North Cent. Rental & Leasing, LLC v. United States

Butler sells agricultural and construction equipment, primarily for Caterpillar. In 2002, Butler formed North Central to take over its leasing operations. The companies are ultimately controlled by the same family and share space. Butler performs North Central’s accounting and ordering functions and initially pays the wages of its employees. Caterpillar assigned separate dealer codes, but Butler used its code to order equipment for itself and North Central. Under North Central's like-kind-exchange (LKE) program, North Central sold its used equipment to third parties, who paid a qualified intermediary, Accruit, which forwarded proceeds to Butler; Butler purchased new Caterpillar equipment for North Central and transferred it to North Central via Accruit, charging the same amount that Butler paid for the equipment. Butler's LKE transactions facilitated favorable Caterpillar financing terms. Butler essentially received a six-month, interest-free loan from each exchange. From 2004-2007 North Central claimed nonrecognition treatment of gains from 398 LKE transactions under IRC 1031, so that the gain was not included in gross income at the time of actual sale or gain. The IRS declared that the transactions were not entitled to nonrecognition treatment, reasoning that North Central structured the transactions to avoid the related-party exchange restrictions of section 1031(f). The district court analyzed Butler's unfettered access to the cash proceeds and the relative complexity of the transactions and entered judgment in favor of the government. The Eighth Circuit affirmed. View "North Cent. Rental & Leasing, LLC v. United States" on Justia Law