Commissioner v. Crichton

Brief Fact Summary. Respondent exchanged mineral interests in an undeveloped piece of land with her kids for interest in a city lot. Respondent treated the exchange as a nontaxable like kind exchange of real property.

Synopsis of Rule of Law. Exchanges of real property may be nontaxable if it is a like kind exchange.

Facts. Respondent and her three children owned a tract of land and an improved city lot. The children transferred their interests in the city lot to Respondent, and she transferred oil, gas, and mineral rights to the children. The interest to Respondent had a value of $15,357.77, and the interest to the children had a cost basis of zero. Respondent treated the exchange as a like kind property exchange and nontaxable. The Commissioner of Internal Revenue determined the exchange resulted in a capital gain of the full amount.

Issue. Should the property have been treated as a like kind exchange free from taxation?

Held. Circuit Judge Hutcheson issued the opinion for the United States Fifth Circuit Court of Appeals in holding that the exchange was a like kind exchange and nontaxable.

Discussion. The Court of Appeals determined that mineral rights are interests in real and not personal property and the plain language of the law provides that exchanges of like kind real property are not taxable.