Proposed regulations under Section 1031.

Comments on Proposed Regulations Under Section 1031

This letter supplements Tax Executives Institute's September 13, 1990, comments on the proposed regulations under section 1031 of the Internal Revenue Code providing additional rules for exchanges of personal property and multiple properties.

In its comments, the Institutte pointed out that Prop. Reg. [section] 1.1031(f)-1 (relating to multiple asset exchanges) essentially requires taxpayers to separately value each and every asset transferred or received in an exchange -- an expensive and administratively burdensome task even when the assets not within an exchange group may constitute only a small portion of the entire exchange. To minimize these compliance burden, TEI recommended the adoption of a safe harbor under which an exchange of businesses within the same four-digit Industry Number of the Standard Industrial Classification System would not be subject to the multiple-asset exchange rules. The Institute also recommended the adoption of a de minimis rule for exchanges in which a small percentage (say, 5 to 10 percent) of the basis of the assets transferred or the fair market value of the assets received is not within the same exchange group.

In a subsequent conversation with an IRS representative, the Institute was asked to elaborate on its discussion of the use of the SIC Codes to delineate like-kind exchange groups. Specifically, we were asked to follow-up on why we favor the use of four-digit Standard Industrial Code (SIC) over the Census Bureau's five-digit product coding system.

Stated simply, TEI believes that the use of the five-digit code creates severe administrative hardships for taxpayers exchanging multiple asset properties. Consider the following examples:

Example 1. Corporation A, which operates a chain of fast-food restaurants in several states under the name of Y, enters into a contract with Corporation B to exchange two fast-food restaurants located in different parts of a state. The properties consist of the land and building, as well as the food service equipment, tables, chairs, etc. Corporation B had operated the restaurant under the name of X. corporation A subsequently opens the new restaurant under the name of Y.

The parties must divide the personal property into exchange groups and value each group separately. Using the five-digit product coding system, there are at least six such exchange groups -- commercial cooking and food-warming equipment (35891); automic vending machines (35811); commercial refrigiration (35853); soda fountain and beer dispensers (35859); dishwashing machines (35892); and restaurant cafeteria and bar furnishings and fixtures (exclusive of the equipment already listed) (25992).

Example 2. Corporation C enters into a contract with Corporation D to exchange several services stations. The properties consist of the land and building, as well as the pumping and garage equipment. Corporation D had operated the service stations under the name of W. Corporation C subsequently opens the new stations under the name of Z.

The parties must divide the personal property into the following eight exchange groups: machanics hand service tools (342331); power driven hand tools, electric (35461); power driven hand tools, pneumatic, hydraulic, and power actuated (35462); automotive maintenance equipment, except hand tools (35597); measuring and dispensing pumps (35860); battery changing alternators, generators, and regulators (36942); metal tanks, completed factory (standard line pressure) (34435); and metal canopies (34447).

Such valuations present a costly and administratively budensome task for the taxpayer in Example 1 exchanging only one piece of property for another. The burden placed on a taxpayer exchanging multiple properties (as in Example 2) is mind-boggling.

TEI recognizes that the IRS is opposed to sanctioning tax-free exchanges of businesses. We submit, however, that the above example does not represent an exchange of businesses. Rather, because the corporations will be operating the properties under different names after the exchange, the exchange essentially represents an exchange of real property with an incidental inclusion of personal property. to require a separate evaluation for each and every exchange group in the above example creates needless -- and expensive -- complexity.

Tax Executives Institutes appreciates this opportunity to supplement our views on the proposed regulations relating to like-kind exchanges. If you have any questions, please do not hesitate to call Lester D. Ezrati, chair of TEI's Federal Tax Committee, at [phone] or the Institute's professional staff (Timothy J. McCormally or Mary L. Fahey) at [phone].