WHETHER EXCHANGE OF ONE BUSINESS'S ASSETS FOR ANOTHER'S ASSETS QUALIFIES FOR SECTION 1031 REQUIRES ANALYSIS OF UNDERLYING ASSETS EXCHANGED.

Rev. Rul. 89-121

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).