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Introduction
Although the majority of
exchanges under I.R.C. Section 1031 probably involve real property,
the exchange of "personal property" is also possible and presents a
substantial tax deferral opportunity for business owners.
"Personal property",
for the purposes of 1031 exchanges, includes any tangible depreciable
capital asset, other than real property, which is held for use in a
trade or business or investment. In practice, these assets include all
types of motor vehicles, aircraft, railroad stock, marine vessels, satellites,
all types of equipment and livestock. As noted tax lawyer and exchange
commentator Terence Floyd Cuff has noted, "If man can build it, it can
be exchanged."
Certain types of intangible
assets may also qualify for non recognition exchange treatment under
Section 1031. These types of assets include franchise rights, intellectual
property rights (patents, trademarks and copyrights) and television
and radio licenses. However, the I.R.S. has taken the position that
the goodwill of a business and covenants to compete do not qualify for
non recognition treatment under Section 1031.
Personal Property
Exchanges
The exchange of personal
property assets under Section 1031 may be available for the sale of
individual assets (e.g., a computer or vehicle), or the sale of a variety
of assets at the same time (such as in a sale of all of the assets of
a business). However, in both cases, to qualify for non recognition
treatment under Section 1031, each item of personal property relinquished
in the exchange must be determined to be "like kind" with the item of
personal property received.
In a single asset exchange,
the like kind requirement is usually met easily, with both the property
relinquished and the property received being in the same "General Asset
Class" or the same "Product Class". In Multiple Asset Exchanges, these
same classifications are used to group assets and determine the recognition
or non recognition of gain upon the sale.
General Asset
Classes
The Regulations issued
by the I.R.S. under Section 1031 introduced a "like class" safe harbor
to determine whether items of depreciable tangible personal property
were "like kind" to each other. Items of tangible personal property
will be considered to be "like kind" if they are within the same General
Asset Class. The Regulations established thirteen "General Asset Classes":
- Office furniture, fixtures
and equipment
- Information systems, such
as computers and peripheral equipment
- Non computer data handling
equipment, such as copiers and typewriters
- Airplanes, helicopters,
air frames and engines
- Automobiles
- Buses
- Light general purpose
trucks
- Heavy general purpose
trucks
- Over the road truck tractor
units
- Trailers and trailer mounted
containers
- Railroad cars and locomotives
- Vessels, barges, tugs
and marine transportation equipment
- Industrial steam and electric
generation and distribution systems
Product Classes
As an alternative to
the "like class" test, items of personal property may be like kind if
they are within the same "Product Class" established by the Standard
Industrial Classification Codes published by the Office of Management
and Budget. For example, all farm and garden machinery is within the
same Product Class 3523 and therefore like kind.
The SIC Codes are complex
and, unfortunately, their use to determine whether personal property
is within the same Product Class has been confused by their replacement
in 1997 with the North American Classification System Manual. It appears
that the I.R.S. is following the old SIC Codes rather than the NACS
Manual classifications to determine product classes, although no official
position has been announced on this issue.
Personal Property
Exchanges Outside of the Safe Harbor
Under the Regulations,
personal property may be "like kind" even if it is not "like class"
or within the same Product Class under the safe harbor. However, the
like kind standard is less broad than for exchanges of real property,
and requires properties to be of the same "nature or character", which
is illustrated best by several examples:
- Copyrights of different
novels
- Major league player contracts
- Bullion type (non currency)
gold coins
- Livestock of the same
sex
- FCC television licenses
for FCC radio licenses
- Emission allowances allocated
by the EPA
- Environmental impact mitigation
credits
As noted, the I.R.S. has
taken the position that the "goodwill" of a business (its existing business
relationships that are expected to continue after a change in ownership)
or its "going concern value" (the ability of the business to produce
income after a change in ownership) are always inherently unique to
the business and inseparable from it. Therefore, according to the I.R.S.,
the goodwill or going concern value of one business will never be like
kind to the goodwill or going concern value of another business. (See
I.R.S. Field Service Advice 199951006).
Multiple Asset
Exchanges
The Regulations require
that each item of personal property relinquished in the exchange must
be determined to be "like kind" with the item of personal property received.
The I.R.S. has in recent years taken the position that this requirement
does not permit a swap of all the assets of one business for all of
the assets of another business of the same type (e.g., a restaurant
for a restaurant) to qualify for non recognition treatment under Section
1031.
The Regulations provide
that the like class rules may be applied to an exchange of a variety
of assets, such as those involved in the sale of a business, by grouping
the assets into their various General Asset Classes and/or Product Classes.
The Regulations provide specific guidance for taxpayers how to group
assets into classes, and determine the capital gain for each class,
the matching of values and liabilities, etc. Given the significant accounting
issues in multiple asset exchanges, taxpayers involved in a multiple
asset exchange should include their accounting advisor in the planning
of the exchange and throughout the exchange process.
General and Identification
Requirements
In addition to the
more specific requirements discussed above, a delayed exchange of personal
property must also comply with the general requirements of the Qualified
Intermediary "safe harbor" provided by the Regulations, including the
use of an independent third party as the Qualified Intermediary, time
deadlines for the identification and receipt of replacement property,
etc. The Regulations require that the identification of replacement
property to be received in an exchange must specifically describe a
particular type of personal property. For example, in an exchange of
two automobiles, an unambiguous description of the replacement vehicle
would describe the specific make, model and year of the automobile.
The other general rules of identification under Section 1031 also apply
to personal property exchanges.
Conclusion
National 1031 Exchange
Service, LLC has a broad range of experience structuring 1031 exchanges
of a variety of personal property assets, including business equipment,
aircraft, vehicles, distribution rights and franchise rights, on a one-time
or continuing basis. Please contact us if you have any questions regarding
exchanges of any type of personal property.
NOT TO BE CONSTRUED
TAX OR LEGAL ADVICE. IF TAX OR LEGAL ADVICE IS NEEDED, AN ATTORNEY,
ACCOUNTANT OR OTHER QUALIFIED COUNSEL SHOULD BE CONSULTED.
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