case, the taxpayer sold an orange grove with unharvested

oranges.    The buyer wanted to operate the orange grove and sell

oranges, including the unharvested oranges.      The issue was

whether the portion of the price attributable to the unharvested

oranges was taxable as a capital gain or as ordinary income.      The

Supreme Court pointed out that the parties attributed substantial

value to the unharvested oranges and held that income from the

sale of the unharvested oranges was ordinary income.      Id. at 550-

551.    The seller sold and the buyer bought a crop of growing

oranges and the real property on which it grew.

       The Supreme Court distinguished Watson from Butler Consol.

Coal Co. v. Commissioner, supra, and cases in which the sale of

land included minerals "not separated from its natural state and

not in the course of annual growth leading to a seasonal
                               - 21 -


separation."   Watson v. Commissioner, supra at 552.   We think the

instant case is more like Butler Consol. Coal Co. v.

Commissioner, supra, because the unmined sand was not separated

from the land.    Respondent contends that Butler Consol. Coal is

distinguishable from this case.    Respondent points out that

petitioners operated the sand mine until the day they exchanged

the land, while the taxpayer in Butler Consol. Coal stopped

operating the mine 11 years before the transaction at issue.      We

disagree that the distinction is material.    The Court in Butler

Consol. Coal observed that "Coal in place is a part of the

realty."    Primarily for that reason, the Court rejected the

Commissioner's argument that the coal in place was held by the

taxpayer for sale to customers in the ordinary course of

business.   In the present case, similarly, the sand in question

had not been mined or otherwise separated from the realty.      In

addition, we have found that the parties to the sale did not

intend to sell and buy sand as part of the transaction.

     Respondent contends that the instant case is like Clemente,

Inc. v. Commissioner, T.C. Memo. 1985-367.    There, the taxpayer

exchanged the right to extract gravel from one parcel of land

(but did not exchange the land itself) for another parcel of

land.   The issue before the Court was whether land and the right

to extract gravel from land were of a like kind.    That case does
                                - 22 -


not apply here because respondent concedes that the real property

petitioners exchanged was of like kind.

     Respondent contends that petitioners' subcontract with

Bolton Landfill to remove sand was a joint venture between

petitioners and Dakic and contends that this establishes that

petitioners exchanged unmined sand.      We disagree; petitioners and

Dakic did not have a joint venture.

     Respondent contends that we should decide whether

petitioners transferred assets other than land to the buyers

based on the substance of the transfer and not its form.     We

disagree that the substance of this transaction differs from its

form.

     We conclude that the unmined sand was not stock in trade or

property held primarily for sale for purposes of section 1031.

D.   Conclusion

        We conclude that petitioners conveyed only land and no other

assets in exchange for property worth $1.2 million.     Petitioners

are entitled to defer recognition of gain on the $1.2 million

because they received like-kind property in exchange.     Sec. 1031.

        To reflect the foregoing,

                                                 Decision will be

                                      entered for petitioners.
