                        T.C. Memo. 1996-254



                      UNITED STATES TAX COURT



ORVILLE E. CHRISTENSEN AND HELEN V. CHRISTENSEN, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 12706-94.                       Filed June 3, 1996.



     Louis S. Weller, for petitioners.

     Cynthia K. Hustad, for respondent.



                        MEMORANDUM OPINION

     KÖRNER, Judge:   By timely notice of deficiency, respondent

determined deficiencies in petitioners' Federal income tax in the

amounts of $220,039 for 1988 and $240 for 1989.    The case was

submitted to the Court on a set of fully stipulated facts and

exhibits under Rule 122.    Except as hereinafter noted, all

statutory references are to the Internal Revenue Code in effect
                                 2

for the years in issue, and all Rule references are to the Tax

Court Rules of Practice and Procedure.

      After the settlement of other issues in the case, it remains

for the Court to decide:

      (1) Whether the transfer of a certain property by petitioner

husband in 1988, followed by the receipt by him of certain other

properties in 1989, constituted a tax-free exchange of like-kind

properties within the meaning of section 1031 for the year 1988;

and

      (2) whether, if such transfer and receipt of properties does

not qualify for tax-free exchange treatment under section 1031,

but is rather a sale and exchange of properties on which gain or

loss is to be recognized, such transactions constitute sales that

are reportable on the installment method under section 453.

      Petitioners, husband and wife, filed joint income tax

returns for the years 1988 and 1989, and at the time of filing

their petition herein were residents of California.

      In 1981, petitioner husband purchased a business property

located in Santa Rosa, California (Tesconi property), which was

operated as a trade or business property producing rental income,

and on which petitioners reported income and losses in their

joint income tax returns.   On December 22, 1988, petitioner

husband entered into an "agreement of exchange of real property"

with Bill and Linda Wilson, Robert and Nina Klotz, and Gary and

Kendra Falconer, under which petitioner husband as "exchanger"
                                   3

agreed to transfer to Mr. and Mrs. Wilson as "facilitators", for

further transfer to Mr. and Mrs. Klotz and Mr. and Mrs. Falconer

as "purchasers", the Tesconi property, as part of a contemplated

tax-free exchange under the provisions of section 1031.       In

addition, the exchanger agreed to notify the facilitators of the

property that the exchanger desired to acquire within 45 days

after the closing date of the transfer to facilitators of the

Tesconi property in order to complete the projected exchange.

Further, the agreement specified that such property to be

received by petitioner husband as exchanger in the projected

exchange would be acquired by him "no later than 180 days after

the closing date (but not later than the due date (taking into

account extensions) of Exchanger's Federal income tax returns for

the taxable year in which Exchanger's property was transferred to

Facilitator)".

     On the same date mentioned above, December 22, 1988,

petitioner husband transferred the Tesconi property to the

facilitators, and on that same date the facilitators transferred

said property to the purchasers.       No consideration for the

transfer was received at that time.

     On February 3, 1989, petitioner husband sent the

facilitators a letter listing the properties that he desired to

acquire as part of the projected exchange.       Nineteen such

properties were listed, and were identified by the Sonoma County

(California) county assessor's parcel numbers, except for one
                                   4

listed property, which was located in Plumas County.   The first

five of these properties were listed in order of preference by

petitioner husband as exchanger.

     Thereafter, some of the desired exchange properties listed

in the designation letter were acquired as follows (all such

properties were listed in the exchanger's notification letter to

the facilitators, and are referred to herein by their commonly

accepted place names).

     1.   On April 25, 1989, Applesauce Alley was transferred by

Golden Oak Enterprises, Inc., to the facilitators, who on the

same day transferred the property to petitioner husband, who

simultaneously transferred title to petitioners as trustees of

the Christensen trust, a revocable trust created by petitioners

for their benefit, to which they were trustees.

     2.   On May 1, 1989, the property known as 6691 Sebastopol

was acquired by the facilitators from Don and Betty Mallory, was

transferred by them to petitioner husband, and was simultaneously

transferred by him to petitioners as trustees for the Christensen

trust.

     3.   On June 12, 1989, Thomas and Jean Scally transferred the

property known as Shiloh Road to the facilitators, who

transferred the property to petitioner husband on the same day.

     4.   On June 20, 1989, David Landrus and William Frye

transferred the property known as Boyd Street to the

facilitators, and on the same day the facilitators transferred
                                 5

the property to petitioner husband, who in turn transferred the

same to petitioners as trustees for the Christensen trust.

