The IRS recently reversed its long-held position that intangibles such as trademarks, trade names, mastheads, and customer-based intangibles could not qualify as like-kind property under Section 1031. Chief Counsel Advisory (CCA) 20091106 states that these intangibles may qualify as like-kind property provided they can be separately valued apart from a business’s goodwill, and that except in “rare or unusual circumstances” they should be valued apart from goodwill. Even so, the “nature and character” requirements of Treas. Regs. § 1.1031(a)(2)(c)(1) must still be met. Thus, not all trademarks, trade names and mastheads are like-kind property to other trademarks, trade names and mastheads.
CCA 20091106 opens up new planning opportunities for business owners seeking to swap similar businesses. Business owners may now defer gain not only with like-kind or like-class tangible assets, but also with like-kind non-goodwill intangibles disposed of in an exchange. Utilizing a “reverse exchange,” taxpayers may “park” non-goodwill intangibles with an Exchange Accommodation Titleholder (EAT), and use the parked property as part of a like-kind exchange within 180 days.
¶ Rev. Rul. 2009-15 explains that a partnership that converts to a corporation under Treas. Reg. § 301.7701-3(c)(1)(i) or under a state law formless conversion statute may make an S corporation election effective for the corporation’s first taxable year, since a conversion of a partnership into a state law corporation under a state law formless conversion statute is treated in the same manner as if the entity had made an election to be treated as an association under §301.7701-3(c)(1)(i).
¶ Section 121 allows taxpayers to exclude up to $250,000 of gain from the sale of a principal residence ($500,000 for married couples) provided the residence was the taxpayer’s principal residence for 2 out of the preceding 5 years. Section 121(b)(4) now provides that if a residence was at any time during that period not used as a principal residence of the taxpayer, the portion of gain allocable to periods of “nonqualified use” will not qualify for the exclusion. A period of nonqualified use is any period during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse, excluding the portion of the period preceding January 1, 2009.
To calculate gain attributable to nonqualified use, realized gain is multiplied by a fraction, the numerator of which is the sum of the periods of nonqualified use, and the denominator of which is the period of the taxpayer’s ownership. Note that periods of nonqualified use do not include (i) periods of nonqualified use following periods of qualified use; and (ii) periods of temporary absence not to exceed two years due to change of employment, health conditions, or other unforeseen circumstances as may be specified by the Secretary. The new restriction on nonqualified use is intended to discourage taxpayers from buying a dwelling for rental purposes, with the intention of later making it the taxpayer’s principal residence, in order to utilize the Section 121 exclusion.
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Law Offices of David L. Silverman 
Recent IRS Developments — October 2009
The IRS recently reversed its long-held position that intangibles such as trademarks, trade names, mastheads, and customer-based intangibles could not qualify as like-kind property under Section 1031. Chief Counsel Advisory (CCA) 20091106 states that these intangibles may qualify as like-kind property provided they can be separately valued apart from a business’s goodwill, and that except in “rare or unusual circumstances” they should be valued apart from goodwill. Even so, the “nature and character” requirements of Treas. Regs. § 1.1031(a)(2)(c)(1) must still be met. Thus, not all trademarks, trade names and mastheads are like-kind property to other trademarks, trade names and mastheads.
CCA 20091106 opens up new planning opportunities for business owners seeking to swap similar businesses. Business owners may now defer gain not only with like-kind or like-class tangible assets, but also with like-kind non-goodwill intangibles disposed of in an exchange. Utilizing a “reverse exchange,” taxpayers may “park” non-goodwill intangibles with an Exchange Accommodation Titleholder (EAT), and use the parked property as part of a like-kind exchange within 180 days.
¶ Rev. Rul. 2009-15 explains that a partnership that converts to a corporation under Treas. Reg. § 301.7701-3(c)(1)(i) or under a state law formless conversion statute may make an S corporation election effective for the corporation’s first taxable year, since a conversion of a partnership into a state law corporation under a state law formless conversion statute is treated in the same manner as if the entity had made an election to be treated as an association under §301.7701-3(c)(1)(i).
¶ Section 121 allows taxpayers to exclude up to $250,000 of gain from the sale of a principal residence ($500,000 for married couples) provided the residence was the taxpayer’s principal residence for 2 out of the preceding 5 years. Section 121(b)(4) now provides that if a residence was at any time during that period not used as a principal residence of the taxpayer, the portion of gain allocable to periods of “nonqualified use” will not qualify for the exclusion. A period of nonqualified use is any period during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse, excluding the portion of the period preceding January 1, 2009.
To calculate gain attributable to nonqualified use, realized gain is multiplied by a fraction, the numerator of which is the sum of the periods of nonqualified use, and the denominator of which is the period of the taxpayer’s ownership. Note that periods of nonqualified use do not include (i) periods of nonqualified use following periods of qualified use; and (ii) periods of temporary absence not to exceed two years due to change of employment, health conditions, or other unforeseen circumstances as may be specified by the Secretary. The new restriction on nonqualified use is intended to discourage taxpayers from buying a dwelling for rental purposes, with the intention of later making it the taxpayer’s principal residence, in order to utilize the Section 121 exclusion.
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