This post was originally published on Forbes Mar 11, 2015If it were not for all the blood Fargo would be about my favorite movie. Part of the attraction is the detailed way it goes about portraying the relationships people have as they go about their work regardless of whether the work is selling cars, making duck portraits, investigating crimes or kidnapping. One of the most brilliant performances is that of Larry Brandenburg who plays Stan Grossman, accountant to the hapless Jerry's curmudgeonly father-in-law. Brandenburg captures perfectly the consigliere that accountants so often end up playing for their successful clients. Here it us up to Stan to explain the facts of business life to the inept son-in-law.
In the representative transaction, North Central agreed on or before June 30, 2004, to sell Truck 1 to a third party for $756,500. North Central's adjusted tax basis in Truck 1 was $129,372.70 at the time. The third party paid Accruit the $756,500 in sales proceeds, and North Central transferred to the third party legal ownership of Truck 1.
On or about August 13, 2004, Butler Machinery identified and purchased the replacement Caterpillar equipment, Truck 2 and Skid Steers 1 and 2. Butler Machinery's total acquisition price for this new property was $761,065.60. Butler Machinery then transferred legal ownership of the replacement property to North Central through Accruit on August 27, 2004.
On September 10, 2004, Accruit transferred the $756,500 in proceeds from the sale of Truck 1 to Butler Machinery. North Central and Butler Machinery then adjusted a note between the two companies to compensate Butler Machinery for the $4,565.60 difference between the $756,500 in sale proceeds and the $761,065.60 that Butler Machinery paid for the replacement equipment.
This section shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of this subsection.
Butler Machinery attempts to downplay the benefit it derived from these de facto interest-free loans by asserting that North Central would have received the same financing terms if it had ordered directly from Caterpillar. The President and CEO of Accruit, however, testified at trial that Accruit would have paid the sales proceeds from the relinquished property directly to Caterpillar if the new equipment were not purchased via Butler Machinery. In other words, if Butler Machinery was not involved in these transactions, neither Butler Machinery nor North Central would have received the de facto interest-free loans.
In sum, Butler Machinery was not necessary to the transactions at issue yet possessed significant, unearmarked cash proceeds as a result of the transactions. Both the Eleventh Circuit and the Ninth Circuit have affirmed determinations that transactions were structured to avoid the purposes of § 1031(f) when unnecessary parties participated in the transactions and when a related party ended up receiving cash proceeds.