     5.   On June 16, 1989, the facilitators transferred the

property known as Haystack Landing to petitioner husband, who in

turn transferred the property to petitioners as trustees for the

Christensen trust.

     6.   On April 26, 1989, Jeffrey and Sandra Bohn transferred

the property known as the Greenville property to petitioners as

trustees for the Christensen trust.

     With respect to all these transfers of property, except as

section 1031(a)(3) may apply, petitioners received no money or

other nonqualifying property from the facilitators or otherwise

as the result of transferring the Tesconi property.

     As part of their 1988 joint income tax return, petitioners

included the statement "the property known as 360 Tesconi Circle

is being exchanged in a deferred 'starker' exchange.   The

transaction will be completed and reported in 1979".   The use of

"1979" in this statement is a typographical error that should

read "1989".

     No issue is raised by the parties, and they apparently agree

that the Tesconi property relinquished by petitioner husband and

the properties received by him were like-kind properties which

would qualify for exchange under section 1031(a)(1).   Likewise,

the parties apparently agree that there was no cash boot or other

nonqualifying property received in this set of transactions under
                                 6

section 1031(b).   Accordingly, the controversy is narrowly

framed:   was the series of transactions involved herein a

qualifying nontaxable exchange within the limitations of section

1031(a)(3); and, if not, does the integrated transaction qualify

for income tax purposes as an installment sale, to be reported

under the provisions of section 453?

     Somewhat prophetically, this Court said in Barker v.

Commissioner, 74 T.C. 555, 560-561 (1980):

          This case involves another variant of the
     multiple-party, like-kind exchange by which the
     taxpayer, as in this case, seeks to terminate one real
     estate investment and acquire another real estate
     investment without recognizing gain. The statutory
     provision for nonrecognition treatment is section 1031.
     The touchstone of section 1031, at least in this
     context, is the requirement that there be an exchange
     of like-kind business or investment properties, as
     distinguished from a cash sale of property by the
     taxpayer and a reinvestment of the proceeds in other
     property.

          The "exchange" requirement poses an analytical
     problem because it runs headlong into the familiar tax
     law maxim that the substance of a transaction controls
     over form. In a sense, the substance of a transaction
     in which the taxpayer sells property and immediately
     reinvests the proceeds in like-kind property is not
     much different from the substance of a transaction in
     which two parcels are exchanged without cash. Yet, if
     the exchange requirement is to have any significance at
     all, the perhaps formalistic difference between the two
     types of transactions must, at least on occasion,
     engender different results.

          The line between an exchange on the one hand and a
     nonqualifying sale and reinvestment on the other
     becomes even less distinct when the person who owns the
     property sought by the taxpayer is not the same person
     who wants to acquire the taxpayer's property. This
     means that multiple parties must be involved in the
     transaction. * * * [Fn. ref. and citations omitted.]
                                  7

       In Starker v. United States, 602 F.2d 1341 (9th Cir. 1979),

the Court of Appeals pointed out that at the time of an agreement

of exchange, the possibility of a cash sale does not preclude the

application of section 1031 if the parties truly intended to have

an exchange of like-kind properties, and if such an exchange is

timely consummated; the transfer of one property and the receipt

of another need not be simultaneous.      See Brauer v. Commissioner,

74 T.C. 1134 (1980).

       Shortly thereafter, in Biggs v. Commissioner, 632 F.2d 1171

(5th Cir. 1980), affg. 69 T.C. 905 (1978), the Court of Appeals

pointed out that the other party of a proposed nontaxable

exchange need not hold title to the property to be exchanged at

the time of the agreement in order to qualify the transaction as

an exchange under section 1031.       Multiple transactions leading up

to the alleged exchange are not necessarily to be considered as

separate sales and purchases.   There must, however, be a true

exchange of properties even though with some taxable boot, not

just a sale and a subsequent purchase.      The whole transaction

must be shown to be part of an overall plan, which is carried

out.

       Concurring with Biggs v. Commissioner, supra, this Court in

Garcia v. Commissioner, 80 T.C. 491 (1983), opined that the step

transaction doctrine is to be included within the reach of

section 1031; the total plan involving a true exchange must be

considered.    Nevertheless, the taxpayer's expressed intentions to
                                 8

have a transaction qualify as a section 1031 exchange do not

matter; what counts is what was actually done.   Carlton v. United

States, 385 F.2d 238 (5th Cir. 1967).

