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Hot Like-Kind Exchange Issues

Originally published in: New York University 68th Institute on Federal Taxation October 21, 2009 Hot Like-Kind Exchange Issues By: Elliot Pisem RELATED PARTY EXCHANGES [1] Section 1031(f): Statutory Provisions and Legislative History [a] Statutory Provisions Section 1031(a) of the Internal Revenue Code of 1986 (the “Code”) provides, generally, that “no gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.” Code section 1031(f)(1), enacted as part of the Omnibus Budget Reconciliation Act of 1989, provides that there shall be no nonrecognition of gain or loss under section 1031 to the taxpayer with respect to an exchange if all three of the following provisions apply: 1. the taxpayer exchanges property with a related person (i.e., any person bearing a relationship to the taxpayer described in Code sections 267(b) or 707(b)(1)); 2. there would otherwise be nonrecognition of gain or loss under section 1031 with respect to the exchange; and 3. before the date 2 years after the last transfer which was part of the exchange either (i) the related person disposes of the relinquished property or (ii) the taxpayer disposes of the replacement property. Any gain or loss recognized by reason of section 1031(f) is taken into account on the date of the related person’s disposition of the relinquished property (or the taxpayer’s disposition of the replacement property). In the case of exchanges on which loss is realized, section 1031(f)(1) may cause the loss to be recognized, but other Code provisions (such as sections 267(a)(1) or section 707(b)(1)) may still prevent loss from being allowed. Section 1031(f)(2) provides that the following dispositions do not trigger the operation of section 1031(f)(1): 1. Dispositions after the earlier of the death of the taxpayer or the death of the related person; 2. Dispositions in a compulsory or involuntary conversion (within the meaning of Code section 1033), but only if the exchange occurred before the threat or imminence of such conversion; and 3. Dispositions with respect to which it is established, to the satisfaction of the Secretary, that neither the exchange nor the disposition has as one of its principal purposes the avoidance of Federal income tax. Code section 1031(f)(4) provides that section 1031 shall not apply to any exchange which is part of a transaction (or series of transactions) structured to avoid the purposes of section 1031(f). [b] Legislative History The legislative history of section 1031(f) states that the non-tax avoidance exception generally will apply to--- 1. a transaction involving an exchange of undivided interests in different properties that results in each taxpayer holding either the entire interest in a single property or a larger undivided interest in any of such properties; 2. dispositions of property in nonrecognition transactions; and 3. transactions that do not involve the shifting of basis between properties. The legislative history of section 1031(f)(4) includes the following example of a transaction structured to avoid the purposes of the related party rules: If a taxpayer, pursuant to a pre-arranged plan, transfers property to an unrelated party who then exchanges the property with a party related to the taxpayer within two years of the previous transfer in a transaction otherwise qualifying under section 1031, the related party will not be entitled to nonrecognition treatment under section 1031. [2] Case Law Addressing Section 1031(f) Although section 1031(f) has been part of the Code for 20 years, only in the past few years have we started seeing decisions of the courts arising under that provision. Indeed, as discussed below, an appeal from the decision of the Tax Court in its first major case under section 1031(f) was decided only in September 2009 by the Court of Appeals for the Ninth Circuit. [a] Tax Court Decision in Teruya Brothers, Ltd. Teruya Brothers, Ltd. v. Commissioner, 124 T.C. 45 (2005), aff’d, 580 F.3d 1038 (9th Cir. 2009), involving two separate exchanges, the Ocean Vista transaction and the Royal Towers transaction, was the Tax Court’s first foray into the section 1031(f) arena. [i] Ocean Vista Facts The Ocean Vista transaction encompassed the following steps: 1. August 16, 1993: Teruya executed a letter of intent to dispose of its fee interest in the Ocean Vista Condominium complex (“OV”) to the Association of Apartment Owners of Ocean Vista (“Association”), the holder of a sublease interest in the property. Association was unrelated to Teruya. By amendment to the letter of intent dated November 2, 1993, Teruya’s obligation to close was made conditional on its ability to consummate a section 1031 exchange. 2. June 1994: Teruya proposed to Times Super Market, Ltd. (“Times”) that Teruya acquire a replacement property (“Kupuohi II”) from Times. Times was considered a “related person” to Teruya under Code section 267(b). Times accepted the proposal. 3. Unstated date (apparently between June 1994 and April 1995): Times accepted Teruya’s proposal. 4. April 3, 1995: Association offered to purchase Teruya’s fee interest in OV. Teruya accepted Association’s offer. Teruya’s obligation to close was specifically conditioned on its ability to consummate a section 1031 exchange. 5. August 1995: Teruya entered into an “exchange agreement” with T.G. Exchange, Inc. (“TGE”), a “qualified intermediary” (“QI”). 6. September 1, 1995: Teruya conveyed OV to TGE, TGE conveyed OV to Association, TGE received the cash proceeds of the Ocean Vista transaction (and additional cash received from Teruya) from Association and paid such cash proceeds to Times, and Times conveyed Kupuohi II to TGE. 7. Following September 11, 1995: TGE conveyed Kupuohi II to Teruya. In sum, before the transaction, Teruya owned OV and Times owned Kupuohi II. After the exchange, Teruya owned Kupuohi II, Association owned OV, and Times had the cash proceeds from the sale of OV plus additional funds from Teruya. Teruya realized gain of $1,345,169 from the sale of OV. On its return, Teruya, in reliance on section 1031, reported that the realized gain had not been recognized. Times realized and recognized gain of $1,352,639 from the sale of Kupuohi II. [ii] Royal Towers Facts The Royal Towers transaction encompassed the following steps: 1. Before December 12, 1994: In anticipation of Teruya’s sale of the Royal Towers Apartment building (“RT”), Teruya contracted to purchase two properties, “Kupuohi I” and “Kaahumanu,” from Times, subject to Teruya’s right to cancel the proposed purchase in the event that the sale of RT failed to proceed according to plan. 2. On or about December 12, 1994: Teruya contracted to sell RT to Savio Development Company (“Savio”), an unrelated party. Teruya’s obligation to close was specifically conditioned on its ability to consummate a section 1031 exchange. 