While it appears from the legislative history that the intention of Congress in first enacting the predecessor section of 1031 and in subsequently reenacting similar provisions was to postpone realization of gain or loss when the taxpayer involved merely changed one piece of property for like property, it is clear that a reinvestment of the proceeds of a sale in like property does not bring the transaction within the provisions of the section. Cf. Trenton Cotton Oil Co. v. Commissioner, 147 F. 2d 33 (C.A. 6, 1945), reversing on other grounds a Memorandum Opinion of this Court.3

While Congress intended to provide for postponement of the realization of gain where there was merely a change in the property held, this intention was limited in its applicability to situations in which there was a true exchange of one piece of property for another."

We have concluded from all the evidence before us that the transactions in which petitioners disposed of the Buena Park property and acquired the Salinas property did not constitute an exchange within the meaning of section 1031 (a).

Petitioners and Alloy Die Casting Company originally entered into an escrow in May 1957, which was, in substance, an agreement for purchase and sale with respect to the Buena Park property. This escrow provided for a specific cash purchase price of $5,550 per acre or an aggregate of $172,871.40. It appears, however, that petitioners wished to acquire like property in exchange for their Buena Park property. Pursuant to this intention, they sought suitable property for acquisition, and, after entering into the original escrow with Alloy, found such property in Salinas. The parties then amended their original escrow in August 1957, providing in the amendment that Alloy would acquire title to the Salinas property and exchange it with petitioners for the Buena Park property. The amendment provided, however, that in the event the exchange contemplated did not take place by September 11, 1957, the original agreement for a sale of the Buena Park property to Alloy for cash would be carried

out.

With respect to the Revenue Act of 1924, sec. 203 (b) (1), the following discussion (recorded in 65 Cong. Rec. 2799 (1924)) took place on the floor of the House of Representatives:

"MR. LAGUARDIA. Under this paragraph is it necessary to exchange the property? Suppose the property is sold and other property immediately acquired for the same business. Would that be a gain or loss, assuming there is greater value in the property acquired?

MR. GREEN of Iowa. If the property is reduced to cash and there is a gain, of course it will be taxed.

MR. LAGUARDIA. Suppose that cash is immediately put back into the property, into the business?

MR. GREEN of Iowa. That would not make any difference."

In Surrey and Warren, Federal Income Taxation 817 (1960), that intention appears to be aptly described as follows:

"In general, the justification upon which the provisions [for example, section 1031] are based is that the change produced by the exchange in the form of the investment is not sufficient in extent to break the essential continuity of the investment."

On the date the amendment to the original escrow was executed, petitioners' daughter, acting for petitioners, opened an escrow with Salinas Title Guarantee Company. She deposited with the Salinas title company $19,000 of petitioners' money and agreed, as buyer, to pay an additional amount for the Salinas property sufficient to equal a total purchase price of $190,000.

Salinas Title Guarantee Company was instructed to acquire title in its name. The escrow instructions contained, in addition, the following language:

I hereby irrevocably authorize your Company to issue and deliver your deed for said premises to ALLOY DIE CASTING CO., a corporation, to be recorded immediately following the recordation of the above mentioned deed to your Company, provided you can then immediately record a deed from Alloy Die Casting Co. without warranty, express or implied, to James Alderson and Clarissa E. Alderson, his wife, issuing final title evidence in the last mentioned grantees.

Alloy's attorney thereafter deposited $172,871.40 in the Salinas escrow. This amount exactly equaled the price which Alloy had agreed to pay petitioners for the Buena Park property, viz, $5,550 per acre for 31.148 acres.

The provisions of this escrow were carried out, Salinas Title Guarantee Company taking title to the Salinas property in its own name and transferring title, in accordance with the buyer's instructions, to Alloy. As a part of the same transaction, Alloy then deeded the property to petitioners who, in turn, deeded title to the Buena Park property to Alloy.

