CAN YOU 1031 EXCHANGE A * TAXI-CAB MEDALLION * FOR ANOTHER LIKE-KIND TAXI-CAB MEDALLION?

1031 exchanges of intangible personal property used in trade or business are becoming more and more popular.  Owners of unusual property types are asking themselves ‘how can I sell property without unnecessarily triggering taxes’.

Is this Intangible Business Property?

 As an aside, IRC Section 197(a) gives taxpayers the ability to take amortization deductions for intangible business property.  Treasury Regulation Sec. 1.197-2 (b)(8) lists out certain intangible types of personal property including licenses, permits, and other rights granted by governmental units.  This regulation provides the following examples: “a liquor license, a taxi-cab medallion (or license), an airport landing or takeoff right (sometimes referred to as a slot), a regulated airline route, or a television or radio broadcasting license.” 1031 exchanges have been allowed for airline slots and FCC broadcasting licenses.

What are the 1031 Requirements?

 IRC Section 1031(a) provides that neither gain nor loss is recognized if a qualifying property is exchanged for an other qualifying property of a 'like kind.'  Under Reg. 1.1031(a)-1(b), 'the words "like kind" have reference to the nature or character of property and not to its grade or quality.'

How Do you Know if it is Like-kind?

 Treasury Regulation 1.1031(a)-2(c) ('the intangibles regulation') addresses the like-kind requirement as applied to the exchange of intangible assets: 'Whether intangible personal property is of a 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, whether intangible assets are of a like-kind is based on a two-part test:

 1. Whether the 'nature or character' of the rights involved' are similar.

 2. Whether the 'nature or character' of the underlying property to which the intangible personal property relates' is similar.

 The intangibles regulation includes some examples. e.g. A taxpayer exchanged a copyright on a novel for another copyright on a different novel.  In other words, you have to look at the two properties involved and “eye-ball” them to see if they are in fact sufficiently similar (including the underlying rights involved) to be considered as like-kind.

Conclusion – Hail a Taxi-Cab Exchange

 Based upon this example and the fact that other actual exchanges of licenses and permits have been upheld, it would seem that YES…you may be able to do a 1031 exchange of a taxi-cab medallion for another like-kind taxi-cab medallion.

 © 2011 Jeffrey R. Peterson - All Rights Reserved

 Jeffrey R. Peterson is President of Commercial Partners Exchange Company. His company is a facilitator of standard deferred 1031 exchanges, build-to-suit construction improvement exchanges, reverse exchanges and aircraft personal property exchanges. Mr. Peterson is an adjunct professor at William Mitchell College of Law and a frequent speaker and CLE presenter throughout the Midwest for various business and professional organizations on numerous issues related to 1031 exchanges.

 IRS Circular 230 Disclosure:  To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

Disclaimer: This material has been prepared for general informational purposes only. It is not intended to, and does not, constitute legal advice.