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.
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