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steps, described as follows (generally, ranchland exchange
transactions): First, instead of True Ranches directly acquiring
the ranchlands, the True family arranged for Smokey Oil Co.
(Smokey Oil) to purchase the parcels of real property for an
aggregate purchase price of over $6.8 million, while True Ranches
acquired the operating assets of each ranch. At the time, Smokey
Oil (a Wyoming S corporation) was owned by Dave True (72.3935
percent), Jean True (24.1316 percent), and the True sons (1.1583
percent each). Second, Smokey Oil transferred the ranchlands to
True Oil in exchange for selected productive oil and gas leases,
which the parties treated as a like-kind, tax-free exchange under
section 1031. Third, True Oil immediately distributed the newly
acquired ranchlands to the individual partners of True Oil (Dave
and Jean True and the True sons) as tenants in common. Fourth,
the partners then contributed their undivided interests in the
ranchlands to True Ranches by general warranty deed. The
partnership distribution and contribution transactions were
treated as nonrecognition transactions under sections 721 and
731.
The intent of the True family in carrying out this series of
acquisitions, transfers, and exchanges was to create income tax
benefits. Through the operation of section 1031(d), which
essentially provides that the basis of property received in a
nonrecognition exchange is the same as the basis of property
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