Section of Taxation Publications
  VOL. 57
NO. 1
FALL 2003
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Water Rights and Like Kind Exchange: Wiechens v. United States
Gretchen Bundy


In Wiechens v. United States, the United States District Court for the District of Arizona granted the government’s cross-motion for summary judgment, asserting that the gain realized from the disposition of water rights was taxable. The court held that the exchange of water rights for a fee simple interest in farmland was not a like-kind exchange within the meaning of section 1031 and “[did] not qualify for non-recognition treatment.” Under section 1031, no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind. Moreover, Regulation section 1.1031(a)-1(a)(2)(b) provides that whether the exchanged properties qualify as like-kind exchanges under section 1031(a) depends on the “nature or character of the property and not . . . its grade or quality.” Although the Wiechens court found that the water rights qualified as a real property interest under Arizona state law, it held that these water rights were not of a sufficiently similar nature or character to a fee simple interest in farmland to satisfy the like-kind property requirement. The finding of the court is significant in that this case establishes as precedent the suggestion in Revenue Ruling 1955-749 that water rights of a limited duration do not qualify as sufficiently similar to a fee simple real property interest under section 1031. Revenue Ruling 1955-749 advises that under certain conditions, water rights and fee simple real property interests may qualify as a like-kind exchange under section 1031. The court, however, did not provide much affirmative guidance as to when a water right would be sufficiently similar to a fee simple property interest under section 1031 beyond the perpetuity requirement suggested in Revenue Ruling 1955-749.

Part I of this Note provides the factual background of Wiechens v. United States. Part II reviews the holding and rule of the court. Part III analyzes how the decision of the court fails to provide adequate reasoning as to why the water rights in question are not sufficiently similar to a fee simple real property interest under section 1031. Part IV concludes that although the court correctly decided that the taxpayers’ water rights did not qualify as a like-kind exchange with fee simple property under section 1031, the court’s reasoning is unclear and provides poor guidance for tax practitioners.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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