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Private Letter Ruling
Number: 200450005
Internal Revenue Service
August 30, 2004
Number: 200450005
Release Date: 12/10/04
Index Number: 1031.02-00, 1031.05-00
CC:ITA:B05 PLR-111387-04
Dear **********:
This letter responds to your request for two
rulings. First, you have requested a ruling that
sport utility vehicles (“SUVs”) will be
treated as like kind to passenger automobiles
for purposes of section 1031 of the Internal
Revenue Code (“Code”) and the regulations
thereunder. Second, you have requested a ruling
that the deferred like-kind exchange program
implemented by Subsidiary meets the assignment
safe harbor and notice requirements in section
6.02 of Rev. Proc. 2003-39, 2003-22 IRB 971.
FACTS
Subsidiary is wholly owned by Taxpayer. Taxpayer
and Subsidiary file a consolidated return.
Subsidiary is primarily engaged in the business
of leasing vehicles to consumers and issuing
loans to consumers for the purchase of vehicles.
Leases are originated through a national network
of independent dealers of Taxpayer’s vehicles.
Following the standard industry practice,
customers are commonly given the option of
either leasing or purchasing a new vehicle from
the dealer. When a customer desires to lease a
new vehicle, the dealer offers to initiate a
lease on behalf of Subsidiary. Subsidiary
regularly disposes of leased vehicles and
replaces them with new vehicles as lease term
expiration and customer demand require.
Subsidiary currently maintains a portfolio of
vehicles leased to customers. These vehicles
include automobiles and sport utility vehicles.
Subsidiary has implemented a deferred like-kind
exchange program (“LKE Program”) for these
vehicles. Consequently, Subsidiary has
structured its vehicle leasing operations with
the intention that the disposition of a vehicle
coming off lease (a relinquished vehicle) by
Subsidiary to an unrelated party and the
acquisition by Subsidiary of a vehicle recently
leased from a dealer (a replacement vehicle)
will qualify as a like-kind exchange under
section 1031. Relinquished vehicles are
typically sold to the dealer, the lessee, or at
auction to a third party. Replacement vehicles
are usually purchased from a member of the
dealer network.
The LKE Program is an ongoing program involving
multiple exchanges of 100 or more vehicles. To
meet the requirements of section 1031,
Subsidiary entered into an Exchange Agreement
with QI, under which QI is to act as a qualified
intermediary under section 1.1031(k)-1(g)(4) of
the Income Tax Regulations.
QI maintains different types of accounts for
Subsidiary: Collection Accounts; Concentration
Accounts; Disbursement Accounts and Investment
Accounts. The Collection Accounts hold amounts
received by QI from the sale of relinquished
vehicles as well as other receipts. Those
amounts related to the LKE Program are
transferred to the Concentration Accounts by the
QI. Each day, funds from the sale of
relinquished vehicles are transferred by the QI
from the Concentration Accounts to the
Disbursement Accounts in order to fund the
acquisition of replacement vehicles from
dealers. All amounts expended by QI in the
acquisition of vehicles are funded by
disbursements directly from the Disbursement
Accounts by check or electronic funds transfer.
Under the Exchange Agreement, Subsidiary makes a
master assignment to QI of its rights (but not
its obligations) in its existing and future
agreements to purchase replacement property and
to sell relinquished property. In all instances,
the seller of replacement property receives
written notice prior to the time that the
replacement property is transferred to
Subsidiary. Notice is provided to dealers in
lease agreements, credit approval faxes, and
funding approval faxes. The purchasers of
relinquished property also receive written
notice prior to transfer. Notice is provided to
lessees, dealers and third parties in written
payoff quotes and, in the case of auction sales,
electronic files submitted to the auction house
and bills of sale.
LAW AND ANALYSIS
Section 1031(a)(1) of the Code provides that in
general, no gain or loss shall be recognized on
the exchange of property held for productive use
in a trade or business or for investment if such
property is exchanged solely for property of
like kind which is to be held either for
productive use in a trade or business or for
investment.
Section 1.1031(k)-1(a) of the regulations
provides that a deferred exchange is defined as
an exchange in which, pursuant to an agreement,
the taxpayer transfers property held for
productive use in a trade or business or for
investment (the "relinquished property") and
subsequently receives property to be held either
for productive use in a trade or business or for
investment (the "replacement property"). In
order to constitute a deferred exchange, the
transaction must be an exchange (i.e. a transfer
of property for property, as distinguished from
a transfer of property for money). For example,
a sale of property followed by a purchase of
property of a like kind does not qualify for
nonrecognition of gain or loss under section
1031 regardless of whether the identification
and receipt requirements of section 1031(a)(3)
and paragraphs (b), (c), and (d) of section
1.1031(k)-1 are satisfied.
Your first ruling request is that SUVs will be
treated as like kind to passenger automobiles
for purposes of section 1031 of the Code and the
regulations thereunder.
Section 1.1031(a)-1(b) provides that as used in
section 1031(a), the words "like kind" have
reference to the nature or character of the
property and not to its grade or quality. One
kind or class of property may not, under that
Code section, be exchanged for property of a
different kind or class. As an example, section
1.1031(a)-1(c) provides that "a truck for a new
truck or a passenger automobile for a new
passenger automobile to be used for a like
purpose" are like kind.
