Nontaxable Exchanges

March 13, 2024

8682 / Does an exchange of corporate stock for corporate stock qualify for nonrecognition treatment?

<div class="Section1">Pursuant to IRC Section 1036, common stock in a corporation may be exchanged for common stock in the same corporation tax-free. The nonrecognition rules of IRC Section 1036 apply to exchanges of common stock in the same corporation, even though the stocks are of a different class and have different voting, preemptive, or dividend rights.<a href="#_ftn1" name="_ftnref1">1</a> Nonrecognition treatment also applies to an exchange of preferred stock for preferred stock in the same corporation. However, gain or loss may be recognized if cash or other property is also received. This treatment applies both to exchanges between an individual shareholder and the corporation and to exchanges between two shareholders. Such an exchange is treated in substantially the same manner as a “like-kind” exchange (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8665">8665</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8669">8669</a>).Finally, the exchange of stock in different corporations and exchanges of common stock for preferred stock do not qualify for nonrecognition treatment even if the shares of stock are similar in all other aspects.<a href="#_ftn2" name="_ftnref2">2</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.Rev. Rul. 72-199, 1972-1 CB 228; Treas. Reg. § 1.1036-1. <a href="#_ftnref2" name="_ftn2">2</a>.IRC § 1036, 1031(a); Treas. Reg. § 1.1036-1. </div></div>

March 13, 2024

8668 / Can a taxpayer defer recognition of gain under the like-kind exchange rules if the exchange is made between related parties?

<div class="Section1">If like-kind property is exchanged between persons who are “related” to each other (as defined in IRC Sections 267(b) or 707(b)(1)), the nonrecognition treatment provided under Section 1031 will not apply if either party disposes of the replacement property within two years after the exchange.<a href="#_ftn1" name="_ftnref1">1</a>If such a disposition is made by either party, then both parties must recognize gain on the exchange in the year of the subsequent disposition.<a href="#_ftn2" name="_ftnref2">2</a> IRC Section 1031(f)(2) contains certain specific exceptions to this rule and a general exception for transactions that the IRS concludes did not have tax avoidance as one of the principal purposes. As a result, nonrecognition treatment will be permitted if the property was disposed of within two years of the exchange as a result of: (1) the death of the taxpayer or the related person; or (2) an involuntary conversion (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8664">8664</a>) if the exchange occurred before the threat of the conversion arose.<a href="#_ftn3" name="_ftnref3">3</a> IRC Section 1031(f)(4) provides that if an exchange is part of a transaction (or series of transactions) structured to avoid the related party rules of Section 1031, the section will not apply at all (except for subsection (f)(4)) and any gain will be recognized in the year of the original sale. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.IRC § 1031(f). <a href="#_ftnref2" name="_ftn2">2</a>.IRC § 1031(f)(1). <a href="#_ftnref3" name="_ftn3">3</a>.IRC § 1031(f)(2). </div></div>

March 13, 2024

8666 / What is a taxpayer’s basis in property received in a like-kind exchange?

<div class="Section1">In a transaction qualifying for nonrecognition treatment, the property received takes a carryover or transferred basis from the property given up. In this manner, the unrecognized gain or loss on the property disposed of is deferred by becoming the basis of the replacement property to be recognized later when the replacement property is disposed of in a taxable transaction.<a href="#_ftn1" name="_ftnref1">1</a><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.IRC § 1031(d). </div></div>

March 13, 2024

8672 / Is a taxpayer whose property is involuntarily converted into money required to replace the lost or destroyed property within a certain amount of time to qualify for nonrecognition treatment?

