Bank subsidiary's LKE program qualifies under Sec. 1031.

• Author: Kautter, David J.
• Position: Like-kind-exchange - Transfers of relinquished vehicles

In Letter Ruling 200240049, the Service ruled that a comprehensive like-kind-exchange (LKE) program providing for various transfers of relinquished vehicles, followed by acquisitions of replacement vehicles through a taxpayer's dealer network using a qualified intermediary (QI), is a deferred exchange that qualifies for Sec. 1031 nonrecognition treatment.

Facts

A bank subsidiary both leases vehicles to consumers and provides them loans to purchase vehicles. Its lease portfolio includes automobiles, passenger vans, sport utility vehicles (SUVs) and light-duty trucks. To meet Sec. 1031 requirements, the taxpayer entered into an exchange agreement with a QI that authorized the QI to purchase all leased vehicles on the taxpayer's behalf, including vehicles that are not replacement vehicles.

Letter Ruling 200240049 deals with sales of relinquished vehicles to lessees and dealers and through auctions. In each case, a purchaser of a relinquished vehicle is notified of the taxpayer's assignment of its rights to the QI on or before the transfer date. Lessees and dealers send completed sale documents to the taxpayer, which verifies the information and sends checks to the QI for deposit. Auction houses wire the sales funds directly to the QI. The exchange agreement expressly limits the taxpayer's rights to receive, pledge, borrow or otherwise obtain the benefits of money or other property held by the QI before the exchange period ends.

The taxpayer acquires replacement vehicles from dealers subject to an agreement. There are two lease programs. Under the first, the dealer has the lessee complete a credit application, and faxes it to the taxpayer. If approved, the taxpayer faxes back a credit approval, which includes proper notifications.

Under the second program, the dealer has the lessee complete a credit application, but also obtains a credit report from an external credit bureau. The dealer completes a form that includes an assignment of the taxpayer's rights to the QI. Within two to three days of executing the lease with the lessee, the dealer delivers the documents to the taxpayer for processing. On receipt, the taxpayer confirms lease approval and faxes a copy of the credit approval to the QI and the dealer. The approval includes language confirming that the taxpayer notified the QI and the dealer.

Payment for replacement vehicles can occur in two ways: the taxpayer (1) orders the QI to transfer funds via the Automated Clearing House to the...