Section 1.1031(a)-2(b) further provides as a
safe harbor that depreciable tangible properties
are of like class if they are either within the
same General Asset Class, as defined in section
1.1031(a)-2(b)(2), or within the same Product
Class, as defined in section 1.1031(a)-2(b)(3).
The General Asset Class and Product Class safe
harbors in the regulations simplify the
determination of whether depreciable tangible
personal property is of a like kind, but they
are not the exclusive method for making this
determination. For depreciable tangible personal
property to be considered of like kind, the
property can be either like kind or like class.
Section 1.1031(a)- 2(a) of the regulations
provides that "an exchange of properties of a
like kind may qualify under section 1031
regardless of whether the properties are also of
like class. In determining whether exchanged
properties are of a like kind, no inference is
to be drawn from the fact that the properties
are not of a like class." Thus, two properties
can be in different General Asset Classes (and
thus not be of a like class) and yet be of like
kind.
The like-kind property standard has been
interpreted more narrowly in the case of
exchanges of personal property as compared to
exchanges of real property. See California
Federal Life Insurance Co. v. Commissioner ,
680 F.2d 85, 87 (9th Cir. 1982). Even within the
more restrictive parameters of the like-kind
standard as applied to personal property, the
differences between an automobile and an SUV do
not rise to the level of a difference in nature
or character but are merely a difference in
grade or quality. Thus, we conclude that the two
are like kind property.
The second ruling you have requested is that the
deferred like-kind exchange program implemented
by Subsidiary meets the assignment safe harbor
and notice requirements in section 6.02 of Rev.
Proc. 2003-39, 2003-22 IRB 971.
Section 1.1031(k)-1(g)(4)(iii) requires that,
for an intermediary to be a qualified
intermediary, the intermediary must enter into a
written “exchange” agreement with the taxpayer
and, as required by the exchange agreement,
acquire the relinquished property from the
taxpayer, transfer the relinquished property,
acquire the replacement property, and transfer
the replacement property to the taxpayer.
Section 1.1031(k)-1(g)(4)(v) provides that an
intermediary will be treated as entering into an
agreement for the acquisition or transfer of
property if the taxpayer’s rights in the
agreement are assigned to the intermediary, and
the other parties to the acquisition or transfer
agreement are notified in writing of the
assignment on or before the date of the relevant
transfer of property (“Assignment Safe Harbor”).
Under the Assignment Safe Harbor, there is no
requirement that the taxpayer also assign or
delegate its obligations under the agreement.
Rev. Proc. 2003-39 provides certain safe harbors
with respect to LKE programs involving ongoing
exchanges of tangible personal property using a
single intermediary. Section 6.02 of that
revenue procedure provides that the taxpayer’s
assignment in the master exchange agreement to
the intermediary of the taxpayer’s rights (but
not necessarily it obligations) in some or all
of its existing and future agreements to sell
relinquished property and/or to purchase
replacement property, and the taxpayer’s written
notice of the assignment to the other party to
each agreement to sell relinquished property
and/or to purchase replacement property on or
before the date of the relevant transfer of
property, will be effective to satisfy the
Assignment Safe Harbor under section
1.1031(k)-1(g)(4)(v).
In the instant case, Subsidiary has assigned to
QI its rights to sell the relinquished property.
In all instances, the purchaser receives written
notice of the assignment prior to the time that
the relinquished property is transferred to the
purchaser. Notice is provided in written payoff
quotes and, in the case of auction sales,
electronic files submitted to the auction house
and the bills of sale.
In addition, Subsidiary assigned its right to
purchase replacement property to QI. In all
instances, the seller receives written notice
prior to the time that the replacement property
is transferred to Subsidiary. Notice is provided
to dealers in lease agreements, credit approval
faxes, and funding approval faxes.
CONCLUSIONS
Accordingly, based on your representations and
the above analysis, we conclude that SUVs and
passenger automobiles are like kind property for
purposes of section 1031 of the Code and the
regulations thereunder. We further conclude that
the deferred like-kind exchange program
implemented by Subsidiary meets the Assignment
Safe Harbor in section 6.02 of Rev. Proc.
2003-39, 2003-22 IRB 971.
CAVEATS
Except as expressly provided herein, no opinion
is expressed or implied concerning the tax
consequences of any aspect of any transaction or
item discussed or referenced in this letter.
This ruling is directed only to the taxpayer
requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as
precedent.
A copy of this letter must be attached to any
income tax return to which it is relevant. We
enclose a copy of the letter for this purpose.
Also enclosed is a copy of the letter ruling
showing the deletions proposed to be made in the
letter when it is disclosed under 6110 of the
Internal Revenue Code.
In accordance with the Power of Attorney on file
with this office, copies of this letter are
being sent to the Taxpayer’s authorized
representatives.
The rulings contained in this letter are based
upon information and representations submitted
by Taxpayer and accompanied by a penalty of
perjury statement executed by an appropriate
party. While this office has not verified any of
the material submitted in support of the request
for rulings, it is subject to verification on
examination.
Sincerely,
John M. Aramburu
Senior Counsel, Branch 5
Office of Associate Chief Counsel
(Income Tax & Accounting)
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