                                                                            FILED
                           NOT FOR PUBLICATION
                                                                             JUN 12 2019
                    UNITED STATES COURT OF APPEALS                       MOLLY C. DWYER, CLERK
                                                                          U.S. COURT OF APPEALS


                            FOR THE NINTH CIRCUIT


THE MALULANI GROUP, LIMITED,                     No.   16-73959
AND SUBSIDIARY,
                                                 Tax Ct. No. 18128-12
              Petitioner-Appellant,

 v.                                              MEMORANDUM*

COMMISSIONER OF INTERNAL
REVENUE,

              Respondent-Appellee.


                           Appeal from a Decision of the
                             United States Tax Court

                      Argued and Submitted October 9, 2018
                               Honolulu, Hawaii

Before: WARDLAW, BERZON, and RAWLINSON, Circuit Judges.

      The Malulani Group, Ltd. and Subsidiary (Malulani) appeal the decision

from the U.S. Tax Court (Tax Court) holding that a 2007 real estate exchange did

not qualify for nonrecognition under 26 U.S.C. § 1031 (§ 1031).


      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
       “We review the Tax Court’s conclusions of law and interpretations of the tax

code de novo.” Teruya Bros., Ltd. v. Comm’r, 580 F.3d 1038, 1043 (9th Cir. 2009)

(citation omitted).

       Generally, a taxpayer must pay taxes on gain realized on the sale or

exchange of property. See 26 C.F.R. § 1.1002-1(a). Section 1031 is an exception

to this rule and is strictly construed. See 26 C.F.R. § 1.1002-1(b); see also Teruya

Bros., 580 F.3d at 1043. Under § 1031(f)(1), a party may benefit from

nonrecognition of the gain from an exchange of like-kind property with a related

party if the related party holds the property for at least 2 years after the last

transfer. See 26 U.S.C. § 1031(f)(1). However, any transaction or series of

transactions “structured to avoid the purposes” of § 1031(f) is ineligible for

nonrecognition. 26 U.S.C. § 1031(f)(4).

       Malulani and Malulani Investments, Ltd. (MIL) are related entities.

Through a qualified intermediary, a Malulani wholly-owned subsidiary sold real

estate (the Maryland Property) to an unrelated third party and replaced it with real

estate owned by MIL (the Hawaii Property). The aggregate tax liability arising out

of the exchange was significantly less than the hypothetical tax that would have

arisen from a direct sale between the related parties.




                                             2
      The outcome of this case is controlled by Teruya Bros. That case also

involved a like-kind exchange of real property between related entities and reliance

on § 1031 to defer recognition of the gain realized from the exchange. See 580

F.3d at 1040-41. After the Internal Revenue Service (IRS) issued a notice of

deficiency, Teruya Bros. appealed to the Tax Court. See id. at 1042. The Tax

Court affirmed the IRS’s determination that the like-kind exchange between the

related entities did not qualify for nonrecognition. See id. We affirmed the Tax

Court decision, explaining that the exchange was structured for “tax avoidance

purposes” because Teruya Bros. and its related entity “achieved far more

advantageous tax consequences by employing [a qualified intermediary to conduct

the like-kind exchanges] than it would have had Teruya simply sold its properties

to the third-party buyers itself.” Id. at 1047 (footnote reference omitted).

      The same is true in this case. Rather than engaging in the intricate like-kind

exchanges that achieved favorable tax consequences for Malulani and MIL,

Malulani could have simply consummated the sales itself. Had it done so,

Malulani would have had to recognize a $1,888,040 gain. See id. Because the

aggregate tax liability arising out of the exchange was significantly less than the

hypothetical tax liability that would have arisen from a direct sale between the




                                           3
related parties, the like-kind exchange served tax-avoidance purposes. Therefore,

Malulani was not entitled to nonrecognition of gain under § 1031.

      We also agree with the Tax Court that any argument regarding MIL’s use of

net operating losses to offset the gain realized was speculative. See The Malulani

Group Ltd. and Subsidiary v. Comm’r, T.C. Memo. 2016-209, 14 n.6 (November

16, 2016).

      AFFIRMED.




                                         4