<div class="Section1">In order to qualify for nonrecognition treatment under IRC Section 1033, the taxpayer must replace the property that has been involuntarily converted within a two-year period. The time period begins to run on the date of the disposition of the converted property or, if the conversion results from condemnation of the property, the date when the condemnation became imminent.<a href="#_ftn1" name="_ftnref1">1</a>If a taxpayer’s principal residence is destroyed as a result of an involuntary conversion that takes place in a federally-declared disaster area, the time period for purchasing replacement property is extended to four years.<a href="#_ftn2" name="_ftnref2">2</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.IRC § 1033(a)(2)(B). <a href="#_ftnref2" name="_ftn2">2</a>.IRC § 1033(h). </div></div>

March 13, 2024

8676 / How much gain is a taxpayer permitted to exclude from income on the sale of a principal residence? How is the exclusion calculated?

<div class="Section1">Generally, an individual who sells a principal residence may elect to exclude up to $250,000 of gain from gross income.<a href="#_ftn1" name="_ftnref1">1</a> However, married couples filing jointly may exclude up to $500,000 if they meet the following requirements: (1) they must file a joint return for the taxable year of the sale or exchange; (2) either spouse must meet the ownership requirements outlined in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8674">8674</a>; (3) both spouses must meet the use requirements outlined in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8674">8674</a>; and (4) neither spouse is ineligible to use the exclusion because he or she had used the exclusion in the two-year period ending on the date of the sale or exchange.<a href="#_ftn2" name="_ftnref2">2</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.IRC § 121(b). <a href="#_ftnref2" name="_ftn2">2</a>.IRC § 121(b). </div></div>

March 13, 2024

8679 / Is a taxpayer permitted to exclude gain on the sale of a principal residence used partially for business purposes if the business portion of the property is not separate from the taxpayer’s dwelling unit?

<div class="Section1">Allocation is only required if the property used for business purposes is separate from the taxpayer’s principal residence. However, if a taxpayer uses a non-separate portion of the residence for business and claims a depreciation deduction as a result of such use, the taxpayer may be required to recognize unrecaptured gain under IRC Section 1250.<a href="#_ftn1" name="_ftnref1">1</a> Example: Kacey is a lawyer and has used three rooms in her residence as her law office for a seven year period. Over this period, she claimed depreciation deductions totaling $10,000. Later, she sells the house for a $30,000 gain. She has no other capital gains or losses for the year. She must recognize $10,000 of the gain (an amount equal to her depreciation deductions) but may exclude the remaining $20,000 because she is not required to allocate gain between residential and business use property under Treasury Regulation Section 1.121-1(e)(1). If Kacey had not been entitled to claim depreciation deductions with respect to the business use of the house, the entire $30,000 of gain would be excluded from gross income.<a href="#_ftn2" name="_ftnref2">2</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.Treas. Reg. § 1.121-1(e)(1). <a href="#_ftnref2" name="_ftn2">2</a>.Treas. Reg. § 1.121-1(e)(4), Ex.6. </div></div>

March 13, 2024

8683 / What are the requirements to exclude 50, 75 or 100 percent of the gain on the sale of qualified small business stock?