     Possibly with the purpose of clarifying some confusion with

respect to the limits of section 1031, and the time that might be

allowable in order to complete such a transaction, which would

qualify as tax free, Congress amended, in the Deficit Reduction

Act of 1984, Pub. L. 98-369 (DEFRA), sec. 77(a), 98 Stat. 494,

595, the provisions of section 1031 by adding a new paragraph (3)

to section 1031(a).   The new subsection reads as follows:

          (3) Requirement that property be identified and
     that exchange be completed not more than 180 days after
     transfer of exchanged property.--For purposes of this
     subsection, any property received by the taxpayer shall
     be treated as property which is not like-kind property
     if--

               (A) such property is not identified as
          property to be received in the exchange on or
          before the day which is 45 days after the date on
          which the taxpayer transfers the property
          relinquished in the exchange, or

               (B) such property is received after the
          earlier of--

                    (i) the day which is 180 days after the
               date on which the taxpayer transfers the
               property relinquished in the exchange, or

                    (ii) the due date (determined with
               regard to extension) for the transferor's
               return of the tax imposed by this chapter for
               the taxable year in which the transfer of the
               relinquished property occurs.
                                 9

     DEFRA section 77(b)(3), 98 Stat. 596, made the new section

1031(a)(3) effective for transfers made after July 18, 1984, in

tax years ending after that date.

Qualification Under Section 1031(a)(3)(A)

     First, we consider whether the projected exchange of

properties qualifies under the restrictions of section

1031(a)(3)(A)--that the desired properties to be received in the

exchange be specifically designated by the exchanger within 45

days.   We reject the suggestion that section 1031(a)(3)(A) was

not satisfied in this case because an excessive number of

properties were designated.   The statute, which we have quoted

above, only requires that the designated replacement properties

be specified within 45 days after the date on which the taxpayer

transfers the property relinquished in the exchange.    In the

instant case, that means 45 days after petitioner husband

transferred the Tesconi property to the facilitators, which was

December 22, 1988.   Forty-five days thereafter was February 5,

1989, and prior to that date, petitioner husband had designated

all the desired replacement properties.   At that time, there was

no further limitation on the application of section

1031(a)(3)(A).   In an attempt to limit the number of properties

that could be so designated, section 1.1031(k)-(1)(c), Income Tax

Regs., was adopted by T.D. 8346, 1991-1 C.B. 150, 157.    The

regulations, however, are prospective only as they apply to

transfers of property made on or after June 10, 1991.    At the
                                 10

time of the instant transaction, therefore, there were no

regulations in effect, nor were there any corresponding

regulations to limit the number of properties that could be

designated.    In the instant case, the letter of designation

specified 19 properties, of which 5 were stated to be preferred

by petitioner husband as exchanger and 6 were ultimately

received.    We do not find anything excessive or improper in such

designation under the law or under the regulations as they stood

at that time.    See St. Laurent v. Commissioner, T.C. Memo. 1996-

150.

Qualification Under Section 1031(a)(3)(B)

       The second requirement of section 1031(a)(3), in

subparagraph (B), is that the property to be received by the

taxpayer in exchange will not qualify for tax-free treatment

under section 1031 if it was received after 180 days from the

date when the taxpayer transfers the property relinquished in the

exchange, or, alternatively, if such property is received after

"the due date (determined with regard to extension) for the

transferor's return of the tax imposed by this chapter for the

taxable year in which the transfer of the relinquished property

occurs".

       There are no regulations concerning these provisions of

section 1031(a)(3)(B), either at the time of enactment of this

subparagraph or since.    We are accordingly left to interpret the

plain language of the statute, which we find to be unambiguous.
                                11

     Section 6072 provides that a return for an individual on the

calendar year basis must be filed by April 15 following the close

of the calendar year.   Section 7503 then provides that if April

15 falls on a Saturday, Sunday, or legal holiday, the due date

will be the next day not a Saturday, Sunday, or legal holiday.

The due date for petitioners' 1988 return was on April 15, 1989,

except that such date was a Saturday.   Therefore, under section

7503, the due date for petitioners' income tax return was April

17, 1989.   As we have detailed above, all the transfers to

petitioner husband, the exchanger, in this transaction happened

after April 17, 1989:   the earliest on April 25, 1989, and the

latest on June 20, 1989.   Such transfer dates fall outside the

exchange period provided for by the statute, section

1031(a)(3)(B)(ii).

     Petitioners nevertheless urge that respondent's argument is

just a quibble, that even though petitioners' joint return was

due on April 17, 1989, and in fact was filed on that date,

petitioners nevertheless were entitled to an automatic 4-month

extension of time for the year 1988, which would extend the due

date for the return from April 17, 1989, to August 17, 1989, and

that since they were automatically entitled to such an extension,

the permissible period within which a tax-free exchange could be

made should be extended by that period.