We have concluded, first, that the original escrow instructions constituted merely an executory agreement. Since the contract provided several conditions precedent to transfer of title by petitioners and payment of the purchase price by Alloy, which had not been carried out at the time of the amendment, we are satisfied that a taxable sale had not then taken place. Cf. Lucas v. North Texas Co., 281 U.S. 11; Milton S. Yunker, 26 T.C. 161, reversed and remanded without discussion of this point 256 F. 2d 130 (C.A. 6, 1958); and Commissioner v. Swift, 54 F. 2d 746 (C.A. 9, 1932), affirming 20 B.T.A. 1099. Furthermore, it appears that under California law the written amendment to the original escrow was sufficient, without more, to alter the terms of that prior contract. Cal. Civ. Code secs. 1698, 1700. These conclusions, however, are not dispositive of the issue before us. We are satisfied from the record that petitioners acquired the Salinas property as purchasers for cash through the Salinas escrow and exercised control over the title thereto. By the terms of that escrow petitioners were unconditionally liable for a purchase price of $190,000. Nothing in the record indicates that Alloy was the purchaser of the Salinas property. Nor is there any indication that Alloy was liable

for any part of the purchase price of that property. Petitioners have introduced no evidence which would substantiate the possibility that petitioners merely acted for Alloy in acquisition of the Salinas property. Thus, we are not faced with a situation in which a party wishing to acquire title to a taxpayer's property acts independently, and for itself, to acquire another piece of property desired by the taxpayers in order to exchange it for the property which the purchaser wants. We have held that where such facts exist, and the so-called purchaser acts for himself and not as agent for the taxpayer, the subsequent exchange is within the meaning of the statute. Mercantile Trust Co. of Baltimore, et al., Executors, 32 B.T.A. 82; cf. W. D. Haden Co., 165 F. 2d 588 (C.A. 5, 1948), affirming on this issue a Memorandum Opinion of this Court.

In Mercantile Trust Co., supra, the property ultimately received by the taxpayers in exchange for their property was acquired by a third party without any activity toward that end by the taxpayer. We said there at 32 B.T.A. 85:

Peti

In our opinion, the respondent's position cannot be sustained unless the Title Co. [the third party] represented the petitioners as their agent, both in the transfer of the Baltimore Street property to the Emerson Hotel Co., and in the purchase of the Lexington Street property. The record, however, conclusively contradicts the existence of that status in either transaction. tioners' only contract disclosed here was with the Title Co. alone. The W. D. Haden case likewise presents a three-cornered transaction in which the taxpayer's only involvement was in a pure exchange of his property for like property. These cases, upon which petitioners rely, are distinguishable from the facts in the instant controversy. Cf. Fidelity-Philadelphia Trust Co., Executor, 23 B.T.A. 620.

We thus arrive at the question whether, when petitioners contracted to purchase the Salinas property and had title thereto transferred to Alloy, which then conveyed title to petitioners and received title to the Buena Park property, the transaction constituted a nontaxable exchange within the meaning of section 1031 (a).

Two points are immediately clear. First, Alloy's acquisition of title to the Salinas property after the agreement to exchange it for the Buena Park property does not remove the transaction from the nonrecognition umbrella of section 1031 (a). Century Electric Co., 15 T.C. 581, affd. 192 F. 2d 155 (C.A. 8, 1951), certiorari denied 342 U.S. 954. Secondly, petitioners' payment of cash (the $19,000 paid into the Salinas escrow) likewise does not make the nonrecognition provisions of section 1031(a) unavailable. George E. Hamilton, 30 B.T.A. 160.

We conclude, however, that in essence petitioners acquired the Salinas property in a separate transaction; that the payment or $172,871.40 made by Alloy was a payment made for petitioners; and

that petitioners do not thereafter bring themselves within the provisions of section 1031 (a) by the formal gesture of arranging that title shall pass through Alloy to them, for, in fact, they did not acquire the Salinas property in exchange for the Buena Park property. Refinements of title will not blind us to the realities of the transaction. Cf. Griffiths v. Commissioner, 308 U.S. 355. We are satisfied that Alloy paid the purchase price for the Buena Park property into the Salinas escrow with the clear understanding that it would receive title to the Buena Park property after acting as a conduit for title to the Salinas property. Thus, petitioners received $172,871.40 for the Buena Park property to which amount they became unconditionally entitled upon transfer of title to that property to Alloy.

