In an unpublished decision, the California Court of Appeal affirmed a trial court’s ruling that the taxpayers did not meet their burden of proof that they identified the replacement property within the required 45 days, and therefore, did not qualify for a deferral of gain on a like-kind exchange under IRC § 1031. California Revenue and Taxation Code § 18031 conforms IRC § 1031, which generally allows the gain on like-kind exchanges of property to be deferred. One of the requirements for like-kind exchange treatment under federal law is that the taxpayer must identify an appropriate replacement property within 45 days of the date on which he or she transfers the relinquished property. Under the 1031 regulations, the identification must be made “in a written document signed by the taxpayer and hand-delivered, mailed, telecopied, or otherwise sent before the end of the identification period” to certain persons involved in the exchange.
The sole issue on appeal was whether the taxpayers identified the replacement property within 45 days of the transfer of the relinquished property. In short, one of the parties asserted he had delivered the letter to an appropriate person within the required time. However, there was no evidence to support the delivery and the court found that the taxpayer’s testimony at trial contradicted his deposition. As such, it ruled in favor of the FTB. Interestingly, it did not appear that the IRS had challenged the deferral of gain. Please contact Gina Rodriquez at 916-551- 3132 with questions Alicia Smith et al. v. FTB.