In general, the “like-kind exchange” regulations under section 1031 of the Internal Revenue Code (Section 1031) provide that an exchange of intangible personal property qualifies for nonrecognition of gain or loss under Section 1031 only if the exchanged properties are of like kind. According to these regulations, whether intangible personal property is of like kind to other intangible personal property “generally depends on the nature or character of the rights involved (e.g., patent or a copyright) and also on the nature or character of the underlying property to which the intangible personal property relates.” Thus, whereas an exchange of a copyright on a novel for a copyright on a different novel would qualify as a like-kind exchange, an exchange of a copyright on a novel for a copyright on a song would not.
These regulations further provide that the goodwill or going concern value of a business is not of like kind to the goodwill or going concern value of another business.
In technical advice memorandum 200602034 (January 13, 2006) (TAM), the Office of Associate Chief Counsel of the Internal Revenue Service (IRS) had concluded that the registered trademarks and trade names of a business entity could not be of like kind to the trademarks and trade names of another business entity under these regulations because they were “closely related to (if not a part of) the goodwill or going concern value of a business.” Then, the IRS Industry Counsel for Media (Large & Mid-Size Business) similarly so concluded in IRS NSAR 20074401F (November 2, 2007)(NSAR) as regard to newspapers’ mastheads, advertiser accounts and subscriber accounts. However, in a recent reversal of position, the Office of Associate Chief Counsel of the IRS concluded in Chief Counsel Advice 200911006 (February 12, 2009)(CCA) that intangibles such as trademarks, trade names, mastheads and customer-based intangibles that can be separately described and valued apart from goodwill qualify as like-kind property under Section 1031 and then further noted that in its opinion “except in rare and unusual situations” such intangibles can be separately described and valued apart from goodwill. The CCA advised the IRS not to follow the position in the TAM and NSAR on this issue.
It is important to note, however, that not all such intangibles will automatically qualify as like-kind property. The nature and character rules, and all of the other requirements, under the Section 1031 regulations still must be met. However, the CCA should be viewed as an opportunity for those taxpayers: (a) contemplating the sale of such intangible asset(s) (including in connection with the sale of a business that includes such intangible asset(s)); and (b) who are amenable to deploying the purchase price received therefor to acquire (and hold) other like-kind replacement intangible asset(s), to consider the use of Section 1031.
In addition to offering taxpayers the potential for more favorable tax treatment, the pronouncement in the CCA is a move toward the consistent treatment of intangible assets as distinguishable from goodwill or going concern value. The IRS’s view of intangible assets under Section 1031 now is in line with the treatment of an intangible asset as separate from goodwill for purposes of the depreciation rules (Newark Morning Ledger Co. v. United States, 507 U.S. 546 (1993)), financial accounting standards which require that companies record acquired intangible assets separate and apart from goodwill, and the valuation of intangible assets for business valuation purposes in the finance community.