<div class="Section1">If certain requirements are met, a noncorporate taxpayer (including certain partnerships and S corporations) may exclude from gross income 100 percent of any gain from the sale or exchange of qualified small business stock held for more than five years if the stock was purchased after September 27, 2010.<a href="#_ftn1" name="_ftnref1">1</a> For stock purchased before February 18, 2009, the exclusion was limited to 50 percent, and for stock purchased between February 18, 2009 and September 27, 2010, the exclusion was limited to 75 percent.<a href="#_ftn2" name="_ftnref2">2</a> With certain exceptions, a qualifying small business is: <ul> <li>A domestic C corporation (not an S corporation) with aggregate gross assets that do not exceed $50 million between August 10, 1993 and the date the stock was issued (the aggregate gross assets also cannot exceed $50 million immediately after the stock was issued);<a href="#_ftn3" name="_ftnref3">3</a></li> <li>Any trade or business other than one involving the performance of legal, health, engineering, architecture, accounting, actuarial services, or any other trade or business in which the principal asset is the skill or reputation of its employees; and</li> <li>At least 80 percent of its assets by value must be used in the active conduct of a qualified trade or business.</li> </ul> The aggregate amount of eligible gain from the disposition of qualified small business stock issued by one corporation that may be taken into account in a tax year may not exceed the greater of the following amounts: (a) $10 million ($5 million in the case of married taxpayers filing separately) reduced by the aggregate amount of such gain taken into account in prior years; or (b) 10 times the aggregate bases of qualified stock of the issuer disposed of during the tax year. For purposes of the limitation in (b), above, the adjusted basis of any qualified stock will not include any additions to basis occurring after the stock was issued.<a href="#_ftn4" name="_ftnref4">4</a> Gain realized by a partner, shareholder, or other participant that is attributable to a disposition of qualified small business stock held by a pass-through entity (i.e., a partnership, S corporation, regulated investment company, or common trust fund) is eligible for the exclusion if the entity held the stock for more than five years, and if the taxpayer held an interest in the pass-through entity at the time of acquisition and at all times since the acquisition of the stock.<a href="#_ftn5" name="_ftnref5">5</a> Significantly, a taxpayer is not entitled to the Section 1202 exclusion as well as the reduced capital gains rates (0 percent, 15 percent or 20 percent). Instead, the tax rate is subject to a maximum rate of 28 percent. Coupled with the 50 percent exclusion, the actual maximum effective rate on the gain is 14 percent. Any gain excluded under IRC Section 1202 by a married couple filing jointly must be allocated equally between the spouses for purposes of claiming the exclusion in subsequent tax years.<a href="#_ftn6" name="_ftnref6">6</a> Special rules apply to IRC Section 1202 stock for alternative minimum tax purposes (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8574">8574</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8579">8579</a> for a discussion of the AMT). In the case of stock eligible for the 50 percent or 75 percent exclusion, an amount equal to 7 percent of the amount excluded from gross income for the taxable year under IRC Section 1202 will be treated as a preference item.<a href="#_ftn7" name="_ftnref7">7</a> If the stock is eligible for the 100 percent exclusion, no portion of the excluded gain will be treated as a preference item (this provision was made permanent by the PATH Act). <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.IRC § 1202(a)(4), as amended by ARRA 2009, ATRA and PATH. See also IRC § 1(h)(7). <a href="#_ftnref2" name="_ftn2">2</a>.IRC § 1202(a)(3). <a href="#_ftnref3" name="_ftn3">3</a>.IRC § 1202(d)(1)(A). <a href="#_ftnref4" name="_ftn4">4</a>.IRC § 1202(b). <a href="#_ftnref5" name="_ftn5">5</a>.IRC § 1202(g). <a href="#_ftnref6" name="_ftn6">6</a>.IRC § 1202(b)(3)(B). <a href="#_ftnref7" name="_ftn7">7</a>.IRC § 57(a)(7). </div></div>

March 13, 2024

8685 / Under what circumstances may a noncorporate taxpayer roll over gain from the sale or exchange of qualified small business stock that is held for six months or more?

