Like Kind Exchange for Intangibles

Recent pronouncements under Financial Accounting Standards No. 141 and 142 ("FAS 141" and "FAS 142") require certain corporations to identify and separately state their purchased intangibles for financial reporting purposes. In general, this change in financial reporting requirements may provide impetus to corporate taxpayers to perform tax planning with respect to transactions involving these separately stated intangible assets.

Internal Revenue Code 1031(a) provides that no gain or loss is recognized if qualifying property is exchanged for other qualifying property of a "like kind." Under Treas. Regs. 1.1031(a)-1(b), the term "like kind" refers to the nature or character of property and not to its grade or quality. Treas. Regs. 1.1031(a)-2(c) addresses the like kind requirement as applied to the exchange of intangible assets. This regulation provides a two-prong test: Whether intangible personal property is like kind to other intangible personal property generally depends on (1) the nature or character of the rights involved (e.g., patent or a copyright) and (2) on the nature or character of the underlying property to which the intangible personal property relates.

For certain intangible property, the nature or character of the rights involved are consistent. The rights may be conferred to a taxpayer by a governmental agency and the rights have clearly established guidelines. In such cases, the determination of the nature and character of the underlying property may be able to follow the same classifications established by the same agencies (e.g., the U.S. Patent and Trademark Office).

For certain intangible property, there may not be consistency of rights or established classification systems for the underlying property. In such cases, it is necessary to examine the specific facts and circumstances of the intangible assets to be exchanged. While the specific rights associated with the intangible and the underlying property to which it relates are not required to be the "same," to the extent they are "like" strengthens the argument for 1031 purposes.

While like kind exchanges of intangible assets are contemplated in the law, there is limited guidance provided to establish the measure of "likeness." Various arguments and considerations must be considered with respect to making a like kind exchange within each category of intangible assets as delineated in FAS 141.

For more information, please contact one of the product leaders listed below.
Adam Handler 213-356-6499
Dave Crawford 202-414-1039
Jennifer Kennedy 202-414-1543

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