3. August 1995: Teruya entered into an “exchange agreement” with TGE. 4. August 24, 1995: Teruya conveyed RT to TGE, TGE conveyed RT to Savio, TGE received the cash proceeds of the RT transaction (and additional cash received from Teruya) from Savio and paid such cash proceeds to Times, and Times conveyed Kupuohi I and Kaahumanu to TGE. 5. Following August 24, 1995: TGE conveyed Kupuohi I and Kaahumanu to Teruya. In sum, before the transaction Teruya owned RT and Times owned Kupuohi I and Kaahumanu. After the transaction, Teruya owned Kupuohi I and Kaahumanu, Savio owned RT, and Times held the cash proceeds from the sale of RT plus additional funds received from Teruya. Teruya realized gain of approximately $10,700,00 from the sale of RT. On its return, Teruya, in reliance on section 1031, reported that the realized gain had not been recognized. Times realized and recognized gain of $2,227,040 from the sale of Kaahumanu. Times realized a loss of $6,453,372 from the sale of Kupuohi I. Times’s deduction for its realized loss was disallowed under section 267. Times reported a net operating loss for its taxable year ending April 25, 1996, even taking into account the gain recognized by it from the sale of Kaahumanu in the Royal Towers transaction and Kupuohi II in the Ocean Vista transaction. [iii] Tax Court Discussion The Tax Court held that the transactions were structured to avoid the purposes of section 1031(f), and that, under section 1031(f)(4), Teruya was not entitled to defer the gains that it realized on the exchanges of OV and RT. The Service did not ask the Tax Court to hold that section 1031(f)(1), which applies to direct exchanges between taxpayers and related parties, denied nonrecognition treatment in this case. This was consistent with the Service’s apparent concession in Revenue Ruling 2002-83, 2002-2 C.B. 927, that section 1031(f)(4) governs QI exchanges and that such transactions are not governed by section 1031(f)(1) as “direct” exchanges effected through the QI as a mere agent of the taxpayer. The Tax Court observed that any attempt by the Service to treat the transactions as a direct exchange would appear to be contrary to Treasury Regulations providing that a qualified intermediary is not considered the agent of the taxpayer for purposes of section 1031(a). Thus, the Tax Court was left to determine only whether section 1031(f)(4) applied to the transactions as “indirect” exchanges in which the QI participated as an “unrelated party,” albeit pursuant to a prearranged plan. The Service argued, based on the example in the legislative history of section 1031(f)(4) (quoted above in Section 1.01[1][b]) that nonrecognition treatment should automatically be denied under section 1031(f)(4) if the transaction, recast as a direct exchange between the taxpayer (Teruya) and the related party (Times) and a subsequent sale by the related party, would have been described in section 1031(f)(1), without regard to the section 1031(f)(2) exceptions. The Tax Court rejected the argument, finding that further analysis was needed to determine whether the recast transaction would have been eligible for the section 1031(f)(2) exception for dispositions with respect to which it is established, to the satisfaction of the Secretary, that neither the exchange nor the disposition has as one of its principal purposes the avoidance of Federal income tax. Notwithstanding the taxpayer’s victory on this preliminary issue, however, the Tax Court determined that the taxpayer had failed to establish that avoidance of Federal income tax was not one of the principal purposes of the transactions, since “[t]he economic substance of the transactions remains that the investments in Ocean Vista and Royal Towers were cashed out immediately and Times, a related person, ended up with the cash proceeds,” and the record disclosed no reason for Teruya’s use of a QI in the transactions. The Tax Court thus inferred that the QI was interposed in an attempt to circumvent the section 1031(f)(1) limitations that would have applied to exchanges directly between related persons. The Tax Court rejected the taxpayer’s argument that its continued investment in the replacement property precluded the application of section 1031(f). The Tax Court believed that such a position would be “flatly contrary” to the words of the statute, which includes a focus on the related party’s continued investment in the relinquished property as well as the taxpayer’s continued investment in the replacement property. The Tax Court also rejected the taxpayer’s argument that its firm intent, reflected throughout the documents, to implement only an exchange, and not a cash sale, precluded the application of section 1031(f). The Tax Court observed that such an intent might be relevant to whether there was, on the one hand, an “exchange” or, on the other hand, a disguised sale or other transaction that did not qualify under section 1031. However, section 1031(f) presupposes that the transaction does, but for the application of section 1031(f) qualify under section 1031, and it is only otherwise qualifying transactions that are denied nonrecognition treatment. As a final matter, the Tax Court refused to find the fact that Times recognized a greater gain on its disposition of Kupuohi II than Teruya realized on its disposition of OV meant that the OV transaction could not have had a purpose of tax avoidance. The fact that Times had available net operating losses that eliminated its actual tax liability also had to be taken into account. Thus, it was relevant to the analysis that “Times paid a much smaller tax price for that gain recognition than Teruya would have paid if it had recognized gain in a direct sale of Ocean Vista.” [b] Ninth Circuit Decision in Teruya Brothers, Ltd. In September 2009, the Court of Appeals for the Ninth Circuit affirmed the Tax Court’s decision in Teruya, holding that the transactions were structured to avoid the purposes of section 1031(f) and that the non-tax avoidance exception did not apply. On appeal to the Ninth Circuit, as in the Tax Court, the Service argued that every deferred exchange between related parties involving a QI “should be recast as a direct exchange, and, if section 1031(f)(1) would preclude nonrecognition treatment for the recast transaction, then the deferred exchange should be deemed to have been structured to avoid the purposes of Search7RH 1031(f).” The Ninth Circuit rejected that argument, as had the Tax Court, “as inconsistent with the structure of the statute.” According to the Ninth Circuit, a transaction will not violate section 1031(f)(4) if the taxpayer can establish to the satisfaction of the Secretary that the transaction does not have a principal purpose of tax avoidance under section 1031(f)(2). In this case, however, the Court of Appeals determined that the improper avoidance of Federal income tax was one of the principal purposes behind the exchanges. The Court of Appeals declined to address whether a reduction in the related party’s loss carryovers could be a sufficient tax detriment to demonstrate lack of a tax avoidance purpose, as Teruya had not argued the point on appeal. [c] Tax Court Decision in Ocmulgee Fields, Inc. More recently, the Tax Court revisited section 1031(f) in Ocmulgee Fields, Inc. v. Commissioner, 132 T.C. No. 6 (March 31, 2009). Like Teruya, Ocmulgee involved the disposition of the taxpayer’s property to a QI, the QI’s sale of the taxpayer’s property to an unrelated third party, the QI’s acquisition of replacement property from a party related to the taxpayer, and the QI’s conveyance of that replacement property to the taxpayer. Before the transaction, the taxpayer, Ocmulgee Fields, Inc. (“Ocmulgee”), owned the Wesleyan Station Shopping Center (“Wesleyan Station”), and Treaty Fields, L.L.C. (“Treaty Fields”), a partnership related to Ocmulgee for purposes of section 1031(f), owned several parcels collectively comprising “Barnes & Noble Corner.” After an exchange effected through a QI, Ocmulgee owned Barnes & Noble Corner, an unrelated purchaser owned Wesleyan Station, and Treaty Fields held the cash proceeds from the sale of Wesleyan Station. Ocmulgee realized gain of $6,122,736 from the sale of Wesleyan Station. Ocmulgee treated the gain as not having been recognized by reason of section 1031. Treaty Fields realized and recognized gain of $4,185,999 from the sale of Barnes & Noble Corner. Gain from the sale by Treaty Fields was taxable to its members at the 15% capital gains rate. Ocmulgee was a C corporation, so any capital gain recognized by it would have been taxed at a 34% rate. The taxpayer in Ocmulgee made much of the fact that, after it had contracted to sell the relinquished property, it had made significant efforts in seeking replacement