<div class="Section1">Generally, a noncorporate taxpayer, including certain partnerships and S corporations, may elect to roll over gain from the sale or exchange of qualified small business stock held more than six months to the extent that the taxpayer purchases other qualifying small business stock within 60 days of the sale of the original stock.<a href="#_ftn1" name="_ftnref1">1</a>If the taxpayer elects to roll over gain on the sale of qualified small business stock, gain will be recognized only to the extent that the amount realized on the sale exceeds (1) the cost of any qualified small business stock purchased by the taxpayer during the 60-day period beginning on the date of the sale, reduced by (2) any portion of such cost previously taken into account under this rollover provision. The rollover provisions of IRC Section 1045 will not apply to any gain that is treated as ordinary income.<a href="#_ftn2" name="_ftnref2">2</a> Rules similar to those applicable to rollovers of gain by an individual from certain small business stock<a href="#_ftn3" name="_ftnref3">3</a> will apply to the rollover of such gain by a partnership or S corporation.<a href="#_ftn4" name="_ftnref4">4</a> Thus, for example, the benefit of a tax-free rollover with respect to the sale of small business stock by a partnership will flow through to an “eligible partner”—meaning a partner who is not a corporation and who held his partnership interest at all times during which the partnership held the small business stock.<a href="#_ftn5" name="_ftnref5">5</a> (A similar rule applies to S corporations and their shareholders.)<a href="#_ftn6" name="_ftnref6">6</a> For the rules regarding (1) the deferral of gain on a partnership’s sale of qualified small business stock followed by an eligible partner’s acquisition of qualified replacement stock, and (2) the deferral of gain on a partner’s sale of qualified small business stock distributed by a partnership, see Treasury Regulation Section 1.1045-1.<a href="#_ftn7" name="_ftnref7">7</a> Any gain not recognized because of a rollover of qualified small business stock will be applied to reduce (in the order acquired) the basis for determining gain or loss of any qualified small business stock purchased by the taxpayer during the 60-day rollover period.<a href="#_ftn8" name="_ftnref8">8</a> Ordinarily, the holding period of qualified small business stock purchased in a rollover transaction will include the holding period of the stock sold. However, for purposes of determining whether the nonrecognition of gain applies to the stock that is sold, the holding period for the replacement stock begins to run on the date of purchase. In addition, only the first six months of the taxpayer’s holding period for the replacement stock will be taken into account for purposes of determining whether the active business requirement is met.<a href="#_ftn9" name="_ftnref9">9</a> <hr> Planning Point: The taxpayer must make an election under IRC Section 1045 by the due date (including extensions) for filing the income tax return for the taxable year in which the qualified small business stock is sold.<a href="#_ftn10" name="_ftnref10">10</a> The election is made by (1) reporting the entire gain from the sale of qualified small business stock on Schedule D; (2) writing “IRC Section 1045 rollover” directly below the line on which the gain is reported; and (3) entering the amount of the gain deferred under IRC Section 1045 on the same line as (2), above, as a loss, in accordance with the instructions for Schedule D.<a href="#_ftn11" name="_ftnref11">11</a> <hr> If a taxpayer has more than one sale of qualified small business stock in a taxable year that qualifies for the IRC Section 1045 election, the election can be made for any one or more of those sales. An IRC Section 1045 election is revocable only with the Commissioner’s consent.<a href="#_ftn12" name="_ftnref12">12</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.See IRC § 1045(a). <a href="#_ftnref2" name="_ftn2">2</a>.IRC § 1045(a). <a href="#_ftnref3" name="_ftn3">3</a>.IRC § 1202. <a href="#_ftnref4" name="_ftn4">4</a>.IRC § 1045(b)(5). <a href="#_ftnref5" name="_ftn5">5</a>.See Treas. Reg. §§ 1.1045-1(b)(1), 1.1045-1(g)(3)(i). <a href="#_ftnref6" name="_ftn6">6</a>.General Explanation of Tax Legislation Enacted in 1998 (JCS-6-98), p. 167 (the 1998 Blue Book). <a href="#_ftnref7" name="_ftn7">7</a>.See Treas. Reg. § 1.1045-1. TD 9353, 2007 CB 721. <a href="#_ftnref8" name="_ftn8">8</a>.IRC § 1045(b)(3). <a href="#_ftnref9" name="_ftn9">9</a>.IRC §§ 1045(b)(4), 1223(15). <a href="#_ftnref10" name="_ftn10">10</a>. Rev. Proc. 98-48, 1998 CB 367. <a href="#_ftnref11" name="_ftn11">11</a>. Rev. Proc. 98-48, 1998 CB 367. <a href="#_ftnref12" name="_ftn12">12</a>. Rev. Proc. 98-48, 1998 CB 367. </div></div>

March 13, 2024

8667 / What are the tax consequences if a taxpayer receives consideration other than like-kind property in an exchange that qualifies for nonrecognition treatment?

