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Use Of Trademarks and Other Intangible Personal Property As “Like-Kind” Property in a 1031 Exchange

The Use Of Trademarks, Trade Names, And Other Intangible Personal Property As “Like-Kind” Property
As Part Of A 1031 Tax-Deferred Exchange

Tax-deferred or “like-kind” exchanges are commonly used by taxpayers to defer paying capital gains taxes in connection with the sale of real property. Like-kind exchanges can also be utilized to defer paying capital gains taxes on tangible and intangible personal property. However, exchanges involving intangible personal property are trickier because, unless the property involved can be valued separate and apart from the business good will, it will not qualify for use in a like-kind exchange.

Over the past several years, the Internal Revenue Service (“IRS”) and the IRS’s Service Industry Counsel for Media (“ICM”) determined that the certain intangible personal property could not be utilized as part of a like-kind exchange. In 2006, the IRS ruled that trademarks and tradenames did not qualify as like-kind property for purposes of tax-deferred exchanges because they were too intertwined with business good will and did not have any value separate from the good will. In 2007, the ICM ruled that newspaper mastheads, advertiser accounts, and subscriber accounts were also ineligible as qualified like-kind property.

In both cases, the IRS and ICM recognized that, under certain circumstances intangible personal property may be used as part of a like-kind exchange pursuant to Section 1031 of the Code. However, in both instances, the IRS and ICM recognized the difficulty in using intangible personal property. This difficulty arises from the fact that certain types of intangible personal property may be so intertwined with the company’s goodwill or going concern value that it cannot be valued separately. If the intangible property cannot be valued separately from the company’s goodwill, then the use of such property would not be permitted because Section 1.1031(a)-2(c)(2) of the Code provides that the goodwill and going concern value of a business is not of a like-kind to the goodwill and going concern value of another business. In 2006, the IRS ruled that trademarks and tradenames were not permissible for use in a like-kind exchange because they could not be valued separately from business good will. In 2007, the ICM ruled that newspaper mastheads, advertiser accounts, and subscriber accounts were too tied to the business goodwill and could not be valued separately for exchange purposes. In reaching its conclusions, the IRS did not find relevant, a 1993 U.S. Supreme Court case, Newark Morning Ledger Co. v. U.S., 507 U.S. 546 (1993), which dealt with the values of an intangible asset for purposes in depreciation. In that case, the U.S. Supreme Court held that an intangible asset is not goodwill for purposes of the depreciation rules if it can be separately described and valued apart from goodwill.

This year, the IRS reversed course this year and ruled that, under certain circumstances, certain types of intangible personal property could qualify as like-kind property for use in a tax-deferred exchange. In the IRS’s Chief Counsel Opinion, 200911006, the Office of Associate Chief Counsel concluded that Newark Morning Ledger Co. is relevant in determining whether intangible personal property constitutes a separate asset or is part and parcel of the business’s goodwill or going concern value within the meaning of Section 1.1031(a)-2(c)(2). The Chief Counsel concluded that, except in rare and unusual situations, intangible personal property that can be separately described and valued apart from goodwill can qualify as like-kind property for like-kind exchange purposes as long as it also satisfies the nature and character rules set forth in Section 1.1031(a)-2(c)(1).


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