properties owned by unrelated parties, thereby negating the “prearrangement” that the taxpayer contended was what the Tax Court found troubling in Teruya. The Tax Court, however, rejected this attempt to distinguish Teruya on several grounds. First, Teruya did not indicate that “prearrangement” was the touchstone for determining whether or not section 1031(f)(4) would apply. The Tax Court observed that an example in the legislative history of section 1031(f) that used that term and to which the Teruya court referred was just that -- an example of “one of many transactions that will fall afoul of section 1031(f)(4).” Second, the Tax Court found that Ocmulgee, in fact, had a “prearranged plan” to acquire replacement property from a related party. Although the taxpayer sought replacement properties owned by unrelated parties during the period after it contracted to sell the relinquished property and before the taxpayer closed on the disposition of the relinquished property to the QI, it had become quite certain by the time of the closing that the only replacement property that could be found was the property owned by a related party, namely, Barnes & Noble Corner. As in Teruya, the taxpayer was unable to establish that neither the deemed exchange with a related party nor the deemed sale of the relinquished property thereafter had as one of its principal purposes the avoidance of Federal income tax. In the Tax Court’s view, “a fair inference to be drawn from the [legislative history of section 1031(f)] is that Federal income tax avoidance generally is a principal purpose of transactions involving basis shifting,” i.e., where the tax basis of the replacement property, prior to the purported like-kind exchange, is higher than the tax basis of the relinquished property, the use of the replacement property’s basis in computing the gain recognized on the ultimate sale of the relinquished property to a third party. In this case, if the transaction had been structured as an exchange between Ocmulgee and Treaty Fields, followed by a sale by Treaty Fields of Wesleyan Station, Treaty Fields would have recognized a gain approximately $1,800,000 less than the gain that would have been recognized by Ocmulgee if it had sold Wesleyan Station in a taxable sale, because of Treaty Fields’s higher adjusted basis in Barnes & Noble Corner which would have been “shifted” to Wesleyan Station in the exchange. Moreover, the indirect exchange in this case resulted in lowering the tax rate on the recognized gain to 15%. The taxpayer in Ocmulgee contended that the exchange gave rise to the imposition of a variety of income tax burdens on the taxpayer and the related party that should be viewed as overcoming the inference of a tax avoidance purpose that would otherwise arise from the basis shifting features of the transaction. The Tax Court, although “not prepared to say that, as a matter of law, a finding of basis shifting precludes the absence of a principal purpose of tax avoidance,” determined that the taxpayer was not able to overcome in this case the “negative inference” to be drawn from basis shifting and a cash out. The Tax Court found that the burdens identified by the taxpayer did not change that conclusion; some of the burdens were no worse than the results that would have followed from a fully taxable sale, others were offset by tax benefits, above and beyond the nonrecognition of gain, that the taxpayer had ignored, and a third group were “speculative.” Ocmulgee has been appealed to the Court of Appeals for the Eleventh Circuit. [d] Burden of Proof and Penalty Issues in Teruya and Ocmulgee In applying the section 1031(f)(2)(C) exception for “non-tax avoidance transactions,” is the issue “persuading” the Tax Court or “satisfying” the Secretary? Will the courts use a high standard, such as “strong proof,” in reviewing the Secretary’s determination of lack of satisfaction? In both Teruya and Ocmulgee, the Tax Court ducked the issue, finding that the taxpayer did not satisfy even the ordinary standard of preponderance of the evidence. The burden-of-proof shifting provisions of Code section 7491(a) may also be in issue in section 1031(f) cases. Because the examination in Teruya commenced prior to July 23, 1998, the effective date of section 7491, the provision was not implicated in that case. In Ocmulgee, the Tax Court found that the taxpayer had not satisfied the “credible evidence” requirement of section 7491 and, therefore, did not have to consider what impact that provision would have if its requirements were otherwise satisfied. The Service apparently did not assert an accuracy-related penalty under Code section 6662 in Teruya. In Ocmulgee, a penalty was asserted, but the Tax Court found that the taxpayer had reasonably relied on its return preparer, and that the preparer, in turn, acting before Teruya had been decided (even though after issuance of Revenue Ruling 2002-83) had not made “unreasonable legal assumptions” in concluding that section 1031(f) did not apply. One would be much more nervous now about taking a position akin to that taken by the taxpayer in Ocmulgee. Would disclosure be sufficient to avoid a section 6662 penalty on this issue? [3] IRS Guidance Addressing Section 1031(f) [a] Exceptions to Section 1031(f): No Basis Shifting; Exchange of Undivided Interests In PLR 200706001, Taxpayer owned an undivided 25% interest in Parcel #1, and Taxpayer’s siblings owned the remaining 75% undivided interests in Parcel #1. A trust for the benefit of Taxpayer and her siblings owned Parcel #3. Both parcels had originally been owned by the Taxpayer’s deceased father. As Taxpayer was a beneficiary of the trust, she and the trust were related persons under Code section 267(b)(6). Taxpayer transferred her 25% undivided interest in Parcel #1 to the trust in exchange for Parcel #3, following which the trust and the Taxpayer’s siblings sold Parcel #1. Taxpayer made a representation that led the Service to conclude that no basis shifting was occurring. The Service ruled that the trust’s sale of the 25% undivided interest in Parcel #1 acquired from Taxpayer in the exchange did not cause a triggering of Taxpayer’s gain on the exchange. In reaching its holding that section 1031(f) did not apply to the subsequent disposition by Taxpayer’s siblings and the trust, the Service relied on the statement in the legislative history of section 1031(f) that the “non-tax avoidance exception” will generally apply to transactions that do not involve the shifting of basis between properties. The ruling describes the taxpayer’s representation as having been that “the respective per acre basis in Parcels #1 and #3 were equivalent.” This representation alone seems to be an inadequate basis for concluding that there was no basis shifting, as there is no statement in the PLR regarding the number of acres in each parcel. Was the Service snookered? Or does the PLR merely not recite all the relevant facts? In granting this ruling, was the Service also influenced by the statement in the legislative history of section 1031(f) that the non-tax avoidance exception also applied generally to exchanges of undivided interests? (Taxpayer’s interest in Parcel #3 before the exchange was not a true undivided interest, but rather a beneficial interest as a beneficiary of the trust.) In PLR 200730002, Taxpayer owned an undivided 1/3 interest, having a value of “about $2,” in Greenacre and an undivided 1/3 interest, having a value of “about $1,” in Blackacre, and each of Taxpayer’s brother and Taxpayer’s niece also owned an undivided 1/3 interest in each of Greenacre and Blackacre. Taxpayer exchanged his undivided 1/3 interest in Greenacre for this brother’s and niece’s combined undivided 2/3 interest in Blackacre. Taxpayer’s brother and niece then sold Greenacre and divided the proceeds equally. The