IRS Reverses Position on Intangibles Relating to Like-Kind Exchanges
In a recent Chief Counsel Advice, the IRS has reversed
some of its own prior rulings and has stated that certain intangible assets,
which can be valued separately from goodwill, qualify as like-kind property
for IRC Section 1031 purposes.
Stunning Reversal
In general, under IRC Section 1031, no gain or loss is recognized where
business or investment property is exchanged solely for like-kind property.
In a stark turnaround, the IRS has ruled that intangibles--such as
trademarks, trade names, mastheads, and customer-based intangibles that can
be separately described and valued apart from goodwill--qualify as like-kind
property for IRC Section 1031 purposes. Furthermore, the IRS’s position is now
that, except in rare and unusual circumstances, these intangibles can be
valued separately from goodwill. This new approach is a complete departure
from the IRS’s previous position, which had been reaffirmed quite recently,
that exchanged intangibles such as those mentioned above could never be
property eligible for like-kind exchange treatment.
Chief Counsel Advice 200911006
The IRS’s recent rationale under federal tax law was that trademarks and
trade names of a business entity couldn’t be of like kind to the trademarks
and trade names of another business entity because they were so closely
related to (if not actually a part of) the goodwill or going-concern value
of a business that the two could not be separated (PLR 200602034). Also,
under Regulation Section 1.1031(a)-2(c)(2), the goodwill or going-concern
value of a business wasn’t considered to be of like kind to the
going-concern value of another business.
Similarly, PLR 20074401F held that precedent such as Newark Morning Ledger
Co. v. U.S. (507 U.S. 546 (1993)) is not relevant to the determination of
whether intangibles are like-kind property under IRC Section 1031 but, rather,
only relates to depreciation rules based on the ability to separately
characterize property apart from goodwill. In that case, the taxpayer argued
that if certain accounts are depreciable and can be amortized under IRC
Section
197, it would be logical to attach values for IRC Section 1031 like-kind
purposes.
But now, the IRS has explicitly stated that--in determining IRC Section 1031
treatment--it should not follow these rationales recently adopted in PLR
200602034 and PLR 20074401F.
Instead, in Chief Counsel Advice 200911006, the IRS has now concluded that
the analysis of Newark Morning Ledger Co. applies in determining whether
intangibles constitute goodwill or going-concern value within the meaning of
Reg. Section 1.1031(a)-2(c)(2). As a result, intangibles such as trademarks,
trade names, mastheads and other customer-based intangibles that otherwise
meet the statutory requirements and can be separately described and valued
apart from goodwill qualify as like-kind property under IRC Section 1031.
Conclusion
In light of the recent shifting landscape in this area,
please contact us for professional advice when involved in a business exchange involving
intangibles, especially when the intangibles are the type discussed in Chief
Counsel Advice 200911006.
This newsletter is provided by
Somerset for our clients and other interested persons upon request.
Since technical information is presented in generalized fashion, no
final conclusion on these topics should be made without further review.
For additional information on the issues discussed, please contact
Steve Riddle,
Tom
Thieme,
Rex Collins or
Doug
Ayres
of our
Litigation & Valuation Team.
This document is not intended or written to be used, and cannot be used,
for the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
www.somersetcpas.com
info@somersetcpas.com
