Like-Kind Exchanges of Intangible Assets
Business assets may now include some intangible assets.
April 27, 2009
The Internal Revenue Service (IRS) recently reversed its position on the definition of qualifying intangible property eligible for like-kind exchange treatment. As recently as last fall, the position of the IRS was that the definition of goodwill included assets such as trademarks, mastheads and subscriber lists, and as such, they were therefore ineligible for like-kind exchange treatment.
In general, under IRC section 1031, no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for a property of a like kind and certain time and identification limits are met. The IRS has held that goodwill and related assets would never be eligible for like-kind exchange treatment. Their definition of goodwill had even expanded to include such assets as trademarks and subscriber lists.
An expansive definition of goodwill was invoked in two separate memorandums issued. In Private Letter Ruling 200602034, the taxpayer asserted that trademarks and trade names satisfied the two-pronged test for intangible property in IRC section 1031 regulations: 1) the nature and character of the rights involved were the same, (i.e., legal protection under trademark law) and 2) the nature and character of the underlying properties were the same (i.e., a combination of words, names, symbols or devices eligible to be registered under trademark law). The IRS concluded in this ruling that the trademarks and trade names were not separate assets, but instead were a component of a larger asset such as goodwill or going-concern value.
This treatment of intangible assets was echoed in Legal Advice by Field Attorneys (LAFA) 20074401F, when the IRS addressed whether a newspaper’s masthead (or logo), advertiser accounts and subscriber accounts could be exchanged under section 1031. In this memorandum, the IRS decided that the masthead was equivalent to a trademark or a trade name. The advertiser and subscriber accounts were deemed to be “closely related” to goodwill and could not be distinguished from the taxpayers trademarks or trade names. As such, none of these assets were eligible for like kind treatment.
The taxpayer’s view that these assets were separate and distinct from goodwill is supported by section 197 and the Newark Morning Ledger ruling [507 US 546, 71 AFTR 2d 93-1380 (1983)]. The IRS agreed that for purposes of section 197, the assets were separate from goodwill, but this determination was only for amortization purposes. Principles used in determining if assets were amortizable were not relevant for purposes of code section 1031 exchanges.
A Reversal of Opinion
A new Chief Counsel Advice (CCA) memorandum addresses the issue and reaches a different conclusion. In CCA 200911006, it was determined that intangibles such as trademarks, trade names, mastheads, and customer-based intangibles that can be separately described and valued apart from goodwill will qualify as like kind property under section 1031. The memorandum further states that except for rare and unusual situations, intangibles such as trademarks, trade names, mastheads and customer-based intangibles can be readily described separately and valued apart from goodwill. As long as all other requirements of section 1031 are met, like-kind exchange treatment of these types of intangible assets would be available. In addition, the CCA asserts that the IRS should no longer follow the positions in PLR 200602034 and LAFA20074401F on this issue.
This change in IRS position on the deferral treatment of intangibles in an exchange of assets could be significant factor in future corporate activities.
Mary F. Bernard, CPA, MST is a Tax Principal and Director of State and Local Tax Services at Kahn, Litwin, Renza & Co., Ltd. in Providence, RI.