Service ruled that Taxpayer’s brother’s and niece’s sale of Greenacre, a 1/3 undivided interest in which had been acquired from Taxpayer in the exchange, did not cause a triggering of Taxpayer’s gain on the exchange. The Service relied primarily on its understanding, based on the legislative history, that taxpayers engaging in exchanges of undivided interests among co-owners “are deemed to not have” the intent to avoid Federal income tax. The Service mentioned as a fact that Taxpayer’s brother’s basis was lower than Taxpayer’s, so that there was, in effect, a “negative basis shift.” The Service also determined that the conclusion that Taxpayer did not have (or was “deemed not to have”) an intent to avoid Federal income tax had a “natural corollary” that the transactions were not structured to avoid the purposes of section 1031(f), and that section 1031(f)(4) thus did not apply. It is interesting that the Service even considered the application of section 1031(f)(4) in the context of an apparently “direct” exchange that was not subject to section 1031(f)(1) because of a lack of tax avoidance purpose. In this PLR, the Service also considered when “relationship” would be measured for section 1031(f) purposes. Taxpayer was the trustee of a trust of which his niece was a beneficiary. The Service stated that, if Taxpayer continued to serve as trustee of the trust, Taxpayer and his niece would be considered “related parties” for purposes of Code section 267(b)(6) (fiduciary of a trust and beneficiary of such trust). The Service ruled, however, that, if Taxpayer resigned as trustee, even if at or near the time of the exchange, the related party rules would not apply to the exchange between Taxpayer and his niece. In PLR 200920032, Taxpayer and Taxpayer’s sibling each owned a 1/3 undivided interest in Farmland through their respective grantor trusts. The remaining 1/3 undivided interest in Farmland was held in trust for the benefit of a deceased sibling’s widowed spouse and children (“Trust C”). Taxpayer and Taxpayer’s sibling wished to remain invested in Farmland, but Trust C wished to liquidate its interest. To facilitate each other’s wishes and to increase the marketability of the interest to be sold, Taxpayer and Taxpayer’s siblings, through their respective grantor Trusts, and Trust C each acquired sole ownership of a portion of Farmland in exchange for its 1/3 undivided interest in the remainder of Farmland, thereby effectively partitioning Farmland into three parcels of equal value. Trust C intended to sell its fee interest after the exchange. Trust C’s basis in its undivided 1/3 interest in Farmland was higher than Taxpayer’s or Taxpayer’s sibling’s respective bases in their undivided interests because of the “step up” in basis that occurred at the time of the death of the deceased sibling. The Service held that (i) section 1031(f) was not applicable in the case of an exchange of interests in real property by Taxpayer with Taxpayer’s sibling, because there was no second disposition of the relinquished property or the replacement property within two years of the exchange, and (ii) there was no exchange between related persons under section 1031(f) in the case of an exchange of interests in real property by Taxpayer (through its grantor trust) with a trust the trustees and beneficiaries of which were Taxpayer’s sibling’s widowed spouse and children, because Taxpayer and Trust C were not related within the meaning of section 1031(f)(3). [b] Exceptions to Section 1031(f): Related Party Consummates its Own Exchange In PLR’s 200810016 and 200810017, each of Taxpayer and a related party that owned the replacement property acquired by Taxpayer completed an exchange. Taxpayer transferred its relinquished property to Taxpayer’s QI, who sold Taxpayer’s relinquished property to a third party buyer for cash. The party related to Taxpayer transferred other property, namely, the related party’s relinquished property which would become Taxpayer’s replacement property, to the related party’s QI. The related party’s QI sold the related party’s relinquished property (about to become Taxpayer’s replacement property) to Taxpayer’s QI for cash, with Taxpayer’s QI using the proceeds of the sale of Taxpayer’s relinquished property. Taxpayer’s QI conveyed Taxpayer’s replacement property to Taxpayer to complete Taxpayer’s exchange. The related party’s QI used a portion of the cash sales proceeds it received from the sale of the related party’s relinquished property to acquire the related party’s replacement property from a third party seller, which it then conveyed to the related party to complete the related party’s exchange. The related party’s QI apparently did not use all proceeds of the sale of the related party’s relinquished property to acquire the related party’s replacement property, resulting in the related party’s receiving some cash boot from its QI at the end of its exchange. Taxpayer represented that (i) it would hold its replacement property (the related party’s relinquished property) for at least two years following the exchange, and (ii) the related party would also hold its replacement property for at least two years following the exchange. The Service ruled that Taxpayer’s exchange and the related party’s exchange each qualified for nonrecognition treatment (except to the extent of the cash boot received by the related party) under section 1031. Section 1031(f)(4) did not apply, because Taxpayer had not structured the transaction using a QI to avoid the purposes of section 1031(f). There had been no “cashing out” of either party’s investment in real estate. The Service concluded, based on its understanding of the legislative history of section 1031(f), that “cashing out” would be absent if: 1. upon completion of the series of transactions, both Taxpayer and the related party would own property that is of like kind to the property exchanged; and 2. neither exchangor would receive cash or other nonlike-kind property (other than some possible boot) in return for relinquished property. These PLR’s, as well as two slightly later PLR’s with similar facts and conclusions (PLR’s 200820017 and 200820025), are significant because the related party’s receipt and retention of cash boot did not prevent either Taxpayer’s exchange or the related party’s exchange from qualifying under section 1031. The rulings represent an expansion of the holding of PLR 200440002, which blessed a similarly structured exchange that did not involve the retention of any cash boot, and PLR 200616005, which blessed a similar transaction in which the taxpayer but not the related party received some cash boot in the exchange. The Service was presumably satisfied in the 2007 and 2008 PLR’s that each of Taxpayer and the related party had sufficient continuity in its respective investment in real estate that there was no “cashing out.” The rulings, as redacted for public release, do not provide significant information regarding why the Service found the receipt of boot acceptable or the upper limit, if any, on how much boot can be received. Would the Service have granted a favorable ruling if Taxpayer would have recognized a greater amount of gain than the related party on the receipt of the cash boot (for example, if the cash boot exceeded the related party’s, but not Taxpayer’s, gain realized)? [c] Section 1031(f) Not Applicable After Sale of Relinquished Property to Related Party In PLR 200709036, Taxpayer was a partnership controlled by a real estate investment trust (the “REIT”). Taxpayer transferred its relinquished property to Taxpayer’s QI. Taxpayer’s QI sold the relinquished property for cash to a corporation which was a “related party” to Taxpayer and a “taxable REIT subsidiary” (“TRS”) of the REIT. TRS planned to sell most or all of the property it acquired from Taxpayer