Volume 14 Issue 5 -- September/October 2002
Many people are aware that real estate can be exchanged for other real estate in a tax-free transaction. Fewer people are aware that business equipment, such as trucks, can also be exchanged tax free. And even fewer are aware that property such as radio stations and accompanying licenses can be exchanged tax free.
The IRS=s requirement for a like-kind exchange is that there be a degree of similarity between the properties exchanged. For example, real estate can be exchanged with any form of real estate. An example of that would be a condominium project exchanged for vacant land.
Applying the rules of similarity to personal property is more complex. Generally, personal property is of like kind if it all falls within the same class, as determined by IRS regulations. For example, office furniture might be exchanged for general office equipment but not for computers. A private airplane might be exchanged for a helicopter but not for a truck.
The rules for exchanging intangible property are more stringent. For example, a copyright in a novel can be exchanged for a copyright in a different novel; it cannot be exchanged for a copyright in a song. On the other hand, the IRS has ruled that a radio broadcast license issued by the Federal Communications Commission can be exchanged for another radio license or even for a television license.
Some radio stations may own the land and building from which the station operates. Nearly all radio and TV stations own equipment needed to run the office and to generate the signal. The broadcast license is a separate, intangible asset and needs to be approved by the FCC.
When a radio station is the subject of a like-kind exchange and various types of properties are involved — license, land, office equipment, and communication equipment — such exchanges raise additional problems not presented by a like-kind exchange of land.
Example; let=s say Station W123 owns land worth $500,000, a broadcast license worth $1,500,000 and equipment worth $500,000. The total amount of assets to be exchanged would be $2,500,000.
In order to have tax-free exchange of the land, license, and communications equipment, each type or class must be grouped separately and exchanged for property of a similar value in order to avoid gain. In other words, there are really three separate exchanges that must be analyzed.
In some like-kind exchanges, there is more than one radio station being relinquished and more than one radio station being purchased. In some cases, radio stations will be bundled in order to encourage a national company to buy all of the stations in a particular geographic area. In those cases, there may be some stations which are qualified for like-kind exchange and others upon which gain should be taxed and, therefore, would not be subject to the exchange requirements of IRC ' 1031.
Similarly, in an exchange of all of the assets of a business (such as a radio station) for another business of a similar type, it will often be necessary or desirable for the exchange of only some of the asset classes to be tax-free. For example, tax-free treatment may be desirable for a radio station license but not for other assets associated with the station.
Another interesting dimension is that sometimes there will be tax-free exchange of a radio license, but there will be no need for the equipment or the land. In those cases, advice is required to determine whether the land should be handled outside the like-kind exchange guidelines, or, stated differently, whether the sale of the land should be taxed.
Exchanges of whole businesses (such as a radio broadcast license, land, broadcast equipment, and office equipment) is more complicated than exchanging one piece of real estate for another (even though that can be quite complex). It must be borne in mind when considering such a transaction that there is the need for planning and documentation.
If you need assistance with any type of tax-free exchange, there are related newsletters on our Web site or you may want to contact The Tax and Business Professionals to assist you.
By Tax and Business Professionals, Inc.
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Manassas, VA 20110
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