North Central Rental & Leasing, LLC, by and through its Tax Matters Partner, M. Daniel Butler, Plaintiff - Appellant
United States of America, Defendant - Appellee
Submitted October 7, 2014
Appeal from United States District Court for the District of North Dakota - Fargo.
For North Central Rental & Leasing, LLC, by and through its Tax Matters Partner, M. Daniel Butler, North Central Rental & Leasing, LLC, by and through its Tax Matters Partner, M. Daniel Butler, Plaintiffs - Appellants: Thomas Carl Borders, Katharine O'Connor, Gregory Palmer, Mcdermott - Will, Chicago, IL.
For United States of America, Defendant - Appellee: Jonathan S. Cohen, U.S. Department of Justice, Tax Division, Appellate Section, Washington, DC; Jessica S. Reimelt, U.S. Department of Justice, Tax Division, Civil Trial Section, Central Region, Washington, DC; Jennifer Marie Rubin, U.S. Internal Revenue Service, Washington, DC.
Before MURPHY, SMITH, and GRUENDER, Circuit Judges.
SMITH, Circuit Judge.
The Internal Revenue Service (IRS) determined that North Central Rental & Leasing, LLC (" North Central" ) had improperly claimed " nonrecognition treatment"  of gains from certain property exchanges. North Central filed suit against the United States, seeking a determination that its gains from the exchanges were, in fact, entitled to nonrecognition treatment.
The district court entered judgment in favor of the United States, and North Central appealed. We affirm.
Butler Machinery Company (" Butler Machinery" ) sells agricultural, mining, and construction equipment for manufacturers, primarily Caterpillar, Inc. (" Caterpillar" ). Prior to 2002, Butler Machinery conducted a rental and leasing business in conjunction with its retail sales business. In 2002, however, Butler Machinery formed subsidiary North Central to take over Butler Machinery's rental and leasing operations.
Although separate entities, Butler Machinery and North Central are closely related and ultimately controlled by the same family. Indeed, Daniel Butler and certain of his family members own Butler Machinery, which in turn owns a 99 percent interest in North Central. Daniel Butler directly owns the remaining 1 percent of North Central. Both Daniel Butler and his sister Twylah Blotsky are board members of both Butler Machinery and North Central. Butler Machinery shares building space with North Central, performs accounting and equipment-ordering functions for North Central, and even initially pays the wages of North Central's employees. Caterpillar assigned separate dealer codes to North Central and Butler Machinery, which enabled each entity to independently purchase its own equipment from Caterpillar; however, Butler Machinery used its own dealer code to order equipment for both itself and North Central.
A. LKE Program
At issue in this case is North Central's like-kind-exchange (LKE) program, which commenced less than two months after Butler Machinery formed North Central. In a nutshell, the LKE program allowed North Central to trade used equipment for new equipment and, in the process, defer tax recognition of any gains or losses from the transactions. Per the LKE program, North Central sold its used equipment to third parties, and the third parties paid the sales proceeds to a qualified intermediary, Accruit, LLC (" Accruit" ). Accruit forwarded the sales proceeds to Butler Machinery, and the proceeds " went into [Butler Machinery's] main bank account." At about the same time, Butler Machinery purchased new Caterpillar equipment for North Central and then transferred the equipment to North Central via Accruit. Butler Machinery charged North Central the same amount that Butler Machinery paid for the equipment.
Butler Machinery's use of LKE transactions in this fashion facilitated favorable financing terms from Caterpillar (referred to as " DRIS" financing terms). Caterpillar advised Butler Machinery before it established either North Central or the LKE program that such a transaction structure would enable Butler Machinery " to take full advantage of [Caterpillar's] DRIS payment terms." The DRIS payment terms, among other things, gave Butler Machinery up to six months from the date of the invoice to pay Caterpillar for North Central's new equipment. During that time, ...