within two years. Taxpayer’s QI used the sales proceeds to acquire Taxpayer’s replacement property from an unrelated third party. The Service held that Taxpayer’s exchange was not structured to avoid the “purposes” of section 1031(f) since a direct exchange, had there been one, would have been between Taxpayer and the unrelated seller of the replacement property, rather than between Taxpayer and the TRS (the related purchaser of the relinquished property). Section 1031(f) would not have applied to that direct exchange between unrelated parties. In this case, there was no basis shifting in anticipation of the sale of the relinquished property because the related party did not own, prior to the exchange, any property that Taxpayer acquired in the exchange. TRS purchased property from Taxpayer for cash consideration at fair market value. Taxpayer did not purchase property from the TRS. The Service did not seem to be bothered by the fact that TRS intended to develop and to sell the property within two years. In order for a “reverse exchange” to come within the safe harbor of Revenue Procedure 2000-37, a taxpayer’s replacement property can be held by an “exchange accommodation titleholder” for no more than 180 days before the taxpayer disposes of the relinquished property and takes title to the replacement property. Could the technique sanctioned by this ruling enable a taxpayer to delay the “true” disposition of the relinquished property by more than 180 days after the acquisition of the replacement property, by disposing of the relinquished property to a related party who can then resell it at leisure? “LIKE-KIND” ISSUES [1] Statutory Provisions and Treasury Regulations [a] In General Code section 1031(a) provides that 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 property of like kind which is to held either for productive use in a trade or business or for investment. Under section 1031(b), if a transaction otherwise qualifies as a like-kind exchange under section 1031(a), but for the fact that the property received in the exchange consists both of like-kind property and property that is not of like kind (i.e., boot), then gain is generally recognized to the extent of the boot received. Treasury Regulation section 1.1031(a)-1(b) provides: As used in section 1031(a), the words “like kind” have reference to the nature or character of the property and not to its grade or quality. One kind or class of property may not, under that section, be exchanged for property of a different kind or class. The fact that any real estate involved is improved or unimproved is not material, for that fact relates only to the grade or quality of the property and not to its kind or class. Unproductive real estate held by one other than a dealer for future use or future realization of the increment in value is held for investment and not primarily for sale. Treasury Regulation section 1.1031(a)-1(c) includes the following examples: No gain or loss is recognized if (1) a taxpayer exchanges property held for productive use in his trade or business, together with cash, for other property of like kind for the same use, such as a truck for a new truck or a passenger automobile for a new passenger automobile to be used for a like purpose; or (2) a taxpayer who is not a dealer in real estate exchanges city real estate for a ranch or farm, or exchanges a leasehold of a fee with 30 years or more to run for real estate, or exchanges improved real estate for unimproved real estate; or (3) a taxpayer exchanges investment property and cash for investment property of a like kind. Treasury Regulation section 1.1031(a)-2(a) states that personal property is of like kind to other personal property if such properties are of like kind or like class. An exchange of properties of like kind may qualify under section 1031 regardless of whether the properties are also of like class. In determining whether exchanged properties are of like kind, no inference is to be drawn from the fact that the properties are not of like class. Treasury Regulation section 1.1031(a)-2(b)(1) states that depreciable tangible personal property is of like kind to other depreciable tangible personal property if such properties are of like kind or of like class. “Like class” means either within the same General Asset Class or within the same Product Class (as defined in the regulations). Treasury Regulation section 1.1031(a)-2(c)(1) states that an exchange of intangible personal property or nondepreciable personal property qualifies for nonrecognition of gain or loss under section 1031 only if the exchanged properties are of a like kind. No like classes are provided for these properties. Whether intangible personal properties are of like kind generally depends (1) on the nature or character of the rights involved (e.g., a patent or a copyright) and also on (2) the nature or character of the underlying property to which the intangible personal property relates. The application of the second prong of the test is not always clear. Thus, examples in the Regulations sanction the exchange of a copyright on a novel for a copyright on a different novel, but do not sanction the exchange of a copyright on a novel for a copyright on a song. May one exchange a copyright on a novel for a copyright on a nonfiction book? The Regulations do not address whether the use that is made of intangibles is relevant in determining whether they are “of like kind.” (In the case of tangible personal property subject to the “like kind or like class” rule, use is sometimes relevant (and sometimes not) under the “General Asset Classes” that can be used to make the “like class” determination; also, compare the “similar or related in service or use” applied in Code section 1033.) [b] Goodwill Treasury Regulation section 1.1031(a)-2(c)(2) states that the goodwill or going concern value of a business is not of a like kind to the goodwill or going concern value of another business. Are there some businesses that are so “nearly identical” to each other that this rule should not apply in the case of an exchange of one for the other? The scope of the denial of like-kind status to any exchanges of goodwill raises the question of whether intangible assets that are related to goodwill, such as trademarks, trade names, customer lists, or other customer-based intangibles, may be exchanged without the recognition of gain under section 1031. See discussion in Section 1.02[2][c], below, and compare Treasury Regulation section 1.338-6(b)(2)(vi) and (vii), which groups goodwill and going concern value separately from all other “section 197 intangibles,” including “customer-based intangibles,” franchises, trademarks, and trade names. [2] IRS Guidance Addressing Exchanges of Intangibles [a] Patent Cross-License Agreements In Notice 2006-34, 2006-1 C.B. 705, the Service requested comments and information on cross-licenses, under which each of two parties that own intellectual property, typically patents, grants to the other a license with respect to specified property. The licensed rights in the respective patents are often nonexclusive and nontransferable. Thus, the cross licenses do not involve transfers of “all substantial rights” in the patents and would not ordinarily be considered dispositions thereof for income tax purposes. Nevertheless, the Service in the Notice listed treatment as an exchange, to which section 1031 might apply, as one of several possible tax treatments of cross-licenses under consideration. The Notice did not comment on the validity of any of the treatments under consideration. Ordinarily, section 1031 can apply to a transfer only if the taxpayer has a realized gain or loss from an exchange (one particular sort of disposition) of property. Some had read the Notice to suggest that section 1031 might apply in situations where