Petitioners did not exchange their property for other property of a like kind. They sold the Buena Park property and reinvested the proceeds therefrom, together with other money, in the Salinas property. Accordingly, the transaction here involved is not within the provisions of section 1031(a) and petitioners are taxable upon the sale of the Buena Park property.

Decision will be entered for the respondent.

Estate of JOHN G. STOLL, Deceased, SECURITY TRUST COMPANY, EXECUTOR, AND VIRGINIA D. STOLL, PETITIONERS, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

LEXINGTON HERALD-LEADER Co., PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 77166, 77167. Filed May 9, 1962.

John G. Stoll owned the Lexington Herald and the Lexington Leader, which published a daily morning and afternoon newspaper, respectively, as well as a combined Sunday edition. The newspapers were operated as an individual proprietorship until October 1953, at which time the Lexington Herald-Leader Co. was formed. To this corporation were transferred the operating assets of the newspapers. Stoll took back all of the stock. In addition, the corporation assumed a total of $1,015,000 of his liabilities, composed of $600,000 obtained in refinancing just prior to incorporation and secured by mortgages on property assigned to the corporation, and $415,000 secured by life insurance policies with cash surrender values in excess of $415,000, which policies were not assigned to the corporation. Held, the assumption by the corporation of the $600,000 indebtedness is not to be considered as "other property or money" received by Stoll within the meaning of section 112(c) and (k), I.R.C. 1939, and that such assumption does not prevent the exchange from being within the provisions of section 112(b) (5), I.R.C. 1939. Held, further, the assumption by the

The purchase price of the Salinas property was $190,000. Petitioners paid $19,000 into the Salinas escrow and Alloy paid in $172,871.40. The surplus was returned to petitioners.

corporation of the $415,000 indebtedness is to be considered as "money received" by Stoll upon the exchange, within the meaning of section 112(c) and (k), I.R.C. 1939, and as such is to be considered in computing the gain to be recognized upon the exchange. James Park, Esq., Joseph L. Rothchild, Esq., and Gayle A. Mohney, Esq., for the petitioners.

Hubert E. Kelly, Esq., for the respondent.

BRUCE, Judge: Respondent determined deficiencies in petitioners' income taxes and additions to taxes for the years and in the amounts which follow:

By their supplemental stipulation of facts the parties have limited the issues to the following: (1) Whether the transfer by John Stoll of the assets of his newspaper business with a basis of $663,879.95 to the Lexington Herald-Leader Co. in exchange for all of its stock and the assumption by it of his liabilities in the amount of $1,015,000 was a nontaxable exchange within the provisions of section 112(b) (5), I.R.C. 1939;1 and (2) whether there was a valid assumption of the indebtedness by the corporation so that principal and interest payments made by the corporation toward the liquidation of the liabilities did not constitute distributions in the nature of dividends.

FINDINGS OF FACT.

Some of the facts have been stipulated and are incorporated herein by this reference.

Petitioners in Docket No. 77166 are the Estate of John G. Stoll, Deceased, Security Trust Company, of Lexington, Kentucky, Executor, and Virginia D. Stoll (sometimes hereinafter referred to as Virginia). John G. Stoll (sometimes hereinafter referred to as Stoll) and Virginia were husband and wife and resided in Lexington, Kentucky. They filed joint Federal income tax returns with the district director of internal revenue for the district of Kentucky for the years 1953 through 1956 on the cash basis of accounting. Stoll died testate on August 26, 1959. Besides Virginia, by whom he had no children,

1 Hereinafter, section references will be to the Internal Revenue Code of 1939 unless otherwise indicated.