The recent publication of IRS Chief Counsel Advice (CCA) 200911006 (Feb. 12, 2009) highlights a significant change in the government’s position on the availability of a tax-free, like-kind exchange of registered trademarks, trade names and other customer-based intangibles under § 1031. While a like-kind exchange involving these intangible assets was conceptually permissible prior to the issuance of the CCA, tax-free treatment was generally denied because of an IRS ruling policy that trademarks, trade names and similar assets were virtually indistinguishable from goodwill, an asset that is not eligible for § 1031 treatment. Treas. Reg. § 1.1031(a)-2(c)(2); Technical Advice Memorandum (TAM) 200602034 (Sept. 29, 2005).
In a complete reversal of its prior TAM position, the CCA concludes that a customer-based intangible asset is not goodwill for purposes of § 1031 if it can be separately described and valued apart from goodwill. Although the CCA is binding only on the taxpayers to whom it is directed, it helpfully explains the IRS rationale and legal authority for its changed position—citing to an analogous holding in Newark Morning Ledger Co. v. U.S., 507 U.S. 546 (1993) (finding that a paid subscriber list constituted an amortizable intangible asset separate and apart from goodwill with an ascertainable value and a limited useful life). More surprisingly, the CCA creates a factual presumption in favor of taxpayers by further concluding that, except in rare and unusual circumstances, intangibles such as trademarks, trade names and similar customer-based intangibles can be separately described and valued apart from goodwill.
While significant issues remain in determining whether the exchange of trademarks or similar customer-based intangibles relating to different products will otherwise be considered “like-kind” or different, in nature or character within the meaning of § 1031, there are cases where the IRS has broadly ruled in favor of the taxpayer. For example, in TAM 200035005 (May 11, 2000), the IRS held that the exchange of a radio license for a TV license qualified as a § 1031 like-kind exchange.
In sum, the CCA signals a “green light” for taxpayers to reconsider the use of a tax-free § 1031 like-kind exchange in the disposition of any business that includes a trademark, trade name or other customer-based intangible.