there is a cross-licensing of patent rights, even though the cross-licenses would not involve transfers of sufficient rights to support a finding that there had been a “sale or exchange” either under Code section 1235 or under general tax principles. The Service resolved the issue in Revenue Procedure 2007-23, 2007-1 C.B. 675, at least with respect to a defined category of “qualified patent cross licensing arrangements” (“QPCLA’s”), stating that the mere grant of a patent license does not result in a sale or other disposition of property within the meaning of section 1001(a), and that such grant of a patent license is therefore not eligible for nonrecognition treatment under section 1031. Similarly, the Service held, gain or loss under section 1001 does not arise in the case of mutual grants of licenses, and section 1031 has no application to a QPCLA. A QPCLA does not include an arrangement involving more than the de minimis licensing or other transfer of other intangible property including, for instance, copyrights, trademarks, and know-how. [b] FCC Licenses of Radio and Television Stations In the Service’s Coordinated Issue Paper on like kind exchanges involving Federal Communications Commission licenses, effective May 27, 2005, the Service stated its position on several section 1031 issues arising upon the exchange of a television station for a radio station. In such an exchange, there is a transfer of the underlying tangible and intangible assets connected with each of the stations. The Service concluded: 1. The exchange of an FCC license of a radio station for an FCC license of a television station is eligible for like-kind exchange treatment under section 1031; 2. A network affiliation agreement and any claimed ability to affiliate should be valued separately from the FCC license under section 1031; 3. Goodwill should be valued separately from the FCC license under section 1031; and 4. Accuracy-related penalties should be fully developed whenever a taxpayer fails to use a direct method (i.e., uses the residual method) to value the FCC license. In the Service’s analysis of whether the FCC licenses were of like kind to each other, the Service looked to section 1.1031(a) 2(c)(1)’s two prong test for intangibles (nature and character of rights granted, and nature and character of underlying property) and concluded that the differences between the FCC licenses -- differences in the assigned frequency of the electromagnetic spectrum -- were differences only in grade or quality and not differences in nature or character. The Service stated that taxpayers need to determine the overall value of the stations being exchanged and to allocate that value among the underlying tangible and intangible assets. The underlying intangible assets may include FCC licenses, network affiliation agreements, and goodwill and going concern value, each of which needs to be valued separately. While not addressing whether a station’s ability to affiliate was a separate asset apart from a network affiliation agreement, or whether the ability to affiliate exists only as part of going concern or goodwill, the Service stated that the ability to affiliate must be valued separately from the FCC license. Although the exchange of FCC licenses may be eligible for like-kind exchange treatment, an exchange of goodwill is not, and taxpayers must recognize any gain on an exchange of goodwill. The Service stated that it was not addressing whether television network affiliation agreements and radio network affiliation agreements are of like kind to each other. The Service stated that this issue may depend on the facts and circumstances surrounding the particular agreements. (Some taxpayers attribute a negligible value, if any, to a radio network affiliation agreement, but a television network affiliation agreement may often have real value.) In LAFA 20072101F (November 14, 2006), Taxpayer exchanged two VHF television stations and cash for a UHF television station. The stations were in different geographical markets for television stations in the United States. Each station was party to a network affiliation agreement prior to the exchange. Addressing two issues not resolved in the Coordinated Issue Paper, the Service held that the value of the exchanged television stations’ ability to affiliate was part of the value of the stations’ network affiliation agreements and should not be considered either a separate asset or part of the stations’ goodwill and going concern value. The Service held further that the stations’ network affiliation agreements were of like kind, despite the fact that the content of the network programming was different. The Service considered, but rejected, an approach to valuing an affiliation agreement that would bifurcate the value between the value of the programs apart from the network brand and the value added by the network brand, with the latter value being inseparable from goodwill and going concern value. [c] Patents, Trademarks, and Proprietary Information In TAM 200602034, Taxpayer entered into four transactions in which it sold the tangible and intangible assets pertaining to two distinct businesses conducted by its subsidiaries and acquired, through its subsidiaries, the tangible and intangible assets of two new businesses. All four businesses had different SIC and NAICS codes. Taxpayer claimed like kind exchange treatment for the disposition and acquisition of the intangible assets, but did not claim like kind treatment with respect to any of the tangible assets involved in the transactions. Taxpayer claimed section 1031 applied to the exchange of five categories of intangible property: (1) patents for patents; (2) trademarks and trade names for trademarks and trade names; (3) designs and drawings for designs and drawings; (4) trade secrets and know-how for trade secrets and know-how; and (5) software for software. The Service agreed that the first prong of the intangibles test, relating to the nature or character of the rights associated with the property, was satisfied by the taxpayer’s groupings with respect to the exchanges of patents, designs and drawings, trade secrets and know-how, and software. The Service, however, found that Taxpayer had not met the second prong of the intangible test with respect to either patents or the unregistered intangibles. In the case of patents, the Service held that the second prong was not satisfied unless the underlying property to which the patents pertained were of the same General Asset Class or the same Product Class or otherwise of like kind. Taxpayer argued that patents could be grouped into four broad classes of underlying property based on United States patent law for classifying intellectual property that may be patented, specifically, (1) process, (2) machine, (3) manufacture, and (4) composition of matter, so that any machine patent would be like kind to any other machine patent. The Service found no authority, however, for Taxpayer’s method of matching of patents for section 1031 purposes. The Service stated that the tax law requires the analysis of exchanges on an item-by-item basis rather than on a global basis, and that the underlying property of each patent needed to be like-kind based on its General Asset Class or Product Class or otherwise of like kind. With regard to unregistered intellectual property, including designs and drawings, trade secrets and know-how, and software, the Service held that (a) the commonality of legal protection through trade secrets satisfied the first prong of the test (relating to the nature and character of the rights granted), and (b) the second prong can generally be satisfied only if the underlying property is in the same General Asset Class of the same Product Class (although the Service recognized this may not always be relevant). Taxpayer argued