<div class="Section1">Editor’s Note: The 2017 tax reform legislation limited the nonrecognition treatment provided under IRC Section 1031 to exchanges of real property that is not held primarily for sale.<a href="#_ftn1" name="_ftnref1">1</a> This provision applies to exchanges occurring after December 31, 2017.If a transaction otherwise qualifying for nonrecognition treatment under IRC Section 1031 involves the receipt of money or non-like-kind property (“boot”) in addition to the like-kind property received in the exchange, any realized gain on the exchange must be recognized to the extent of the value of the boot received, and the carryover or transferred basis must be adjusted. Example: Joanne owns a business that has three warehouses. A few years later, Joanne transfers one of the warehouses, which had an adjusted basis of $45,000 and a fair market value of $48,000, to Calin, in exchange for vacant land with a fair market value of $42,000, and $6,000 in cash. Joanne’s realized gain is $3,000 ($42,000 truck and $6,000 cash received, or $48,000 minus $45,000 basis). Because the cash is boot, Joanne must recognize gain to the extent of the boot. Joanne’s overall gain is $3,000 and the boot is $6,000. As a result, Joanne must recognize the entire $3,000 gain. Joanne’s carryover basis is increased by the amount of any gain recognized and decreased by the amount of any money received.<a href="#_ftn2" name="_ftnref2">2</a> As a result, in this case, Joanne’s basis of $45,000 is increased to $48,000 as a result of the $3,000 gain. That $48,000 basis is decreased by the amount of money received, $6,000, to $42,000. As a result, Joanne’s basis in the replacement property is $42,000. Therefore, if Joanne were to sell the land for $42,000 (its fair market value), she would have no gain or loss.<a href="#_ftn3" name="_ftnref3">3</a> Similarly, if the person who receives the like-kind property assumes a liability that secures the property, the transferor is treated as having received money to the extent of the assumed liability. If the property received in the exchange is also secured by a liability, then the boot deemed received is only the excess, if any, of the liability transferred with the original property over the liability assumed on the replacement property.<a href="#_ftn4" name="_ftnref4">4</a> Example: Al owns a warehouse with a basis of $160,000, a value of $200,000, and subject to a mortgage of $150,000. He transfers the warehouse to Asher in exchange for an office building with a value of $175,000, which is subject to a $125,000 mortgage. From a strictly economic perspective, Al’s amount realized is the fair market value of the office building, $175,000, plus a net assumption by Asher of $25,000 of liability (Al’s property is subject to $150,000 mortgage and Asher’s property is subject to a $125,000 mortgage.) Thus, Al’s realized gain is $40,000 ($200,000 minus $160,000 basis). Although the transaction is a like-kind exchange, Al must recognize the realized gain to the extent of the boot received. In this case, as a result of the transfer of mortgages, Al is deemed to have received $25,000 in cash ($150,000 minus $125,000). Of the $40,000 realized gain, Al must recognize $25,000. The balance of the gain, $15,000, is not recognized. Al’s carryover basis is adjusted as follows: The $160,000 basis is increased to $185,000 by the $25,000 of recognized gain. It is then decreased by $25,000, the amount of money Al is deemed to receive. As a result, Al’s basis in the office building is $160,000. Therefore, if Al were to sell the office building for $175,000 (its fair market value), he would recognize $15,000 of gain. To recap, Al realized $40,000 of gain with respect to the exchange. Of that amount, $25,000 was immediately recognized and $15,000 was deferred. <table style="height: 507px" width="551" align="center"> <tbody> <tr> <td style="text-align: center" colspan="2" width="373">Realized Gain Computation</td> </tr> <tr> <td colspan="2" width="373">Nonrecognized Portion of Gain</td> </tr> <tr> <td width="265">Amount Realized</td> <td width="109">$200,000</td> </tr> <tr> <td width="265">Basis</td> <td width="109">$160,000</td> </tr> <tr> <td width="265">Total Gain Realized</td> <td width="109">$40,000</td> </tr> <tr> <td width="265">Recognized Gain (Mortgage Boot)</td> <td width="109">$25,000</td> </tr> <tr> <td width="265">Deferred Gain</td> <td width="109">$15,000</td> </tr> <tr> <td colspan="2" width="373">Recognized Portion Of Gain (Boot)</td> </tr> <tr> <td width="265">Mortgage Given Up</td> <td width="109">$150,000</td> </tr> <tr> <td width="265">Mortgage Taken On</td> <td width="109">($125,000)</td> </tr> <tr> <td width="265">Boot</td> <td width="109">$25,000</td> </tr> <tr> <td colspan="2" width="373">Basis of Building Received</td> </tr> <tr> <td width="265">Carryover Basis From Property Given Up</td> <td width="109">$160,000</td> </tr> <tr> <td width="265">Plus: Gain Recognized</td> <td width="109">$25,000</td> </tr> <tr> <td width="265">Less: Cash Boot Deemed Received</td> <td width="109">($25,000)</td> </tr> <tr> <td width="265">Basis of Building Received</td> <td width="109">$160,000</td> </tr> </tbody> </table> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.IRC § 1031(a)(1). <a href="#_ftnref2" name="_ftn2">2</a>.IRC § 1031(d). <a href="#_ftnref3" name="_ftn3">3</a>.Treas. Reg. § 1.1031(d)-1(b). <a href="#_ftnref4" name="_ftn4">4</a>.Treas. Reg. § 1.103(b)-1(c). </div></div>