     We must reject petitioners' argument.   The fact is that

petitioners' joint return was filed on April 17, 1989, its due
                                  12

date.   The further fact is that no extension of time to file such

return was applied for by petitioners.   Furthermore, the

"automatic" granting of such extension of the period for time to

file is not as automatic as petitioners urge.    Section 6081(a)

gives the Secretary power to grant extensions of time for filing

returns, generally for not more than 6 months.    Pursuant to that

statutory provision, section 1.6081-4, Income Tax Regs.,

effective in the years before us, provides an "automatic"

extension of time to file of 4 months, but such extension is to

be considered granted only if certain conditions are met:

     (a) An application of extension on Form 4868 must be made

and executed by the taxpayer or other authorized person;

     (b) such application must be filed with the appropriate

revenue officer on or before the normal due date of the return

(in this case, April 17, 1989);

     (c) such application must show the full estimated amount of

the tax to be due with the return, and the remittance of such

estimated amount with the application is required; and

     (d) the automatic extension of time is granted only if the

above conditions are met.

     In the instant case, the return for 1988 that petitioners

filed showed an overpayment of tax and a refund due.    However,

none of the other above-mentioned conditions were met by

petitioners and, in fact, no application for extension for 1988

was filed.
                                13

     Accordingly, we must hold that the requirements of section

1031(a)(3)(B) are unambiguous; the transfer of the replacement

properties to petitioner husband as exchanger took place after

the required receiving period; no extension of time for filing

the required return for 1988 was applied for or granted; and the

transfers involved in this case do not qualify for tax-free

treatment under section 1031.



Qualification of the Transaction for Reporting on the Installment
Basis

     We have held that the alleged "exchange" of the Tesconi

property by petitioner husband in exchange for various designated

properties, all acquired in 1989, are not to be treated as a tax-

free exchange under section 1031; rather, it is a sale by

petitioner husband, in payment of which he received the

properties that we have listed herein.   The parties have

stipulated that the gain on the disposition of the Tesconi

property was $776,441 after deducting basis, refinancing costs,

and expenses of sale.   It is true, however, that although the

Tesconi property was conveyed to the facilitators and to the

purchasers on December 22, 1988, the compensation to petitioner

husband was not received until after April 17, 1989.   Petitioners

argue that, if the Court should hold that the transaction herein

does not qualify for tax-free exchange treatment under section

1031, nevertheless it should qualify for installment sale
                                 14

treatment under section 453.1   Section 453(a) provides that

except as otherwise provided, income from an installment sale

shall be taken into account for purposes of taxation under the

installment method.    An installment sale is defined in section

453(b) as a "disposition of property where at least 1 payment is

to be received after the close of the taxable year in which the

disposition occurs".    Section 453(c) defines the installment

method of reporting as "a method under which the income

recognized for any taxable year from a disposition is that

proportion of the payments received in that year which the gross

profit (realized or to be realized when payment is completed)

bears to the total contract price".      If the facts fulfil the

requirements of an installment sale, this method of tax reporting

is to be followed unless the taxpayer elects to have the section

not apply to such a disposition.      Sec. 453(d).

     In the instant case, the property was conveyed by petitioner

husband to the facilitators and by them to the purchasers on

December 22, 1988.    Nevertheless, no payment for the conveyance,

in the form of the properties detailed above, was received until


     1
        This issue was not raised by petitioners in their
petition herein, nor by respondent in answer. However, it was
argued by petitioners on brief, and respondent responded to it
and accepted it on brief. Normally we shall not consider an
issue that was not pleaded, but raised for the first time on
brief. Rule 34(b)(4). However, since respondent has replied to
the argument and has accepted petitioners' position thereon, the
issue will be deemed raised and tried by consent of the parties
under Rule 41(b).
                                  15

various dates in the year 1989.    Accordingly, we agree with

petitioner and respondent and hold that although the Tesconi

property was conveyed by petitioner husband to the purchasers in

1988, no payment therefor was received until 1989, so that an

installment sale took place under section 453(b).     Since

respondent did not determine that any taxable sale took place in

the year 1989, nor any deficiency of tax resulting therefrom, we

need to make no further determinations regarding this matter, but

simply hold that respondent's determination of additional income

for 1988 on account of the Tesconi transfer was in error.

                                       Decision will be entered

                              under Rule 155.