that unregistered intangibles should satisfy the second prong of the intangible like-kind property test if the exchanged properties are in the same broad categories suggested in the Uniform Trade Secrets Act, for instance, a formula, pattern, compilation, program, device, method, technique, or process, regardless of differences in the nature or character of the property to which the intangibles related. The Service, however, noted no authority for such a broad classification, observing, that “such broad categories would permit the matching of very different kinds of property interests beyond the scope and intendment of Search7RH 1031.” With respect to trademarks and trade names, Taxpayer argued that all of the exchanged marks or trade names were of like kind to the extent that they fell within a corresponding category under the Lanham Act for intangible assets properly registered with the United States Trademark Office. That Act, Taxpayer noted, applies to a “word, name, symbol, or device or any combination thereof.” In this case, Taxpayer argued that all of the exchanged trademarks fell within the last category, namely, a combination of words, names, symbols, or devices. The Service, however, rejected Taxpayer’s argument, determining that a trademark or trade name could not be considered of like kind to another trademark or trade name, because such assets are so closely related to the goodwill of the business (which, under the Regulations, cannot be like kind to goodwill of another business). Accordingly, the exclusion for goodwill and going concern value under Treasury Regulation section 1.1031-2(c)(2) would apply to such items. The Service held that, under section 1031(h)(2), foreign intangibles cannot be like kind to domestic intangibles. Intangibles were held to be “used” for purposes of section 1031(h)(2)(A) in the location where the intangibles were enjoyed. The Service also held that the taxpayer’s “identification” of the intangible assets to be acquired as replacement property did not meet the requirements of section 1.1031(k)-1(b), in part because it was not sufficiently detailed. The “identification” consisted only of (1) the name of the seller, (2) a very general description of the property (i.e., “Intellectual Property, including but not limited to patents, trademarks, copyrights, software, know how, designs and other intellectual property assets as may be owned, licensed by or leased by the seller”), and (3) estimated value. There were no descriptions of the underlying property pertaining to any of the intangible assets. [d] Mastheads and Newspaper Advertising and Subscriber Accounts In LAFA 20074401F (September 25, 2007), Taxpayer exchanged a newspaper business for another newspaper business. The Service held that the exchanged newspapers’ (1) mastheads were not of like kind, (2) advertising accounts were not of like kind, and (3) subscriber accounts were not of like kind. The Service concluded that the mastheads, advertising accounts, and subscriber accounts were so closely related to (if not a part of) the goodwill and going concern value of a business that they could not be exchanged as like-kind property under the per se rule in the Regulations regarding goodwill. See Treas. Reg. Search7RH 1.1031(a)-2(c)(2). Taxpayer argued that the Service’s position was not consistent with Newark Morning Ledger Co. v. United States, 507 U.S. 546 (1993), in which the Supreme Court held that a newspaper’s subscriber lists could be separable from the newspaper’s goodwill and thus depreciable under Code section 167. The Service rejected Taxpayer’s argument, stating that the relevant question was not whether intangibles are depreciable because they have a limited useful life, the duration of which can be ascertained with reasonable accuracy -- which had been the issue in Newark Morning Ledger -- but whether an intangible that is closely related to, if not a part of, goodwill and going concern value is of like kind to another intangible that is closely related to, if not a part of, goodwill and going concern value. The Service acknowledged that Code section 197 recognizes trademarks and trade names as assets separate from goodwill, but considered that fact irrelevant. In CCA 200911006, the Service reversed its prior position and held that intangibles such as trademarks, trade names, mastheads, and customer-based intangibles that can be separately described and valued apart from goodwill can qualify as like-kind property under section 1031. The Service stated that, except in rare and unusual circumstances, such intangibles can be separately described and valued apart from goodwill. The Service concluded that the analysis of Newark Morning Ledger does apply in determining whether intangibles constitute goodwill or going concern value for section 1031 purposes. The Service will no longer follow the rationale of TAM 200602034 and LAFA 20074401F on this issue. [3] IRS Guidance Addressing Depreciable Personal Property In PLR 200912004, Taxpayer operated a vehicle leasing business. Taxpayer exchanged a number of its cars, light general purpose trucks (having unloaded weight of less than 13,000 pounds), and vehicles that share characteristics of both cars and light purpose trucks for another group of vehicles. Taxpayer combined all the vehicles into a single exchange group, taking the position that they were all of like kind, even if not of like class. The Service agreed, holding that the vehicles differed only in grade or quality and were of the same nature and character and were, therefore, of like kind. In its analysis, the Service discussed changed circumstances arising from the evolution of motor vehicles over the past few decades, which has blurred some of the distinctions between cars and light-duty trucks. The Service made no negative inference from the fact that the cars and light trucks were listed in separate General Asset Classes. [4] Is It “Real Property”? Impact of State Law Labels The Treasury Regulations under section 1031 contain several provisions that have led to the broad generalization that “all real property is of like kind to all other real property.” Treasury Regulation Section 1.1031(a)-1(b) provides, “The fact that any real estate involved [in an exchange] is improved or unimproved is not material [to the determination of whether the exchanged properties are of like kind].” Treasury Regulation Section 1.1031(a)-1(c)(2) provides, “No gain or loss is recognized if ... a taxpayer who is not a dealer in real estate exchanges city real estate for a ranch or farm, or exchanges a leasehold of a fee with 30 years or more to run for real estate, or exchanges improved real estate for unimproved real estate.” The Regulations do not state what impact state law definitions of “real property” may have on the determination of whether an interest in property constitutes real property that may be exchanged for any other sort of real property under section 1031. Compare Treasury Regulation sections 1.48-1(c) (local law not controlling for purposes of determining whether property is personal), incorporated by reference in Treasury Regulation section 1.1245-3(b)(1) definition of “personal property,” which is in turn incorporated by reference in section 1.1250-1(e)(3)(1) definition of “real property,” and 1.856-3(d) (local law definitions not controlling for purposes of determining meaning of term “real property” as used in Code section 856, relating to real estate investment trusts). [a] IRS Guidance Addressing Impact of State Law [i] State Law Treated as Dispositive in Like Kind Analysis In some situations, the fact that an interest in property is denominated “real property” for state law purposes has apparently been dispositive, in and of itself, for section 1031 purposes. In PLR 200631012, a partnership exchanged shares of stock in