March 13, 2024

8665 / What exchanges of property qualify as like-kind exchanges and are therefore eligible for nonrecognition treatment?

<div class="Section1">Editor’s Note: The 2017 tax reform legislation limited the nonrecognition treatment provided under IRC Section 1031 to exchanges of real property that is not held primarily for sale.<a href="#_ftn1" name="_ftnref1">1</a> This provision applies to exchanges occurring after December 31, 2017. An exception exists if either (1) the property involved in the exchange was disposed of on or before December 31, 2017, or (2) the property received in the exchange was received on or before December 31, 2017.<a href="#_ftn2" name="_ftnref2">2</a> The new rules also provide that real property located within the U.S. and foreign real property are not of a like-kind.<a href="#_ftn3" name="_ftnref3">3</a>IRC Section 1031(a) provides that no gain or loss is recognized if property held for productive use in a trade or business or for investment is exchanged solely for property of a “like-kind” to be held for productive use in a trade or business or for investment.<a href="#_ftn4" name="_ftnref4">4</a> IRC Section 1031 does not provide a permanent exclusion of gain or loss because the taxpayer’s basis in the property exchanged transfers to the exchanged property, becoming the basis of that property.<a href="#_ftn5" name="_ftnref5">5</a> So if the taxpayer subsequently sells the replacement property, the deferred gain or loss would be recognized. The phrase “like-kind” refers to the nature or character of the property and not to its grade or quality.<a href="#_ftn6" name="_ftnref6">6</a> So, whether real property is improved or unimproved is not relevant because virtually all types of real property are deemed to be of the same nature or character. Perhaps for this reason, the Section 1031 nonrecognition provision has been frequently used in connection with exchanges of real property and, under the 2017 tax reform legislation, is now limited to real property exchanges. Interestingly, the regulations provide that a leasehold interest with at least 30 years to run is equivalent to an ownership interest in real property.<a href="#_ftn7" name="_ftnref7">7</a> Prior to the 2017 tax reform legislation, only certain types of property were eligible for nonrecognition treatment under the rules applicable to like-kind exchanges. Exchanges of stock in trade (or other property held primarily for sale) and stocks, bonds, notes, and other securities or evidences of indebtedness or interest were specifically excluded under Section 1031, even though they might otherwise have qualified as business or investment property.<a href="#_ftn8" name="_ftnref8">8</a> Additionally, IRC Section 1031(h) specifically excluded exchanges in which at least one of the properties is real property located outside the United States (the 2017 tax reform legislation specifically provides that real property located within the U.S. and foreign real property are not of a like-kind). Similarly, an exchange involving a partnership interest in a real estate partnership is specifically excluded from like-kind exchange treatment.