                  T.C. Summary Opinion 2011-14



                     UNITED STATES TAX COURT



    RALPH E. CRANDALL, JR., AND DENE D. DULIN, Petitioners v.
            COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 29479-08S.              Filed February 15, 2011.



     Ralph E. Crandall, Jr., and Dene D. Dulin, pro sese.

     Timothy Berry, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect when the petition was filed.1   Pursuant to

section 7463(b), the decision to be entered is not reviewable by




     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year at issue. All
Rule references are to the Tax Court Rules of Practice and
Procedure.
                                - 2 -

any other court, and this opinion shall not be treated as

precedent for any other case.

     Respondent determined a deficiency of $14,475 in

petitioners’ 2005 Federal income tax and an accuracy-related

penalty of $2,895.   After concessions,2 the sole issue for

decision is whether petitioners are entitled to nonrecognition of

gain under section 1031 for a 2005 real estate transaction.

                            Background

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

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.   Petitioners resided in

California at the time the petition was filed.

     Petitioners owned an undeveloped parcel of property in Lake

Havasu City, Arizona (Arizona property).   Petitioners held the

Arizona property for investment.   Petitioners desired to own

investment property closer to their California residence.     After

receiving some limited advice concerning a tax-free exchange of

properties, petitioners took steps to sell the Arizona property

and purchase new property with the intention of executing a tax-

free exchange.   On March 4, 2005, petitioners sold the Arizona

property for $76,000.   The buyers of the property paid

petitioners $10,000, and the remaining $66,000 was placed in an



     2
      Respondent conceded the accuracy-related penalty.
Petitioners conceded respondent’s disallowance of deductions on
their Schedule A, Itemized Deductions.
                               - 3 -

escrow account with Capital Title Agency, Inc. (Capital Title).

At petitioners’ direction $61,743.25 was held in the escrow

account.   Capital Title initially released $4,256.75 to

petitioners.   Petitioners’ basis in the Arizona property was

$8,500.

     In furtherance of the purchase petitioners made payments3 to

Chicago Title Co. (Chicago Title) and placed in an escrow account

as follows:

                      Date                         Amount
   Jan. 4, 2005                                 $10,000.00
   Mar. 14, 2005 (three separate payments)        24,700.00
                                                   4,256.75
                                                     294.00
                                                1
   Mar. 18, 2005                                  61,550.00
                                                100,800.75

     1
      This payment was transferred from the Capital Title escrow
account to the Chicago Title escrow account as petitioners
directed.


The Capital Title and Chicago Title escrow agreements did not

reference a like-kind exchange under section 1031, nor did they

expressly limit petitioners’ right to receive, pledge, borrow, or

otherwise obtain the benefits of the funds.

                             Discussion

     In general, the Commissioner’s determination set forth in a

notice of deficiency is presumed correct, and the taxpayer bears



     3
      The payments are labeled “Deposits” in the escrow
agreement.
                               - 4 -

the burden of showing that the determination is in error.     Rule

142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).     Pursuant

to section 7491(a), the burden of proof as to factual matters

shifts to the Commissioner under certain circumstances.

Petitioners did not allege that section 7491(a) applies.    See

sec. 7491(a)(2)(A) and (B).   Therefore, petitioners bear the

burden of proof.   See Rule 142(a).

     The general rule regarding recognition of gain or loss on

the sale or exchange of property is that the entire amount of the

gain or loss is recognized.   Sec. 1001(c).   An exception to the

general rule is found in section 1031.

     Section 1031 provides that no gain or loss is recognized

when business or investment property is exchanged solely for

other business or investment property of like kind.   The

regulations define “like kind” as a reference to the nature or

character of the property and not the property’s grade or

quality.   Sec. 1.1031(a)-1(b), Income Tax Regs.   In order to take

advantage of the nonrecognition provisions of section 1031

through a deferred exchange, a taxpayer must satisfy a number of

technical requirements.1   Sec. 1031(a)(3); sec. 1.1031(k)-1,

Income Tax Regs.




     1
      The timing requirements of sec. 1031(a)(3) are not at
issue.
                                 - 5 -

      A deferred exchange is defined as “an exchange in which,

pursuant to an agreement, the taxpayer transfers property held

for * * * investment * * * and subsequently receives property to

be held * * * for investment”.    Sec. 1.1031(k)-1(a), Income Tax

Regs.   To qualify as a deferred exchange the transaction must be

an exchange of property, not a transfer of property for money.

Id.   The reinvestment of the proceeds from a cash sale of one

property into a second property of like kind will not qualify as

a section 1031 exchange.   Greene v. Commissioner, T.C. Memo.