several New York cooperative housing corporations for improved and unimproved real property. The partnership had been holding the apartments leased under the proprietary leases associated with the shares for rental purposes. The Service held that the shares were of like kind to the replacement properties. The Service seemed to rely only on the fact that some New York statutes treated an interest in a cooperative apartment as “equivalent to an interest in real property.” The Service stated, “whether stock in a cooperative apartment located in New York State constitutes real or personal property under section 1031 is determined under New York law.” The Service did not require that New York State law be uniform in its treatment of the stock, noting that some New York cases might suggest there are conflicts whether an interest in a cooperative is real property. [ii] State Law Ignored in Like Kind Analysis Some rulings have stated explicitly that state law is not relevant and that whether properties are like kind for purposes of section 1031 is a matter of Federal law. In Revenue Ruling 2004-86, 2004-2 C.B.191, the Service held that the exchange of an interest in real property for all of the beneficial interests in a Delaware statutory trust owning real property qualified under section 1031 as a tax free exchange. Under Delaware law the trust was an entity recognized as separate from its owners, and a beneficial interest in the trust was personal property. Nevertheless, for Federal income tax purposes the owners of a beneficial interest in the trust were considered to own the trust assets attributable to that interest. Thus, the Service held that the exchange of an interest in real property for an interest in the trust would be treated as an exchange of real property for an interest in real property for purposes of section 1031. See also PLR 200709036, described in Section 1.01[3][c], above, where Taxpayer relinquished 100% of the limited liability company interests in its wholly owned limited liability company that owned real property. In determining whether section 1031 applied, the Service ignored the state law characterization of the transferred interests as entity interests, and looked only to the Federal income tax characterization of the interests as interests in real property. [iii] State law Relevant, but Not Determinative, in Like Kind Analysis In some recent PLR’s, the Service has discussed both state law labels and other factors in making the determination of whether or not properties are of like kind, in effect, using the state law characterization as a necessary, but not sufficient, condition for determining whether the exchanged properties could potentially be like kind. In PLR 200805012, Taxpayer intended to exchange real property owned in fee for transferable development rights which Taxpayer would then record with respect to a second real property it owned in the same city as the relinquished property. The development rights, as applied to Taxpayer’s property, permitted Taxpayer (or its lessee) to develop that property with greater floor space than would otherwise have been allowed without the development rights. The Service held that the development rights were of like kind to the relinquished fee interest in real property. In reaching its holding, the Service first looked to the characterization of the development rights under state and local law. While noting that it was unclear whether development rights were treated as interests in real property for all purposes of State law, the Service stated that it was sufficient that some portions of the State tax statutes treated the rights as an interest in real property. As a second step in its analysis whether the development rights were like kind to the relinquished fee interest, the Service determined that the development rights were “analogous to perpetual rights,” noting that development rights did not exist at the discretion of a city agency or other decision-making authority and had no expiration date. In PLR 200901020, Taxpayer intended to exchange residential development rights with respect to certain parcels of real property for hotel development rights, a fee interest in land, and a leasehold interest in real estate of 30 years or more remaining. The Service held that the relinquished development rights were of like kind to the development rights pertaining to hotel development, the fee interest in real property, and the long-term lease. The Service looked to both the characterization of the development rights under State law and to whether the development rights were effectively of perpetual duration. Since the rights were in perpetuity and were directly related to taxpayer’s interest, use, and enjoyment of the underlying land, the Service concluded that the development rights were of like-kind to the fee interests in property. It is interesting that, in reaching its holding, the Service used the example in the Regulations of an exchange of a fee interest in real estate with a lease as support for its position that State law characterization of a property right as an interest in real property is not sufficient for an exchange to qualify under section 1031: Not all interests defined as real property interests for state law purposes, are of like-kind for purposes of Section 1031. Although the Service generally looks to state law in determining what property rights constitute real property interests, such classifications are not necessarily determinative of what real property interests are of like-kind to other real property interests under federal income tax law. That determination is a matter of federal, not state, law. For example, even if a short-term lease (any lease having a term of less than 30 years with extensions) is an interest in real property under state law, it is not of like kind to a fee interest in real estate. However, as noted above in Search7RH 1.1031(a)-1(c)(2), long-term leasehold interests in real estate with 30 or more years to run are of like kind to other real estate. [iv] Significance of Differences in State Law Characterization If State law characterization is a necessary, even if not sufficient, condition for determining whether an exchange qualifies for nonrecognition under section 1031, differences in State law can take on large significance under the view that an exchange of real property for personal property does not qualify per se for section 1031 treatment. In TAM 200424001, Taxpayer and its subsidiaries operated Class I railroads throughout the United States and built and maintained track on its own rights of way. Taxpayer exchanged both intact rail line segments and rail and ties that had been removed from a line segment for new component materials with which to manufacture replacements for its track system. The Service held that relinquished property consisting of components of railroad track that are assembled and attached to the land and considered real property for State law purposes are not like kind under section 1031 to unattached components, which are personal property under applicable State law. The Service assumed for purposes of the TAM that the intact line segments exchanged by Taxpayer were real property under applicable State law. In reaching its holding, the Service noted that it was “well-established in case law that real property is not of the same nature or character as personal property” and therefore “are not like kind under Search7RH 1031(a).” If differences in state law labels, standing alone, can be sufficient to prevent an exchange from qualifying under section 1031, one could reach the odd conclusion that an exchange of tangible business property located in one state for physically identical property, used in the same business and in the same manner in another state, was fully taxable. This argument was mad