Intangibles can be like-kind property.

• Author: Petti, Andrew

The IRS has ruled on several occasions in the past that exchanged intangibles such as trademarks, trade names, mastheads, and advertiser and subscriber accounts could never be eligible for deferral under Sec. 1031. However, earlier this year it reversed course. In Chief Counsel Advice (CCA) 200911006, the Service took the unusual step of explicitly rescinding its earlier conclusions. CCA 200911006 arguably brings this area of the law more into line with other court and IRS guidance on the applicability of Sec. 1031 to intangible assets and provides taxpayers with more opportunity (if not more clarity) for business and tax planning.

Sec. 1031

Sec. 1031 provides a means to defer gain or loss on the disposition of assets via the exchange of like-kind assets (Sec. 1031(a)). In general, Sec. 1031 provides that taxpayers do not recognize gain or loss on the exchange of property held for productive use in a trade or business (or for investment) if the property is exchanged for like-kind property that is also to be held for productive use in a trade or business (or for investment). In determining whether intangible personal property is of like kind, the Sec. 1031 regulations require taxpayers to evaluate two separate criteria:

* The nature and character of the intangible rights involved (e.g., a patent or a copyright); and

* The nature and character of the underlying property to which the intangible property relates (Regs. Sec. 1.1031(a)-2(c)(1)).

The exchanged assets must be of like kind under both prongs.

The regulations give only two examples illustrating the application of these rules. Example 1 provides that an exchange of the copyright on a novel for the copyright on another novel is a like-kind exchange (Regs. Sec. 1.1031(a)-2(c)(3), Example (1)). Example 2, as a contrary example, provides that an exchange of the copyright on a novel for the copyright on a song is not a like-kind exchange (Regs. Sec. 1.1031(a)-2(c)(3), Example (2)). The regulations explicitly preclude the application of the like-kind exchange rules to exchanges of goodwill (Regs. Sec. 1.1031(a)-2(c)(2)). The IRS believes that goodwill and going concern value are "so inherently unique and inseparable from the business" that they can never be of like kind with any other goodwill or going concern value (T.D. 8343). Therefore, taxpayers wishing to avail themselves of Sec. 1031 for the exchange of intangible assets must establish at the very least that the exchanged intangibles are not goodwill or going concern value.

TAM 200602034

In 2006, the IRS released Technical Advice Memorandum (TAM) 200602034, which overlaid on top of the two-step analysis above a restrictive rule relating to trademarks and trade names. In the TAM, the taxpayer exchanged, among other things, a group of trademarks and trade names for another group of trademarks and trade names. Applying the two-step analysis, the taxpayer argued that all the exchanged trademarks and trade names were of like kind because:

* The nature and character of the rights involved are the same (i.e., all the trademarks and trade names provide the same legal protections); and

* The nature and character of the underlying...