1991-403 (citing Carlton v. United States, 385 F.2d 238, 242 (5th

Cir. 1967), Coastal Terminals, Inc. v. United States, 320 F.2d

333, 337 (4th Cir. 1963), and Estate of Bowers v. Commissioner,

94 T.C. 582, 589 (1990)); Lee v. Commissioner, T.C. Memo. 1986-

294; Gibson v. Commissioner, T.C. Memo. 1982-342; sec. 1.1031(k)-

1(a), Income Tax Regs.   Gain or loss may be recognized if the

taxpayer actually or constructively receives money that does not

meet the qualifications of section 1031(a) before the taxpayer

actually receives like-kind property.    Sec. 1.1031(k)-1(a),

Income Tax Regs.

      “The taxpayer is in constructive receipt of money or

property at the time the money or property is credited to the

taxpayer’s account, set apart for the taxpayer, or otherwise made

available so that the taxpayer may draw upon it at any time”.

Sec. 1.1031(k)-1(f)(2), Income Tax Regs.    If the taxpayer’s
                                  - 6 -

control of receipt of the money or property is subject to

substantial limitations or restrictions, then there is no

constructive receipt.     Id.   To avoid being in constructive

receipt of money or property, a taxpayer may use a qualified

escrow account.    Section 1.1031(k)-1(g)(3), Income Tax Regs.,

defines a qualified escrow account as the following:

          (ii) A qualified escrow account is an escrow account
          wherein--

               (A) The escrow holder is not the taxpayer or a
          disqualified person * * *, and

               (B) The escrow agreement expressly limits the
          taxpayer’s right to receive, pledge, borrow, or
          otherwise obtain the benefits of the cash or cash
          equivalent held in the escrow account * * *.

The taxpayer’s own limitation of use of the funds does not

convert the escrow account into a qualified escrow account.

Klein v. Commissioner, T.C. Memo. 1993-491.

     The Arizona property and the California property are like-

kind properties.    At issue is whether there was an exchange

within the meaning of the statute and the regulations.

     We have no doubt that petitioners intended the transaction

to qualify under the provisions of section 1031.     However, it is

well established that a taxpayer’s intention to take advantage of

tax laws does not determine the tax consequences of his

transactions.     Bezdjian v. Commissioner, 845 F.2d 217 (9th Cir.

1988), affg. T.C. Memo. 1987-140; Carlton v. United States, supra

at 243 (citing Commissioner v. Duberstein, 363 U.S. 278, 286
                               - 7 -

(1960)).   To support their argument, petitioners testified that

the funds in the Capital Title escrow account were held solely

for the purchase of the California property and that they

received no proceeds from the sale of the Arizona property.

     Respondent argues that petitioners’ transactions were a sale

and reinvestment of the proceeds because the Capital Title escrow

agreement did not expressly restrict petitioners’ access to and

use of the funds held in the escrow account.   Respondent asserts

that petitioners were in constructive receipt of the proceeds

from the sale of the Arizona property and that the gain on the

sale must be recognized in 2005.

     The underlying purpose of section 1031 is to permit a

taxpayer to defer gain with respect to “an ongoing investment,

rather than ridding himself of one investment to obtain another.”

Teruya Bros., Ltd. v. Commissioner, 580 F.3d 1038, 1042 (9th Cir.

2009) (citing Starker v. United States, 602 F.2d 1341, 1352 (9th

Cir. 1979) (“The legislative history [of sec. 1031] reveals that

the provision was designed to avoid the imposition of a tax on

those who do not ‘cash in’ on their investments in trade or

business property.”)), affg. 124 T.C. 45 (2005).

     Neither escrow agreement expressly limited petitioners’

right to receive, pledge, borrow, or otherwise obtain the benefit

of the funds nor made any mention of a like-kind exchange.

Because of the lack of limitations, neither escrow account was a
                               - 8 -

qualified escrow account.   See Hillyer v. Commissioner, T.C.

Memo. 1996-214; Lee v. Commissioner, supra.   Although petitioners

used the funds in the Capital Title escrow account to purchase

the California property, the lack of express limitations in the

escrow agreement results in petitioners’ being treated as having

constructively received the proceeds.

     We conclude that the disposition of the Arizona property was

a sale and the funds deposited in the Capital Title escrow

account represent the receipt of the proceeds.   See sec. 1001(c).

Consequently, this transaction does not qualify for section 1031

nonrecognition, and petitioners must recognize gain for 2005.

See sec. 1001(c).   The Court notes that the tax consequences are

not what petitioners intended and the result may seem somewhat

harsh. However, Congress enacted strict provisions under section

1031 with which taxpayers must comply.   We also note that

respondent has conceded the accuracy-related penalty.

     We have considered the parties’ arguments and, to the extent

not discussed herein, we conclude the arguments are irrelevant,

moot, or without merit.
                            - 9 -

To reflect the foregoing,


                                         Decision will be entered

                                    for respondent as to the

                                    deficiency in income tax and

                                    for petitioners as to the

                                    accuracy-related penalty.