<a href="#_ftn9" name="_ftnref9">9</a> Though the like-kind exchange rules have always been well-settled in the area of real property, application of the “like-kind” standard (pre018) was not so clear with respect to exchanges of personal property. In Revenue Ruling 82-166, the IRS ruled that an exchange of gold bullion (held for investment purposes) for silver bullion (which would also be held for investment purposes) did not qualify as a like-kind exchange, based on the finding that silver and gold are intrinsically different metals and are used in different ways;silver is essentially an industrial commodity while gold is primarily utilized as an investment in itself. Therefore, the IRS reasoned that an investment in one of the metals is fundamentally different from an investment in the other metal.<a href="#_ftn10" name="_ftnref10">10</a> Conversely, the IRS has found that trades of major league player contracts, as well as the exchange of gold bullion for Canadian Maple Leaf gold coins, qualified for like-kind treatment.<a href="#_ftn11" name="_ftnref11">11</a> In one example of pre018 like-kind exchange treatment, the IRS ruled upon the exchange of intangible property in the form of contract rights under two separate manufacturing and distribution contracts. The IRS found that a taxpayer could exchange rights to manufacture and distribute a certain set of products under one contract with those available to the taxpayer’s subsidiary under a second contract in a like-kind exchange without recognition of gain or loss. Both contracts at issue in this case involved the manufacturing and distribution of a certain set of products, though the contracts covered different territories and had different terms and renewal periods. The IRS found that the contract rights were of a like-kind using a two part test that examined (1) the nature or character of the rights involved and (2) the nature or character of the underlying property to which the agreements relate. Both contracts were in the nature of manufacturing and distribution agreements. While the IRS found that manufacturing and distribution are distinct business activities, and that the rights to each would not be of a like kind, it also found that in the case of the particular products at issue, manufacturing and distribution are historically treated as two aspects of a single business activity, so that the first prong was satisfied. Each agreement covered a group of products that share substantially similar manufacturing and distribution processes. Though the products had different brand names, packaging and appearances, among other differences, these differences impacted the grade or quality of the products, not their nature or character. As a result, the second prong was satisfied and the IRS ruled that the contracts could be transferred in a like-kind exchange.<a href="#_ftn12" name="_ftnref12">12</a> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.IRC § 1031(a)(1). <a href="#_ftnref2" name="_ftn2">2</a>.IRC § 1031(a)(2). <a href="#_ftnref3" name="_ftn3">3</a>.IRC § 1031(h). <a href="#_ftnref4" name="_ftn4">4</a>.IRC § 1031(a)(1). <a href="#_ftnref5" name="_ftn5">5</a>.IRC § 1031(d). <a href="#_ftnref6" name="_ftn6">6</a>.Treas. Reg. § 1.1031(a)-1(b). <a href="#_ftnref7" name="_ftn7">7</a>.Treas. Reg. § 1.1031(a)-1(c); VIP Industries Inc. v. Comm., TC Memo 2013-157. <a href="#_ftnref8" name="_ftn8">8</a>.IRC § 1031(a)(2). <a href="#_ftnref9" name="_ftn9">9</a>.IRC § 1031(a)(2)(D). <a href="#_ftnref10" name="_ftn10">10</a>. Rev. Rul. 82-166, 1982 CB 190. <a href="#_ftnref11" name="_ftn11">11</a>. Rev. Rul. 67-380, 1967 CB 291; Rev. Rul. 71-137, 1971-1 CB 104; Rev. Rul. 82-96, 1982-1 CB 113. <a href="#_ftnref12" name="_ftn12">12</a>. Let. Rul. 201531009. </div></div>