Adams v. Commissioner

In 1963, William Adams (plaintiff) purchased a house in San Francisco, where he lived with his family until 1979, when they moved to Rohnert Park, California. Thereafter, Adams rented out the San Francisco property. In 2004, Adams exchanged the San Francisco house for a home in Eureka, California. Adams’s son, Bill, an experienced builder, lived in Eureka. Adams chose the home because he thought Bill could either manage it as a rental or occupy the home himself, since its five-bedroom size suited Bill’s large family. The house, however, was in poor condition and required significant repairs. From July through September 2004, Bill and his family worked approximately 60 hours per week to make the house livable, performing extensive repairs and improvements. During that time, Adams allowed Bill and his family to live in the home rent-free, accepting their services in lieu of monetary rent. Starting in October 2004, Bill paid Adams $1,200 a month in rent. Although this amount was slightly below the market rate, Bill continued renovating, repairing, and maintaining the home until moving out in early 2008. On his federal income taxes, Adams reported no gain or loss from the exchange of the San Francisco house. The commissioner of the Internal Revenue Service (defendant) assessed a deficiency, asserting that the exchange did not qualify for nonrecognition treatment under § 1031(a) because Adams had acquired the Eureka home for personal reasons, not for investment. Adams petitioned the tax court for a redetermination.