Rev. Rul. 89-121
1989-2 C.B. 203, 1989-47 I.R.B. 8.
Internal Revenue Service Revenue Ruling
EXCHANGE OF SIMILAR BUSINESSES UNDER SECTION 1031 OF THE CODE
Published: November 3, 1989
Section 1031. - Exchange of Property Held for Productive Use or
Investment, 26 CFR 1.103(a)-1: Property held for productive use
in trade or business or for investment.
Exchange of similar businesses under section 1031 of the Code.
The transfer of the assets of a business in exchange for the assets
of a similar business cannot be treated as an exchange of a single
property under section 1031 of the Code. Rev. Ruls. 57-365 and
85-135 clarified.
ISSUE
Should the exchange of the assets of a business for the assets
of a similar business be treated as an exchange of a single property
for another single property in applying the provisions of section
1031 of the Internal Revenue Code?
FACTS
The facts are the same as those set forth in Rev. Rul. 85-135,
1985-2 C.B. 181. Rev. Rul. 85-135 concerns the application of sections
1031, 1033, and 1071 of the Code to the exchange of the assets
of television stations. Under the facts of that revenue ruling,
X corporation owned television stations K and L. Y corporation
owned television station H. To diversify their media markets and
to comply with the Federal Communications Commission's cross-ownership
policies, X exchanged with Y the assets of K and L for the assets
of H. The assets exchanged did not include property described in
section 1031(a)(2) of the Code (i.e., stock in trade or other property
held primarily for sale, stocks, bonds, notes, choses in action,
interests in a partnership, certificates of trust or beneficial
interest, other securities, or evidences of indebtedness or interest).
LAW AND ANALYSIS
Section 1031(a) of the Code provides that no gain or loss shall
be recognized if property held for productive use in a trade or
business or for investment (with certain exceptions not relevant
here) is exchanged solely for property of a like kind to be held
either for productive use in a trade or business or for investment.
Rev. Rul. 85-135 holds, in part, that X and Y each received property
of a like kind to that transferred so that both X and Y qualify
for nonrecognition of gain or loss on the exchange pursuant to
section 1031(a) of the Code. In so holding, Rev. Rul. 85-135 fails
to address the manner in which like-kind property is determined
in the exchange. In Rev. Rul. 72-151, 1972-1 C.B. 225, the Service
held that, when an exchange involves multiple assets, the fact
that the assets in the aggregate comprise a business or an integrated
economic investment does not cause the exchange to be treated as
a disposition of a single property for purposes of section 1031.
Rather, an analysis is required of the underlying assets involved
in the exchange. See Rev. Rul. 55-79, 1955-1 C.B. 370.
HOLDING
X's transfer of the assets of K and L in exchange for Y's transfer
of the assets of H cannot be treated as an exchange of a single
property for another single property in applying the provisions
of section 1031 of the Code. Rather, the determination of whether
(or the extent to which) section 1031 applies to an exchange of
the assets of one business for the assets of another business requires
an analysis of the underlying assets exchanged.
EFFECT ON OTHER REVENUE RULINGS
This revenue ruling clarifies Rev. Rul. 85-135 regarding the
determination of like-kind property in an exchange of multiple
assets under section 1031 of the Code. This revenue ruling similarly
clarifies Rev. Rul. 57- 365, 1957-2 C.B. 521, which involves the
exchange of the assets of one telephone company for the similar
assets of another telephone company, and holds that the exchange
of the assets of one business for identical assets of another will
be considered an exchange of property of a like kind within the
scope of section 1031 of the Code.
DRAFTING INFORMATION
The principal author of this revenue ruling is Christopher Rogers
of the Office of Assistant Chief Counsel (Income Tax and Accounting).
For further information regarding this revenue ruling, contact
Mr. Rogers on (202) 377- 9583 (not a toll-free call).
Rev. Rul. 89-121, 1989-2 C.B. 203, 1989-47 I.R.B. 8. |
